T.C. Memo. 2001-240
UNITED STATES TAX COURT
ZINOVY BRODSKY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18571-98. Filed September 14, 2001.
Martin A. Schainbaum and David B. Porter, for petitioner.
Allan D. Hill, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Table of Contents
FINDINGS OF FACT . . . . . . . . . . . . . . . . . . . . . . 7
The Accounts of Petitioner and/or Ms. Brodsky . . . . . . . . 8
Identification of the Accounts of
Petitioner and/or Ms. Brodsky . . . . . . . . . . . 8
Certain Activity With Respect to
Petitioner’s Accounts . . . . . . . . . . . . . . 9
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Petitioner’s Income-Producing Activities . . . . . . . . . 14
University Video Wholesale . . . . . . . . . . . . . . 15
MZ Trading Company . . . . . . . . . . . . . . . . . . 15
Felix Vulis . . . . . . . . . . . . . . . . . . . . . 17
Nikolas Kiritopoulos . . . . . . . . . . . . . . . . . 21
Vladimir Syelsky . . . . . . . . . . . . . . . . . . . 22
M.P. Electronics . . . . . . . . . . . . . . . . . . . 24
New Age Electronics . . . . . . . . . . . . . . . . . 25
Church Street Property . . . . . . . . . . . . . . . . 26
Sanchez Street Property . . . . . . . . . . . . . . . 27
Interest and Telephone Expenses . . . . . . . . . . . . . . 30
Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . 30
Joint Returns of Petitioner and
Ms. Brodsky for 1991 through 1993 . . . . . . . . 30
MZ Trading’s Return for 1993 . . . . . . . . . . . . . 37
Respondent’s Examination of Certain Returns . . . . . . . . 37
Notices of Deficiency . . . . . . . . . . . . . . . . . . . 48
Amendment to Answer and Reply to that Amendment . . . . . . 51
OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Evidentiary Issues . . . . . . . . . . . . . . . . . . . . 52
Issues Relating to the Burden of Proof . . . . . . . . . . 65
The Court’s Evaluation of Evidence
in the Record on Which the Parties Rely . . . . . . . 70
Testimonial Evidence . . . . . . . . . . . . . . . . . 70
The Testimony of Ms. Rodegeb,
Ms. Martin, and Mr. Oliveras . . . . . . . . 71
Petitioner’s Testimony . . . . . . . . . . . . . 71
Mr. DiBernardo’s Testimony . . . . . . . . . . . 71
Mr. Jordan’s Testimony . . . . . . . . . . . . . 71
Mr. Raja’s Testimony . . . . . . . . . . . . . . 74
Mr. Syelsky’s Testimony . . . . . . . . . . . . . 75
Mr. Vulis’ Testimony . . . . . . . . . . . . . . 75
Mr. Dubrovsky’s Testimony . . . . . . . . . . . . 75
Mr. Sutton’s Testimony . . . . . . . . . . . . . 76
Mr. Guterman’s Testimony . . . . . . . . . . . . 76
Documentary Evidence . . . . . . . . . . . . . . . . . 77
Unreported Income . . . . . . . . . . . . . . . . . . . . . 77
Alleged Personal Loans . . . . . . . . . . . . . . . . 81
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Alleged Business Loans to UVW . . . . . . . . . . . . 88
Alleged Reimbursements . . . . . . . . . . . . . . . . 100
Alleged Advances To Purchase Personal Items . . . . . 101
Alleged Rental Payments . . . . . . . . . . . . . . . 104
Alleged Items of MZ Trading . . . . . . . . . . . . . 105
Alleged Repayments of Loans . . . . . . . . . . . . . 117
Claimed Cost of Goods Sold . . . . . . . . . . . . . . . . 119
Claimed Schedule C Deductions . . . . . . . . . . . . . . . 122
Claimed Interest Deductions . . . . . . . . . . . . . 125
Claimed Telephone Expense Deductions . . . . . . . . . 127
Claimed Bad Debt Deduction . . . . . . . . . . . . . . 132
Claimed Capital Loss: Church Street Property . . . . . . . 134
Claimed Capital Gain: Sanchez Street Property . . . . . . 138
Claimed Schedule E Deductions . . . . . . . . . . . . . . . 142
Fraud Penalty Under Section 6663(a) . . . . . . . . . . . . 149
Underpayment . . . . . . . . . . . . . . . . . . . . . 149
Fraudulent Intent . . . . . . . . . . . . . . . . . . 150
Accuracy-Related Penalty Under Section 6662(a) . . . . . . 153
Addition to Tax Under Section 6651(a)(1) . . . . . . . . . 156
CHIECHI, Judge: Respondent determined the following defi-
ciencies in, addition under section 6651(a)(1)1 to, and fraud
penalties under section 6663(a) on petitioner’s2 Federal income
1
All section references are to the Internal Revenue Code
(Code) in effect for the years at issue. Unless otherwise
indicated, all Rule references are to the Tax Court Rules of
Practice and Procedure.
2
Respondent issued to both petitioner and his former wife,
Natalya Brodsky (Ms. Brodsky), a notice of deficiency (notice)
for 1991 and 1992 and a separate notice for 1993. Ms. Brodsky
did not join in the petition that petitioner filed and is not a
party in the present case.
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tax (tax):
Addition to Tax Fraud Penalty
Year Deficiency Under Sec. 6651(a)(1) Under Sec. 6663(a)
1991 $60,952 --- $45,714
1992 155,798 --- 116,849
1993 397,861 $98,365 298,396
Respondent determined in the alternative to the determinations
under section 6663(a) that petitioner is liable for each of the
years at issue for the accuracy-related penalty under section
6662(a).
The issues remaining for decision are:
(1) Does petitioner have unreported income for each of the
years at issue? We hold that he does to the extent stated
herein.
(2) Is petitioner entitled to reduce for each of the years
at issue his Schedule C gross receipts by certain claimed cost of
goods sold? We hold that he is not.
(3) Is petitioner entitled to deduct for each of the years
1991 and 1992 certain claimed Schedule C expenses? We hold that
he is not.
(4) For 1992, did petitioner realize a loss from the sale
of certain real property located at 1020 Church Street, San
Francisco, California (Church Street property), or did he realize
a gain from that sale in the amount determined by respondent? We
hold that he did not realize a loss, but that he realized, and is
required to recognize, the gain determined by respondent.
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(5) Is petitioner required to recognize for 1993 gain from
the sale of certain real property located at 287 Sanchez Street,
San Francisco, California (Sanchez Street property), in excess of
the amount that he reported? We hold that he is.
(6) Is petitioner entitled to deduct for each of the years
1991 and 1992 certain claimed Schedule E expenses? We hold that
he is not.
(7) Is petitioner liable for each of the years at issue for
the fraud penalty under section 6663(a)? We hold that he is not.
(8) Is petitioner liable for each of the years at issue for
the accuracy-related penalty under section 6662(a)? We hold that
he is.
(9) Is petitioner liable for 1993 for the addition to tax
under section 6651(a)(1)? We hold that he is.
The Court held the trial in this case on October 19, 1999.
At that trial, petitioner appeared pro se. Sometime after the
trial in this case, and before the posttrial briefs were due,
petitioner retained counsel. On December 16, 1999, petitioner,
through that counsel, filed, inter alia, a motion to open the
record in order to receive additional evidence (petitioner’s
motion). By Order dated March 31, 2000 (March 31, 2000 Order),
the Court granted petitioner’s motion and calendared a further
trial in this case to commence on August 21, 2000. The March 31,
2000 Order directed the parties in pertinent part, as follows:
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After due consideration, it is
* * * * * * *
ORDERED that each expert witness shall prepare a
written report, a copy of which shall be submitted by
counsel for the party who is proffering such report
directly to the undersigned and served on the other
party on or before June 30, 2000. * * *
* * * * * * *
ORDERED that any documents or materials that are
not part of the existing record in this case and that a
party expects to use at the further trial in this case
(except for impeachment), but which are not stipulated,
shall be identified in writing and exchanged by the
parties on or before July 20, 2000. The Court may
refuse to receive into evidence any document or mate-
rial not stipulated or exchanged, unless otherwise
agreed by the parties or allowed by the Court for good
cause shown. * * *
* * * * * * *
ORDERED that each party shall prepare a further
trial memorandum which shall be served and submitted
directly to the undersigned on or before August 4,
2000. The further trial memorandum shall contain-–
* * * * * * *
(2) A statement of issues (statement of issues)
in which each party shall set forth separately
(a) each issue of fact (including any issue sub-
sidiary to an ultimate issue) and (b) each issue
of law (including any issue subsidiary to an ulti-
mate issue) to be resolved by the Court. Each
such issue shall be set forth in the statement of
issues in sufficient detail so as to enable the
Court to decide the case in its entirety by ad-
dressing each of the issues listed.
(3) A statement of positions and theories (state-
ment of positions and theories) in which each
party shall set forth separately a clear and full
but concise exposition of such party’s position
and the theory underlying that position with re-
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spect to each of the issues that are separately
set forth in such party’s statement of issues
required by (2) above.
* * * * * * *
ORDERED that the statement of issues required to
be included in each party’s further trial memorandum,
as ordered above, shall govern the admissibility of
evidence at the further trial in this case in that
evidence offered at such further trial by a party shall
be deemed irrelevant unless it pertains to one or more
of the issues set forth in such party’s statement of
issues. It is further
ORDERED that neither party shall be allowed to
advance a position or theory underlying that position
with respect to any of the issues required to be in-
cluded in the statement of issues, as ordered above,
which is different from the position and theory as to
each such issue required to be included in the state-
ment of positions and theories, as ordered above. * * *
The Court held the further trial in this case on August 21
through 23, 2000.
FINDINGS OF FACT
Some facts have been stipulated and are so found except as
stated herein.
At the time the petition was filed, petitioner resided in
San Rafael, California.
Petitioner, who was born in Russia, immigrated to the United
States in June 1979. During the years at issue, petitioner and
Ms. Brodsky were married. They divorced sometime after 1993.
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The Accounts of Petitioner and/or Ms. Brodsky
Identification of the Accounts
of Petitioner and/or Ms. Brodsky
During the taxable years indicated, petitioner and/or Ms.
Brodsky maintained at least the following bank accounts, credit
card accounts, and loan accounts with the financial institutions
shown below (collectively, petitioner’s banks):
Taxable Financial Type of
Year Institution Account Account No. Account Holder
1991-1993 Bank of Checking 11804-10677 Petitioner
America
1991-1993 Bank of Checking 11801-10725 UVW Department1
America
1991-1993 Bank of Checking 12493-03650 Petitioner and
America Ms. Brodsky
1991-1993 Bank of Bank2 1249-9-01004 Ms. Brodsky
America
1991-1993 Bank of Line of 1396118294 Petitioner and
America credit3 Ms. Brodsky
1991-1993 McKesson Checking 105500/S Ms. Brodsky
Employees’
Federal
Credit Union
1992-1993 McKesson Checking 105500/D Ms. Brodsky
Employees’
Federal
Credit Union
1991-1992 American Bank4 4/003-4971259 Ms. Brodsky
Savings
1991-1993 American Savings 4/004-0384497 Ms. Brodsky as
Savings Custodian for
Victoria Brodsky
1991-1992 Bank of Automobile 1389-6-56940 Petitioner
America loan
1991-1993 Citibank Credit card 220-72-38214-0 Ms. Brodsky
1991-1993 Bank of Master Card 5273-0298-7013-4366 Petitioner
America
1991-1993 Bank of Master Card 5273-0298-0010-0917 Petitioner and
America Ms. Brodsky
1991-1993 Bank of Visa5 4019-0121-0086-4798 Petitioner and
America Ms. Brodsky
1
The letters “UVW” stand for University Video Wholesale, which, as
discussed below, was a name under which petitioner operated a sole proprietor-
ship during the years at issue. The record does not disclose the reason why
account No. 11801-10725 over which petitioner had signature authority refers
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to UVW Department rather than merely to UVW.
2
The record does not disclose whether account No. 1249-9-01004 was a
checking, a savings, or some other type of account.
3
Account No. 1396118294 was a revolving loan account which had a credit
limit of $22,000.
4
The record does not disclose whether account No. 4/003-4971259 was a
checking, a savings, or some other type of account.
5
The parties stipulated that account No. 4019-0121-0086-4798 was a
Master Card account that petitioner maintained during the years indicated.
That stipulation is clearly contrary to the facts that we have found are
established by the record, and we may, and we shall, disregard it. See Cal-
Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989). The record
establishes, and we have found, that account No. 4019-0121-0086-4798 was a
Visa account in the names of both petitioner and Ms. Brodsky.
(For convenience, we shall refer (1) to Bank of America account
No. 11801-10725 as petitioner’s UVW account, (2) to Bank of
America account No. 1396118294 as petitioner’s equity line
account, (3) collectively to petitioner’s equity line account,
petitioner’s Bank of America automobile loan account No. 1389-6-
56940, and all credit card accounts listed above as petitioner’s
credit accounts, (4) collectively to all banking, checking, and
savings accounts listed above as petitioner’s bank accounts, and
(5) collectively to all the accounts listed above as petitioner’s
accounts.)
Certain Activity With Respect to Petitioner’s Accounts
During the years at issue, the total amounts shown below
were deposited into petitioner’s bank accounts, including peti-
tioner’s UVW account, or were deposited into petitioner’s credit
accounts, including petitioner’s equity line account, i.e., were
paid against the balances due on such credit accounts:
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Account No. Type of Account 1991 1992 1993
1 1 1
11804-10677 Bank $21,147.00 $12,205.00 $48,589.00
1 1 1
11801-10725 Bank 382,284.00 373,748.00 317,727.00
1
12493-03650 Bank 49,490.00 30,310.00 5,077.00
1249-9-01004 Bank --- --- ---
1
1396118294 Line of credit 182,947.00 299,225.00 538,471.00
105500/S Bank 8,225.00 14,320.00 17,906.00
105500/D Bank --- 45,544.00 50,230.00
4/003-4971259 Bank --- --- ---
4/004-0384497 Bank 120.00 --- 350.00
1389-6-56940 Bank 227.00 10,427.43 ---
220-72-38214-0 Credit card 15,898.00 1,880.00 1,307.00
5273-0298-7013-4366 Master Card 5,166.00 24,626.00 2,772.00
5273-0298-0010-0917 Master Card 19,445.00 9,516.00 4,039.00
4019-0121-0086-4798 Visa 1,813.00 1,522.00 1,099.00
1 1 1
686,762.00 823,323.43 987,567.00
1
The total amounts of the various deposits into certain of petitioner’s
accounts which the parties stipulated contained mathematical errors. Such
stipulations of such total amounts are clearly contrary to the facts that we
have found are established by the record in this case. We have disregarded
such incorrect total amounts and have listed above the correct total amounts
of deposits that we have found are established by the record. See Cal-Maine
Foods, Inc. v. Commissioner, supra.
During the years at issue, petitioner received the amounts
of cash shown below when certain deposits were made into certain
of petitioner’s bank accounts, including petitioner’s UVW ac-
count, and certain payments were made against the balances due on
certain of petitioner’s credit accounts, including petitioner’s
equity line account:
Account No. Type of Account 1991 1992 1993
11804-10677 Bank $120 $130 $801
11801-10725 Bank 1,725 1,904 1,129
12493-03650 Bank 17 60 ---
1249-9-01004 Bank --- 900 ---
1396118294 Line of credit --- 250 210
105500/S Bank --- 126 200
105500/D Bank --- --- 409
5273-0298-7013-4366 Master Card --- 288 ---
5273-0298-0010-0917 Master Card --- --- 70
1,862 3,658 2,819
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On December 4, 1991, petitioner cashed a cashier’s check
payable to him in the amount of $15,000 that was issued by Home
Savings of America.
Included within the total deposits during 1992 into peti-
tioner’s UVW account were the following deposits:
Date of Amount of
Deposit Description and Payor of Item Deposited Deposit
3/23/92 Check for $50,000 from Vladimir Kroma1 $50,000
4/28/92 Bank of America cashier’s check for $12,000 pur- 12,000
chased by UVW and made payable to Marcel
Feldberg2
1
The last name of Vladimir Kroma (Mr. Kroma) also appears in the record
as “Khoma”.
2
UVW purchased the $12,000 cashier’s check by tendering to Bank of
America (1) a $4,090 check dated Apr. 7, 1992, payable to the order of UVW,
and drawn on the account of RAD Tronics, Inc., (2) a $5,910 check dated Apr.
28, 1992, payable to cash, and drawn on petitioner’s UVW account, and (3) a
$2,000 check dated Apr. 28, 1992, payable to cash, and drawn on petitioner’s
UVW account.
Included within the total deposits during the years at issue
into petitioner’s equity line account were the following depos-
its, which included one check, a portion of which was deposited
into that account and a portion of which was negotiated for cash:
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Amount
Date of Amount of Negotiated
Deposit Description and Payor of Item Deposited Deposit for Cash
3/19/91 Not disclosed by credible evidence in the $20,119 ---
record
4/30/92 Great Western Bank cashier’s check No. 15,000 ---
1610058213 for $15,000 payable to peti-
tioner
4/26/93 Check for $77,580 from Old East-West Trad- 77,580 ---
ing Co. (East-West)
5/3/93 Check for $30,000 from East-West 30,000 ---
5/12/93 Check for $41,950 from East-West 41,950 ---
5/25/93 $30,000 in cash from East-West and Mikhail 30,000 ---
Guterman
6/1/93 Check for $3,414 from First Marin Realty, 3,344 $70
Inc.
6/11/93 Check for $2,025 from First Marin Realty, 2,025 ---
Inc.
6/15/93 $5,000 in cash from East-West 5,000 ---
8/30/93 $22,000 in cash from East-West 22,000 ---
9/14/93 $17,700 in cash from Roman Kirdan 17,700 ---
During 1992, certain checks, including the following, were
drawn on petitioner’s UVW account:
Date of
Check Check No. Payee Amount
1/8/92 0628 Konstantin Reingatch $5,000
1/28/92 0650 Igor Dubrovsky 990
4/15/92 0750 Cash 12,000
5/18/92 0781 Cash 14,000
8/30/92 0868 Cash 2,850
During 1992 and 1993, certain checks, including the follow-
ing, were drawn on petitioner’s equity line account:
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Date of
Check Check No. Payee Amount
3/20/92 0551 Cash $1,000.00
5/19/921 0538 Not disclosed by credible evidence 31,167.50
in the record
6/30/92 0562 Cash 20,000.00
7/13/92 0568 Mr. Kroma2 1,250.00
12/16/92 0522 K. Reingatch 7,500.00
3/27/93 8663 K. Reingatch 1,742.00
5/4/933 0589 Not disclosed by credible evidence 37,680.00
in the record
8/24/93 8829 YLB East West Trading Co. 41,500.00
1
Check No. 0538 is not part of the record. The date of check No. 0538
shown above is the date on which that check was posted to petitioner’s equity
line account.
2
The record includes only a copy of the front of check No. 0568.
Although we are satisfied from that copy that check No. 0568 was negotiated,
we are not satisfied from the copy of the front of check No. 0568 or from any
other evidence in the record that Mr. Kroma deposited and/or cashed that
check, nor do we know from the record the date on which check No. 0568 was
negotiated. For example, Mr. Kroma could have endorsed check No. 0568 to
petitioner, who in turn deposited and/or cashed it.
3
Check No. 0589 is not part of the record. The date of check No. 0589
shown above is the date on which that check was posted to petitioner’s equity
line account.
The following check was drawn on checking account No. 12493-
03650 that petitioner and Ms. Brodsky maintained at Bank of
America during the years at issue:
Date of
Check Check No. Payee Amount
3/2/92 2901 Cash $7,000
During 1992, the following purchases were made from Carvis
Discount and charged to Master Card account No. 5273-0298-0010-
0917:
Transaction Date Amount
2/10/92 $2,133.59
3/2/92 2,550.83
On the dates shown below, petitioner purchased from Bank of
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America the following cashier’s checks payable to the payees
indicated:
Date Payee Amount
3/2/921 Macy’s California $3,000
3/3/92 Macy’s California 10,000
5/18/92 Macy’s California 14,000
6/30/92 Mr. Kroma2 20,000
7/20/92 Carvis Discount3 16,000
1
The copy of the $3,000 cashier’s check payable to Macy’s California is
not totally legible, but it appears that the date in March 1992 appearing on
that check is 3/2/92.
2
The record includes only a copy of the front of the purchaser’s copy of
the cashier’s check payable to Mr. Kroma. We are not satisfied from that copy
or from any other evidence in the record that that cashier’s check was ever
negotiated. Even if we were satisfied that that cashier’s check was negoti-
ated, we are not satisfied from that copy or from any other evidence in the
record that Mr. Kroma deposited and/or cashed the cashier’s check payable to
him, nor do we know from the record the date on which that check was negoti-
ated. For example, Mr. Kroma could have endorsed that cashier’s check to
petitioner, who in turn deposited and/or cashed it.
3
The record includes only a copy of the front of the purchaser’s copy of
the cashier’s check payable to Carvis Discount. We are not satisfied from
that copy or from any other evidence in the record that that cashier’s check
was ever negotiated. Even if we were satisfied that that cashier’s check was
negotiated, we are not satisfied from that copy or from any other evidence in
the record that Carvis Discount deposited and/or cashed the cashier’s check
payable to it, nor do we know from the record the date on which that check was
negotiated. For example, Carvis Discount could have endorsed that cashier’s
check to petitioner, who in turn deposited and/or cashed it.
Petitioner’s Income-Producing Activities
As discussed in more detail below, during each of the years
at issue, petitioner operated one or more sole proprietorships
and engaged in certain income-producing activities with certain
individuals and entities. In addition, during part of 1993,
petitioner was a partner in a partnership operating under the
name MZ Trading Company (MZ Trading).
On January 1, 1991, January 1, 1992, and January 1, 1993,
petitioner and Ms. Brodsky did not have a cash hoard or other
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substantial accumulation of cash.
University Video Wholesale
During the years at issue, petitioner operated a sole
proprietorship under the name University Video Wholesale3 that
engaged in various activities relating to the sale of video
equipment to small retail stores and the purchase for resale of
certain other types of consumer goods such as shoes and handbags.
MZ Trading Company
Around April 1, 1993, petitioner and Mikhail Guterman (Mr.
Guterman) formed a partnership known as MZ Trading Company. MZ
Trading engaged in various activities relating to the purchase in
the United States of certain types of merchandise and the sale of
such merchandise to customers located in Russia and the Ukraine.
During at least part of 1993, a checking account over which
petitioner had signature authority was maintained at Bank of
America in the name of MZ Trading (MZ Trading account).
Included within the total deposits during 1993 into peti-
tioner’s checking account 11804-10677 were the following depos-
its, which included two checks, a portion of each of which was
deposited into that account and a portion of each of which was
3
As discussed below, the joint tax returns of petitioner and
Ms. Brodsky for 1991 and 1992 indicated that the name under which
petitioner operated the Schedule C business that he reported in
those returns was Zinovy Brodsky, and their joint tax return for
1993 did not provide the names under which petitioner operated
the two Schedule C businesses that he reported in that return.
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negotiated for cash:
Amount
Date of Description and Amount of Negotiated
Deposit Payor of Item Deposited Deposit for Cash
3/23/93 Check for $200 from MZ Trading $200 ---
4/14/93 Check for $346 from MZ Trading 346 ---
9/21/93 Check for $422 from Mr. Guterman 400 $22
10/13/93 Check for $4,000 from MZ Trading 4,000 ---
10/14/93 Check for $4,000 from MZ Trading 4,000 ---
10/22/93 Check for $1,000 from MZ Trading 950 50
11/22/93 Check for $511 from Mr. Guterman 511 ---
Included within the total deposits during 1993 into peti-
tioner’s UVW account were the following deposits, which included
four checks, a portion of each of which was deposited into that
account and a portion of each of which was negotiated for cash:
Amount Nego-
Date of Description and Amount of tiated
Deposit Payor of Item Deposited Deposit for Cash
3/30/93 Check for $3,000 from MZ Trading $3,000 ---
4/12/93 Check for $4,000 from MZ Trading 4,000 ---
4/14/93 Check for $5,000 from MZ Trading 5,000 ---
4/23/93 Check for $99 from MZ Trading 70 $29
4/27/93 Check for $410 from MZ Trading 410 ---
5/3/93 Check for $98 from Mr. Guterman 98 ---
5/14/93 Check for $190 from MZ Trading 150 40
6/3/98 Check for $81 from Mr. Guterman 81 ---
8/25/93 Check for $1,000 from MZ Trading 900 100
8/31/93 Check for $1,000 from MZ Trading 880 120
10/7/93 Check for $1,000 from Mr. Guterman 1,000 ---
Included within the total deposits during 1993 into peti-
tioner’s equity line account were the following checks:
Date of
Deposit Description and Payor of Check Amount of Deposit
6/22/93 Check for $977.41 from the MZ Trading account, $977.41
payable to “B/A Custom Line”, and signed by
petitioner
9/7/93 Check for $3,000 from Mr. Guterman payable to 3,000.00
petitioner
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Petitioner signed a check dated December 17, 1993, in the
amount of $140 that was drawn on the MZ Trading account and made
payable to “B/A” and negotiated it to make a payment against the
balance due on his Master Card account No. 5273-0298-7013-4366.
At a time after the year 1993 that is not disclosed by
credible evidence in the record, petitioner and Mr. Guterman
prepared most, if not all, of a handwritten document dated August
5, 1999, that lists a series of transactions in which petitioner
claims MZ Trading engaged during 1993. (We shall refer to the
handwritten document dated August 5, 1999, as MZ Trading’s
purported 1993 transaction summary.) For each transaction listed
on MZ Trading’s purported 1993 transaction summary, entries
appeared under columns headed “cost”, “sold”, “profit”, and
“expenses”. Numbers and handwriting that is largely illegible
appeared under each of those columns.
Felix Vulis
During at least the years at issue, petitioner participated
in various income-producing activities with Felix Vulis (Mr.
Vulis) and certain organizations with which Mr. Vulis was associ-
ated.
During at least 1992 and 1993, Mr. Vulis was chief executive
officer of Amuke4 Group of Companies (Amuke Group), and Slava
Averbach (Mr. Averbach) and Alex Ferrer (Mr. Ferrer) also partic-
4
The word “Amuke” stood for “America Ukraine”.
- 18 -
ipated in operating those companies. During those years, Amuke
Group, which had an undisclosed relationship with an entity known
as America-Ukraine Professional Business Association and Chamber
of Commerce (Amuke Business Association), engaged in various
activities relating to the purchase of certain merchandise and
the sale of such merchandise to customers located in the former
Soviet Union. (We shall refer collectively to Amuke Group and
Amuke Business Association as the Amuke organizations.)
During 1992 and 1993, petitioner engaged in certain income-
producing activities with the Amuke organizations, which con-
sisted of petitioner’s locating for those organizations certain
merchandise that they believed they would be able to sell at a
profit to their customers. In general, if petitioner located
certain merchandise that the Amuke organizations wanted to
purchase for resale, they advanced petitioner the funds to
acquire that merchandise. Over the course of their business
relationship, petitioner located, and the Amuke organizations
purchased, various kinds of merchandise such as sweatshirts,
water filters, candies, lighters, men’s suits, and canned fruit.
The Amuke organizations compensated petitioner for locating
certain merchandise on their behalf by paying him a portion of
the profit from the resale of such merchandise. Petitioner
received Form 1099, Miscellaneous Income (Form 1099), from Amuke
Group for 1992. That form showed that petitioner received from
- 19 -
Amuke Group during 1992 “Nonemployee compensation” of $5,872.
The record does not disclose whether Amuke Group issued Form 1099
to petitioner for 1993.
At a time that is not disclosed by the record, Mr. Vulis
guarantied repayment of a $15,000 loan that Mr. Ferrer, who was a
business associate of Mr. Vulis at Amuke Group, made to peti-
tioner (Mr. Ferrer’s $15,000 loan). At a time that also is not
disclosed by the record, Mr. Vulis, as the guarantor of Mr.
Ferrer’s $15,000 loan, repaid that loan.
During at least 1993, petitioner participated in certain
income-producing activities with Commonwealth Enterprises,
another business with which Mr. Vulis was associated. Common-
wealth Enterprises, like the Amuke organizations, was engaged in
the purchase of certain merchandise for resale to customers
located in the former Soviet Union. Petitioner conducted busi-
ness with Commonwealth Enterprises in a manner similar to the
manner in which he conducted business with the Amuke organiza-
tions; that is to say, in general, petitioner located certain
merchandise on behalf of Commonwealth Enterprises that it be-
lieved it would be able to resell at a profit to its customers,
and Commonwealth Enterprises compensated petitioner for his work
by paying him a portion of the profit from the resale of such
merchandise.
Included within the total deposits during 1992 into peti-
- 20 -
tioner’s UVW account were the following deposits, which included
one check, a portion of which was deposited into that account and
a portion of which was negotiated for cash:
Amount
Date of Amount of Negotiated
Deposit Description and Payor of Item Deposited Deposit for Cash
8/7/92 Check for $7,870 from Amuke Group $7,720 $150
8/28/92 Check for $1,150 from Amuke Group payable 15,896 ---
to UVW and Bank of America cashier’s check
for $14,746 purchased by petitioner and
payable to L.F. Banks Co.1
9/11/92 Check for $3,850 from Commonwealth Enter- 3,850 ---
prises
12/16/92 Check for $10,500 from Commonwealth Enter- 10,500 ---
prises
1
Petitioner purchased the $14,746 cashier’s check by tendering to Bank
of America, inter alia, a $3,000 check dated Aug. 27, 1992, from Commonwealth
Enterprises payable to petitioner.
Included within the total deposits during 1992 and 1993 into
petitioner’s equity line account (i.e., payments against the
balance due on that account) were the following checks, including
one check, a portion of which was deposited into that account
(i.e., paid against the balance due on that account) and a
portion of which was negotiated for cash:
- 21 -
Amount
Date of Amount of Negotiated
Payment Description and Payor of Check Payment for Cash
1
5/12/92 Bank of America cashier’s check for $36,000 $36,000 ---
purchased by petitioner payable to Star
Electronics
6/26/92 Check for $6,000 from Amuke Business Asso- 7,000 ---
ciation payable to petitioner and
check for $1,000 from Amuke Business Asso-
ciation payable to UVW
6/30/92 Check for $26,250 from Amuke Business Asso- 26,000 $250
ciation payable to petitioner
2
9/23/92 Check for $30,375 from Amuke Group payable 30,000 ---
to UVW with “Water Systems” written on the
memorandum line
1/14/93 Check for $5,000 from Amuke Group payable 5,000 ---
to petitioner
2/10/93 Check for $23,891 from Commonwealth Enter- 23,891 ---
prises payable to petitioner
4/26/93 Check for $22,500 from Mr. Vulis payable to 22,500 ---
cash
5/3/93 Check for $37,680 from Mr. Vulis payable to 37,680 ---
cash
7/9/93 Check for $6,450 from Commonwealth Enter- 6,450 ---
prises payable to petitioner
1
Petitioner purchased the $36,000 cashier’s check by tendering to Bank
of America, inter alia, a $31,167.50 check dated May 11, 1992, from Amuke
Business Association that was payable to cash.
2
The record does not disclose what happened to the remaining $375 of the
$30,375 check that was not used to make a payment against the balance due on
petitioner’s equity line account.
The proceeds of the check for $30,375 from Amuke Group that
is listed above constituted an advance or loan from Amuke Group
to petitioner in order for him to purchase certain water filters.
In 1992, the following check payable to Commonwealth Enter-
prises was drawn on petitioner’s UVW account:
Date of Check Check No. Amount
12/18/92 0988 $20,000
Nikolas Kiritopoulos
During at least part of 1993, petitioner participated in
certain income-producing activities with Nikolas Kiritopoulos
- 22 -
(Mr. Kiritopoulos). During at least part of that year, Mr. Vulis
had signature authority over a bank account maintained by Mr.
Kiritopoulos (Kiritopoulos’ account). Pursuant to that author-
ity, on the date shown below, Mr. Vulis signed the following
check that was drawn on Mr. Kiritopoulos’ account, payable to
petitioner, and deposited into petitioner’s equity line account:
Date of Description and Amount
Deposit Payor of Item Deposited of Deposit
8/25/93 Check for $41,500 from Mr. Kiritopoulos $41,500
payable to petitioner
Vladimir Syelsky
During 1992, petitioner engaged in certain income-producing
activities with Vladimir Syelsky (Mr. Syelsky), an immigrant to
the United States who was born in the former Soviet Union.
On August 12, 1992, Mr. Syelsky filed a “NOTICE OF COMMENCE-
MENT OF CASE UNDER CHAPTER 7 OF THE BANKRUPTCY CODE, MEETING OF
CREDITORS, AND FIXING OF DATES” with the United States Bankruptcy
Court for the Northern District of California (Bankruptcy Court).
On September 15, 1992, Mr. Syelsky filed a document with the
Bankruptcy Court that was entitled “DECLARATION CONCERNING
DEBTOR’S SCHEDULES” (Mr. Syelsky’s declaration). In that docu-
ment, Mr. Syelsky declared under penalties of perjury that the
debtor’s schedules and summary of schedules that he filed with
that Court were true and correct. Attached to Mr. Syelsky’s
declaration was a “SUMMARY OF SCHEDULES” in which he reported to
the Bankruptcy Court that he had $100 of total assets and
- 23 -
$129,186 of total liabilities. On December 29, 1992, Mr. Syelsky
filed a document entitled “REPORT OF TRUSTEE IN NO ASSET CASE”
dated September 11, 1992, which was signed by the trustee of Mr.
Syelsky’s bankruptcy estate, and which stated, inter alia:
that the trustee has made diligent inquiry into the
whereabouts of property belonging to the estate and
that there is no property available for distribution
from the estate over and above that exempted by the
debtor(s).
On December 29, 1992, the Bankruptcy Court filed a “FINAL DECREE”
which ordered, inter alia, Mr. Syelsky’s case under chapter 7 of
the U.S. Bankruptcy Code closed.
On December 15, 1992,5 a check for $30,000, which Mr.
Syelsky signed and on which the words “1099" and “Commission”
were written (Mr. Syelsky’s check), was deposited, along with a
check for $100 from Eid’s TV, into petitioner’s UVW account. The
proceeds of Mr. Syelsky’s check constituted an advance or loan
from Mr. Syelsky to petitioner (Mr. Syelsky’s $30,000 loan) in
order for him to purchase on behalf of Mr. Syelsky certain
merchandise that petitioner had located and that Mr. Syelsky
wanted to resell to one of Mr. Syelsky’s customers. Mr. Vulis
guarantied repayment of Mr. Syelsky’s $30,000 loan. Sometime
after Mr. Syelsky gave petitioner Mr. Syelsky’s check, Mr.
5
The date of Dec. 15, 1993, appeared on the front of the
check for $30,000 that Mr. Syelsky signed. However, it is clear
from the record that that check was actually signed and deposited
on Dec. 15, 1992, and that the year 1993 was written on that
check by mistake.
- 24 -
Syelsky canceled his order for the merchandise in question and
asked petitioner to return the $30,000. Thereafter, Mr. Vulis,
as the guarantor of Mr. Syelsky’s $30,000 loan, repaid that loan.
Around December 15, 1992, Mr. Syelsky gave petitioner a
$20,000 check that Mr. Syelsky signed and that represented a
personal loan by Mr. Syelsky to petitioner. On that date, the
proceeds of that $20,000 check were used to make a payment
against the balance due on petitioner’s equity line account.
M.P. Electronics
At certain times during 1991 and 1992, petitioner conducted
certain business transactions with M.P. Electronics, a business
operated by Hardit Chaudry (Mr. Chaudry) and Kishore Raja (Mr.
Raja). At those times, M.P. Electronics engaged in the purchase
for resale of various types of merchandise from retail stores,
such as Circuit City, Macy’s, and Good Guys (retail stores),
which were overstocked, defective, damaged, and/or otherwise not
salable by such stores. (We shall refer collectively to the
types of merchandise that M.P. Electronics purchased from certain
retail stores as nonsalable merchandise.) Generally, at those
times, petitioner and M.P. Electronics jointly placed bids with
certain retail stores for the purchase of certain of such stores’
nonsalable merchandise.
On the dates shown below, the following checks were drawn on
petitioner’s UVW account and made payable to M.P. Electronics or
- 25 -
Fashions For Less6:
Date of Amount
Check Check No. Payee of Check
8/27/91 0485 Fashions store $212
8/28/91 0487 Fashions store 584
9/2/91 0499 Fashions store 1,100
9/5/91 0491 Fashions store 334
4/22/92 0757 M.P. Electronics 200
4/22/92 0758 M.P. Electronics 5,000
On April 21, 1992, petitioner purchased a cashier’s check
for $11,400 from Bank of America that was payable to M.P. Elec-
tronics.
On December 17, 1991, a cashier’s check for $9,900, which
was signed by petitioner as the purchaser of the check and
payable to Circuit City, was purchased from Bank of America.
Although petitioner signed that cashier’s check as the purchaser,
the words “PURCHASER: M AND P ELECTRONICS” were typewritten on
the purchaser’s copy of that check.
New Age Electronics
During at least part of 1992, petitioner engaged in certain
business transactions with New Age Electronics, Inc. (New Age)
that are not disclosed by the record, which involved the purchase
of certain merchandise for resale in Russia. New Age issued
petitioner Form 1099 for 1992, which showed that petitioner
received “Nonemployee compensation” of $2,400.
6
During at least part of 1991, Mr. Raja’s wife operated a
ladies clothing store under the name Fashions for Less (Fashions
store).
- 26 -
Church Street Property
From 1988 through at least 1992, Mr. Vulis, who at the time
of the further trial in this case was a licensed real estate
broker in the State of California, was the broker in charge of
Markfel Property Management and Investment Corporation (Markfel).
In general, during those years, Markfel served as a real estate
investment vehicle for various individuals who wanted to invest
in certain real properties. As such, Markfel identified a
particular real property as a desirable investment, collected
funds from those individuals who were interested in investing in
that real property, and purchased that real property in the names
of those interested individuals, and not in its own name. Any
individual who chose to invest through Markfel in a particular
real property was responsible for any expenditures with respect
to that real property in proportion to such individual’s invest-
ment interest therein.
At times that are not disclosed by credible evidence in the
record, petitioner paid Markfel amounts of money that are not
disclosed by credible evidence in the record, which were to be
used to invest in certain real properties, to increase his
respective investment interests in such properties, and/or to pay
his proportionate share of any respective expenditures with
respect to such interests. Over the course of his dealings with
Markfel, petitioner allocated the funds that he paid Markfel to
- 27 -
several real properties.
One of the real properties that Markfel had identified as a
desirable investment was a property located at 1020 Church
Street, San Francisco, California. Sometime around the end of
September 1988, the Church Street property was purchased in the
names of Mr. Vulis and Peter Kogan (Mr. Kogan). At a time not
disclosed by credible evidence in the record, petitioner directed
that an unspecified portion of the funds that he had paid Markfel
be invested in the Church Street property. At least during part
of 1991 and 1992 until the date of the sale of the Church Street
property, Mr. Vulis, Mr. Kogan, and petitioner owned certain
interests in that property. The extent of petitioner’s interest
in that property is not disclosed by credible evidence in the
record. As an owner of an interest in the Church Street prop-
erty, petitioner was responsible for paying a certain portion of
any expenditures with respect to that property.
In 1992, the Church Street property was sold. Sometime
thereafter, Mr. Vulis provided certain information with respect
to that sale, which is not disclosed by the record, to Edward
Sutton (Mr. Sutton), the preparer (return preparer) of Form 1040,
U.S. Individual Income Tax Return, that petitioner and Ms.
Brodsky jointly filed (joint return) for 1992.
Sanchez Street Property
During at least 1987, 1988, 1991, and 1992, petitioner, Ms.
- 28 -
Brodsky, Joseph Dubrovsky (Mr. Dubrovsky),7 and certain other
individuals invested in certain real properties, including a
property located at Camino Del Mar, San Francisco, California
(Camino property), and a property located at 287 Sanchez Street,
San Francisco, California. On the dates shown below, petitioner
and Ms. Brodsky paid the following amounts by check to acquire
their interest in the Camino property:
Date of Check Amount of Check
5/12/87 $30,000
6/2/87 20,000
7/10/87 7,000
On December 7, 1987, Mr. Dubrovsky and his wife, Bella
Dubrovsky (Ms. Dubrovsky), transferred to petitioner and Ms.
Brodsky a 10-percent interest in the Camino property. Around
March 3, 1989, the Camino property was sold or exchanged.
Around June 6, 1988, petitioner deposited a $63,000 check
dated June 3, 1988, from Mr. Dubrovsky.
Sometime in February 1989, Mr. Dubrovsky and Ms. Dubrovsky
acquired the Sanchez Street property. During at least the period
beginning sometime in 1991 and ending on the date of the sale of
the Sanchez Street property in 1993, petitioner and Ms. Brodsky
owned an interest in that property. No credible evidence in the
record discloses the extent of that interest or how or when they
acquired that interest. As owners of an interest in the Sanchez
7
Mr. Dubrovsky’s first name also appears in the record as
“Josif” and “Josef”.
- 29 -
Street property, petitioner and Ms. Brodsky were responsible for
paying any expenditures with respect to that property in propor-
tion to their investment interest therein.
Included within the total deposits during 1991 into peti-
tioner’s UVW account were the following deposits, which included
one or two checks, a portion of which was deposited into that
account and a portion of which was negotiated for cash:
Amount
Date of Amount of Negotiated
Deposit Description and Payor of Item Deposited Deposit for Cash
2/12/91 Check for $10,000 from Mr. Dubrovsky and $14,195 ---
Ms. Dubrovsky, check for $795 from Conti-
nental Video System, and 2 cash deposits
totaling $3,400
3/11/91 Money order for $975 from Mr. Dubrovsky 2,515 ---
and 2 cash deposits totaling $1,540
8/22/91 Check for $1,224 from S&J Co.1 and check 2,734 $70
for $1,580 from West Coast Video
1
During 1986 and as of the time of the further trial in this case, Mr.
Dubrovsky was a part owner of S&J Co. The record does not disclose whether
Mr. Dubrovsky owned any part of S&J Co. on Aug. 22, 1991.
On the dates shown below, the following checks that were
payable to Mr. Dubrovsky were drawn on petitioner’s UVW account:
Date of Check Check No. Amount
2/13/92 0671 $1,000
4/16/92 0752 1,000
On the dates shown below, the following checks that were
payable to Mr. Dubrovsky were drawn on petitioner’s equity line
account:
Date of Check Check No. Amount
10/20/92 0554 $2,000
1/30/93 0574 1,675
- 30 -
Interest and Telephone Expenses
During 1991, 1992, and 1993, petitioner paid interest to
Bank of America with respect to petitioner’s equity line account
in the respective amounts of $1,632.18, $1,176.48, and $1,217.63.
During the years at issue, petitioner maintained (1) sepa-
rate home telephone lines, one of which was supposed to be used
for personal purposes and one of which was supposed to be used
for business purposes, and (2) separate cellular telephone lines,
one of which was supposed to be used for personal purposes and
one of which was supposed to be used for business purposes. He
paid the charges with respect to all of those telephone lines by
checks drawn on petitioner’s UVW account and one or more of
petitioner’s other accounts.
During each of the years at issue, petitioner paid at least
the following amounts for telephone expenses by checks drawn on
petitioner’s UVW account:
Telephone
Service Provider 1991 1992 1993
Pacific Bell $1,393.24 $1,059.27 $328.29
Cellular One 729.28 903.92 1,352.68
Nationwide Cellular --- --- 103.16
Services, Inc.
Tax Returns
Joint Returns of Petitioner and
Ms. Brodsky for 1991 through 1993
Petitioner and Ms. Brodsky filed joint returns for each of
the years at issue. The 1991 and 1992 joint returns identified
- 31 -
Mr. Sutton as the return preparer. The 1993 joint return identi-
fied Richard J. DiBernardo, C.P.A. (Mr. DiBernardo), as the
return preparer.8 At the time the 1993 joint return was being
prepared, respondent was conducting an examination of certain of
petitioner’s tax returns for years prior to 1993.
On page 1 of the 1991 joint return, petitioner and Ms.
Brodsky reported, inter alia, the following:
Line on Page 1 of Amount
Item of Income or (Loss) the 1991 Return Reported
Wages, salaries, tips, etc. 7 $66,852
Taxable interest income 8a 590
Dividend income 9 642
Taxable refunds of state and 10 1,428
local income taxes
Business income or (loss) 12 20,811
1
Total pensions and annuities 17a 4,786
Rents, royalties, partnerships, 18 (10,493)
estates, trusts, etc.
Other income2 22 883
1
Petitioner and Ms. Brodsky reported on page 1, line 17b, that none of
the reported amount of pensions and annuities was taxable.
2
Petitioner and Ms. Brodsky described their “Other income” as an
“INVESTMENT INTEREST ADJUSTMENT”.
In their 1991 joint return, petitioner and Ms. Brodsky reported
“adjusted gross income” of $79,242, “Itemized deductions” of
$56,819, and “Taxable income” of $13,823.
The 1991 joint return included Schedule C, Profit or Loss
From Business (Schedule C). The 1991 Schedule C indicated that
petitioner operated an audio-video sales business under the name
8
Mr. DiBernardo first met petitioner in 1995, sometime prior
to May 14, 1995, the date on which respondent received the 1993
joint return in question.
- 32 -
Zinovy Brodsky. In Part I, Income, of the 1991 Schedule C,
petitioner and Ms. Brodsky reported “Gross receipts or sales” of
$380,364, “Cost of goods sold” of $317,429, “Other income” of
$700, and “gross income” of $63,635. In Part II of the 1991
Schedule C, Expenses, petitioner and Ms. Brodsky claimed deduc-
tions for, inter alia, “Other Interest” of $3,000 and “Other
expenses” of $3,877.9 Petitioner and Ms. Brodsky reported in the
1991 Schedule C “total expenses before expenses for business use
of your home” of $33,183, “Expenses for business use of your
home” of $9,641, and “Net profit or (loss)” of $20,811.
The 1991 joint return also included Schedule E, Supplemental
Income and Loss (Schedule E), in which petitioner and Ms. Brodsky
reported the Church Street property and the Sanchez Street
property as rental properties. In Part I of the 1991 Schedule E,
petitioner and Ms. Brodsky claimed only “Rental and Royalty
Expenses” with respect to the Church Street property and both
“Rental and Royalty Income” and “Rental and Royalty Expenses”
with respect to the Sanchez Street property. In Part I of the
1991 Schedule E, petitioner and Ms. Brodsky claimed “Total
expenses” of $8,461 and a “Deductible rental loss” of $2,115 with
respect to the Church Street property. In that part of that
9
According to a statement attached to their 1991 joint
return, petitioner and Ms. Brodsky reported that the deduction
claimed for “Other expenses” included, inter alia, $1,058 for
“CAR PHONE” and $1,445 for “PHONE”.
- 33 -
schedule, they reported “Rents received” of $34,958 and claimed
“Total expenses” of $62,884 and a “Deductible rental loss” of
$8,378 with respect to the Sanchez Street property. In Part I of
the 1991 Schedule E, petitioner and Ms. Brodsky claimed “Total
rental or royalty income or (loss)” of ($10,493) with respect to
the Church Street property and the Sanchez Street property.
On page 1 of the 1992 joint return, petitioner and Ms.
Brodsky reported, inter alia, the following:
Line on Page 1 of
Item of Income or (Loss) the 1992 Return Amount
Wages, salaries, tips, etc. 7 $65,805
Taxable interest income 8a 459
Dividend income 9 856
Taxable refunds, credits, or off- 10 1,626
sets of state and local income taxes
Business income or (loss) 12 5,951
Capital gain or (loss) 13 (3,000)
1
Total pensions and annuities 17a 9,157
Rents, royalties, partnerships, 18 (3,167)
estates, trusts, etc.
Other income2 22 (883)
1
Petitioner and Ms. Brodsky reported on page 1, line 17b, that only $354
of the reported amount of pensions and annuities was taxable.
2
Petitioner and Ms. Brodsky described their “Other income” as an
“INVESTMENT INTEREST CARRYOVER”.
The 1992 joint return showed “adjusted gross income” of $67,580,
“Itemized deductions” of $84,921, and no “Taxable income”.
The 1992 joint return included Schedule C which indicated
that petitioner operated an audio-video sales business under the
name Zinovy Brodsky. In Part I, Income, of the 1992 Schedule C,
petitioner and Ms. Brodsky reported “Gross receipts or sales” of
$293,937, “Cost of goods sold” of $258,180, and “Gross income” of
- 34 -
$35,757. In Part II of the 1992 Schedule C, Expenses, petitioner
and Ms. Brodsky claimed, inter alia, “Other Interest” of $9,000,
“Travel” of $300, and “Other expenses” of $2,408.10 The 1992
Schedule C showed “Total expenses before expenses for business
use of home” of $22,617, “Expenses for business use of your home”
of $7,189, and “Net profit or (loss)” of $5,951.
The 1992 joint return also included Schedule D, Capital
Gains and Losses (Schedule D). Part II of the 1992 Schedule D,
Long-Term Capital Gains and Losses, reported that on March 1,
1992, petitioner and Ms. Brodsky sold for $23,000 an interest in
the Church Street property, which they claimed they acquired on
March 1, 1990, that on the date of that sale they had a basis of
$50,000 in that property interest, and that they realized a loss
from that sale of $27,000. Part V of the 1992 Schedule D,
Capital Loss Carryovers from 1992 to 1993, reported all of that
claimed loss as a long-term capital loss carryover to 1993.
The 1992 joint return also included Schedule E in which
petitioner and Ms. Brodsky reported the Church Street property
and the Sanchez Street property as rental properties. In Part I
of the 1992 Schedule E, petitioner and Ms. Brodsky reported no
“Rental and Royalty Income” and claimed no “Rental and Royalty
Expenses” with respect to the Church Street property. In that
10
Petitioner and Ms. Brodsky reported that the amount claim-
ed for “Other expenses” included, inter alia, $2,008 for “PHONE”.
- 35 -
part of that schedule, they reported “Rents received” of $36,505
and claimed “Total expenses” of $68,174 and a “Deductible rental
real estate loss” of $3,167 with respect to the Sanchez Street
property. In Part I of the 1992 Schedule E, petitioner and Ms.
Brodsky claimed “Total rental real estate and royalty income or
(loss)” of ($3,167) with respect to the Sanchez Street property.
On May 14, 1995, respondent received the 1993 joint return.
On page 1 of the 1993 joint return, petitioner and Ms. Brodsky
reported, inter alia, the following:
Line on Page 1 of
Item of Income or (Loss) the 1993 Return Amount
Wages, salaries, tips, etc. 7 $69,506
Taxable interest income 8a 250
Dividend income 9 1,087
Business income or (loss) 12 (9,360)
Capital gain or (loss) 13 (3,000)
1
Total IRA distributions 16a 8
Rental real estate, royalties, 18 15,080
partnerships, S corporations,
trusts, etc.
1
Petitioner and Ms. Brodsky reported that the entire amount of the IRA
distributions was taxable.
In the 1993 joint return, petitioner and Ms. Brodsky reported
“adjusted gross income” of $73,118, “Itemized deductions” of
$60,029, and “Taxable income” of $3,689.
The 1993 joint return included two Schedules C, one of which
showed that petitioner operated a business as an “AUDIO/VIDEO
COMPONENTS WHOLESALER” (wholesale business) and the other of
which showed that petitioner operated a business described as
- 36 -
“CONSIGNMENT SALES - CD’s” (consignment sales business).11 Part
I, Income, of the 1993 Schedule C relating to the wholesale
business reported “Gross receipts or sales” of $158,022, “Cost of
goods sold” of $137,990, and “Gross income” of $20,032. The 1993
Schedule C for the wholesale business showed “Total expenses
before expenses for business use of home” of $23,025, “Expenses
for business use of your home” of $4,867, and “Net profit or
(loss)” of ($7,860). Part I, Income, of the 1993 Schedule C
relating to the consignment sales business reported no “Gross
income”, “Total expenses before expenses for business use of
home” of $1,500, and “Net profit or (loss)” of ($1,500).
The 1993 joint return also included Schedule D. Part II of
the 1993 Schedule D, Long-Term Capital Gains and Losses, reported
“Gain from Form 4797" of $11,315, “Long-term capital loss carry-
over from 1992 Schedule D” of $27,000, and “Net long-term capital
gain or (loss)” of ($15,685).
The 1993 joint return also included Form 4797, Sales of
Business Property (Form 4797), that was referenced in Part II of
the 1993 Schedule D. In Part III of that form, Gain From Dispo-
sition of Property Under Sections 1245, 1250, 1252, 1254, and
1255, petitioner and Ms. Brodsky reported that on January 1,
1993, they sold for $48,000 an interest in the Sanchez Street
11
The respective Schedules C for those two businesses did
not list the names under which petitioner operated them.
- 37 -
property, which they claimed they acquired on February 9, 1989,
that on the date of that sale they had a basis of $40,721 in that
property interest, “Depreciation (or depletion) allowed or
allowable” of $4,036, and an “Adjusted basis” of $36,685, and
that they realized “Total gain” from that sale of $11,315.
The 1993 joint return also included Schedule E in which
petitioner and Ms. Brodsky reported the Sanchez Street property
as rental property. In Part I of the 1993 Schedule E, petitioner
and Ms. Brodsky claimed only “Rental and Royalty Expenses” with
respect to that property. In that part of that schedule, they
claimed “Total expenses” and “Deductible rental real estate loss”
of $688 and “Total rental real estate and royalty income and
(loss)” of ($688) with respect to the Sanchez Street property.
In Part II of the 1993 Schedule E, Income or Loss From Partner-
ships and S Corporations, petitioner and Ms. Brodsky claimed
$15,768 of “Nonpassive income from Schedule K-1" from MZ Trading.
MZ Trading’s Return for 1993
MZ Trading filed Form 1065, U.S. Partnership Return of
Income (Form 1065), for 1993, which reported that MZ Trading
started business on April 1, 1993. In the 1993 Form 1065, MZ
Trading reported “Gross receipts or sales” of $655,334, “Cost of
goods sold” of $576,189, and “Total income” of $79,145.
Respondent’s Examination of Certain Returns
Sometime in 1990, respondent assigned Kathleen Rodegeb (Ms.
- 38 -
Rodegeb), one of respondent’s revenue agents, to examine the
joint returns that petitioner and Ms. Brodsky had filed for the
taxable years 1987 through 1989. Sometime after she began the
examination of those returns, Ms. Rodegeb commenced an examina-
tion of the joint return that petitioner and Ms. Brodsky had
filed for the taxable year 1990. Mr. Sutton represented peti-
tioner and Ms. Brodsky during the course of respondent’s examina-
tion of their joint returns for 1987 through 1990.
During her examination of the joint returns of petitioner
and Ms. Brodsky for 1987 through 1990, Ms. Rodegeb asked peti-
tioner to send her all of his records with respect to those
taxable years. In response to that request, petitioner provided
Ms. Rodegeb with only limited records consisting of certain bank
statements, certain purchase invoices, and certain canceled
checks. Petitioner did not provide Ms. Rodegeb with any books of
account, such as general ledgers, or other records with respect
to his income-producing activities (books and records) for the
taxable years 1987 through 1990 that she needed in order to
conduct the examination of those taxable years. Consequently,
Ms. Rodegeb issued summonses on behalf of respondent to the banks
at which petitioner had informed her he and/or Ms. Brodsky had
maintained accounts during 1987 through 1990.
Around October 8, 1991, Ms. Rodegeb held a conference
(October 1991 conference) with petitioner and Mr. Sutton at which
- 39 -
she informed them that she did not believe that the limited books
and records that petitioner had provided to her substantiated the
various items that were claimed in the joint returns for 1987
through 1990. At that conference, Ms. Rodegeb made certain
recommendations to petitioner with respect to the types of books
and records that he should maintain. Ms. Rodegeb also informed
both petitioner and Mr. Sutton at the October 1991 conference
that, after she concluded the examination of the joint returns of
petitioner and Ms. Brodsky for taxable years 1987 through 1990,
she intended to recommend that respondent issue a so-called
inadequate records notice (inadequate records notice) to them,
which would require that they show respondent that they were
keeping adequate books and records.
Sometime after the October 1991 conference, Ms. Rodegeb met
with her manager regarding, inter alia, her recommendation that
respondent issue an inadequate records notice to petitioner and
Ms. Brodsky. The only effect of issuing such a notice would have
been to trigger an examination of the joint returns of petitioner
and Ms. Brodsky for taxable years after 1990, the last year
examined by Ms. Rodegeb. Since Ms. Rodegeb’s manager had already
concluded that respondent should examine those joint returns, it
was decided that respondent would not issue an inadequate records
notice to petitioner and Ms. Brodsky at the conclusion of respon-
dent’s examination of their joint returns for taxable years 1987
- 40 -
through 1990.
At the conclusion of respondent’s examination of the 1990
joint return of petitioner and Ms. Brodsky, respondent did not
make any determinations with respect to the gross receipts
reported in Schedule C of that return.
Around March 1994, respondent assigned another revenue
agent, Theresa Martin (Ms. Martin), to examine the 1991 joint
return of petitioner and Ms. Brodsky. In early March 1994, Ms.
Martin mailed to petitioner and Ms. Brodsky a letter and a
written request for 1991 documents (collectively, the March 1994
letter). The March 1994 letter asked petitioner and Ms. Brodsky
to provide her with all of the statements, checks, and bank
documents for all of the bank accounts, both personal and busi-
ness, over which one or both of them had signature authority. In
response to the March 1994 letter, petitioner provided Ms. Martin
with certain statements and canceled checks with respect to
petitioner’s UVW account.
Sometime between the date in early March 1994 on which Ms.
Martin sent the March 1994 letter to petitioner and Ms. Brodsky
and the date in May 1994 on which Ms. Martin first met with
petitioner and Ms. Brodsky (May 1994 conference), petitioner
executed a power of attorney that authorized Mr. Sutton to
represent him with respect to respondent’s examination of the
1991 joint return that petitioner and Ms. Brodsky had filed.
- 41 -
Sometime after the May 1994 conference, Ms. Martin wrote Mr.
Sutton a letter (Ms. Martin’s second 1994 letter) in which she
indicated that she believed that petitioner and/or Ms. Brodsky
had maintained accounts during 1991 in addition to the accounts
about which petitioner had previously informed her. Ms. Martin
explained in Ms. Martin’s second 1994 letter why she held that
belief and enclosed a second written request for 1991 documents
with that letter. That second request asked petitioner and Ms.
Brodsky to provide Ms. Martin within one month all records
pertaining to any such additional accounts. Ms. Martin received
no response to Ms. Martin’s second 1994 letter or to her second
written request for 1991 documents. Consequently, Ms. Martin
issued summonses on behalf of respondent to the banks at which
she knew or believed petitioner and/or Ms. Brodsky had maintained
accounts during 1991.
Sometime in August 1994, respondent, through Ms. Martin,
decided to commence an examination of the 1992 joint return of
petitioner and Ms. Brodsky. Around that time, Ms. Martin mailed
Mr. Sutton a letter and a written request for documents for their
taxable year 1992 (collectively, the August 1994 letter). The
August 1994 letter asked that petitioner and Ms. Brodsky provide
Ms. Martin with all records with respect to the accounts that one
or both of them had maintained during 1992. Ms. Martin received
no response to the August 1994 letter. Consequently, Ms. Martin
- 42 -
issued summonses on behalf of respondent to the banks at which
she knew or believed petitioner and/or Ms. Brodsky had maintained
accounts during 1992.
Based on certain information contained in the documents that
Ms. Martin received as a result of the summonses that respondent
issued, she concluded that petitioner and/or Ms. Brodsky had
maintained additional accounts during 1991 and 1992 that they had
failed to disclose to her. Consequently, Ms. Martin issued
summonses on behalf of respondent to obtain information with
respect to those additional accounts.
Based on certain information contained in the documents that
Ms. Martin had received as a result of the summonses that respon-
dent issued, she prepared a spreadsheet for 1991 and 1992. That
spreadsheet showed each of the deposits that had been made into
each of the accounts that Ms. Martin knew petitioner and/or Ms.
Brodsky had maintained during those years, as well as the date
and the amount of each such deposit (1991-1992 deposits analy-
sis). After Ms. Martin completed the 1991-1992 deposits analy-
sis, she mailed a copy of it to Mr. Sutton along with another
written request for documents and a written request that peti-
tioner and Ms. Brodsky identify any item listed in that analysis
which they believed to be nontaxable and provide her with records
to verify the source of any such item. Ms. Martin did not
receive any response to those requests. Thereafter, in order to
- 43 -
schedule a meeting with petitioner and Ms. Brodsky, Ms. Martin
attempted several times to reach Mr. Sutton by telephone and also
sent him another letter. Mr. Sutton did not respond to those
telephone calls or that letter.
Sometime in December 1994, Ms. Martin received a power of
attorney authorizing Elizabeth Schwiff (Ms. Schwiff) to represent
petitioner and Ms. Brodsky with respect to respondent’s examina-
tion of their joint returns for 1991 and 1992. Thereafter, Ms.
Martin telephoned Ms. Schwiff. During that telephone call, Ms.
Schwiff asked Ms. Martin to mail her copies of (1) all of the
requests for documents that Ms. Martin had issued with respect to
1991 and 1992, (2) the bank statements that Ms. Martin had
reviewed for those years regarding accounts that petitioner
and/or Ms. Brodsky had maintained during those years, and (3) the
1991-1992 deposits analysis that Ms. Martin had prepared. Ms.
Martin complied with Ms. Schwiff’s requests. Sometime after Ms.
Martin mailed Ms. Schwiff the copies of all of the documents that
Ms. Schwiff had requested, Ms. Schwiff informed Ms. Martin that
petitioner and Ms. Brodsky intended to organize their records.
Thereafter, Ms. Martin had no further contact with Ms. Schwiff.
Sometime between the end of May 1995 and the beginning of
July 1995, respondent received a power of attorney authorizing
Mr. DiBernardo to represent petitioner and Ms. Brodsky with
respect to respondent’s examination of their joint returns for
- 44 -
1991 and 1992. Mr. DiBernardo asked Ms. Martin to send him
copies of (1) all of the requests for documents that Ms. Martin
had issued with respect to 1991 and 1992, (2) the bank statements
that Ms. Martin had reviewed for those years regarding accounts
that petitioner and/or Ms. Brodsky maintained during those years,
and (3) the 1991-1992 deposits analysis that Ms. Martin had
prepared. Ms. Martin complied with Mr. DiBernardo’s requests.
Sometime after Mr. DiBernardo began representing petitioner
and Ms. Brodsky with respect to respondent’s examination of their
joint returns for 1991 and 1992, Ms. Martin attempted to schedule
a conference with petitioner, Ms. Brodsky, and Mr. DiBernardo.
Ms. Martin scheduled three separate conferences with petitioner,
Ms. Brodsky, and Mr. DiBernardo, each of which petitioner can-
celed 1 to 2 days prior to the date on which it was scheduled to
take place. Consequently, Ms. Martin issued summonses on behalf
of respondent to petitioner and Ms. Brodsky in order to compel
them to meet with her. Ms. Martin served the summons on peti-
tioner at his home and sent a copy to Mr. DiBernardo. After
having been served with the summons, petitioner informed Ms.
Martin that he was not able to meet with her on the date stated
in the summons and did not suggest another date on which he was
able to meet with her. Ms. Martin rescheduled the conference
date listed in the summons in order to accommodate petitioner.
Pursuant to respondent’s summonses to petitioner and Ms.
- 45 -
Brodsky, they met with Ms. Martin on November 29, 1995 (November
1995 conference). At that conference, petitioner and Ms. Brodsky
made certain statements regarding the sources of certain deposits
that were made into one or more of their accounts during 1991 and
1992 but did not provide any documentation to corroborate those
statements. After the November 1995 conference, Ms. Martin asked
petitioner and Ms. Brodsky to provide her with documentation to
corroborate the statements that they had made at that conference
regarding the sources of certain deposits that were made into one
or more of their accounts during 1991 and 1992. Ms. Martin
received no documents in response to that request. Thereafter,
Ms. Martin scheduled several more conferences with petitioner and
Ms. Brodsky, all of which they canceled.
Sometime early in 1996, respondent, through Ms. Martin,
commenced an examination of the joint return of petitioner and
Ms. Brodsky for 1993, asked them for documents relating to that
year, received no response to that request, and issued summonses
on behalf of respondent to the banks at which petitioner and/or
Ms. Brodsky had maintained accounts during 1993. Sometime in the
spring of 1996, Ms. Martin’s manager directed her to complete the
examination of the 1991 and 1992 joint returns of petitioner and
Ms. Brodsky.
Thereafter, respondent transferred responsibility for the
examination of the 1993 joint return of petitioner and Ms.
- 46 -
Brodsky to another revenue agent, Rafael Oliveras (Mr. Oliveras),
who completed that examination. Mr. Oliveras, inter alia,
reviewed the documents that respondent received in response to
the summonses issued to the banks at which petitioner and/or Ms.
Brodsky had maintained accounts during 1993. In connection with
his examination of the 1993 joint return of petitioner and Ms.
Brodsky, Mr. Oliveras had a number of telephonic conferences with
their authorized representative (representative). Mr. Oliveras
asked that representative whether during 1993 certain of the
deposits into the accounts of petitioner and/or Ms. Brodsky
represented items that are not taxable. Although the representa-
tive of petitioner and Ms. Brodsky suggested to Mr. Oliveras that
there might be certain nontaxable items, that representative did
not specify which deposits during 1993 are nontaxable, nor did
such representative provide Mr. Oliveras with any documentation
or other information showing that certain of such deposits are
nontaxable. The representative of petitioner and Ms. Brodsky
never informed Mr. Oliveras that petitioner had obtained any
loans during 1993.
In addition to working on the examination of the 1993 joint
return of petitioner and Ms. Brodsky, Mr. Oliveras conducted an
examination of Form 1065 of MZ Trading for 1993. In connection
with that latter examination, Mr. Oliveras performed a bank
deposits analysis of MZ Trading’s bank accounts for 1993 and
- 47 -
prepared a schedule dated January 7, 1997 (Mr. Oliveras’ summary
of MZ Trading’s deposits during 1993). Mr. Oliveras’ summary of
MZ Trading’s deposits during 1993 set forth, inter alia, Mr.
Oliveras’ conclusions with respect to certain information regard-
ing each of the deposits that was made into MZ Trading’s accounts
during 1993, i.e., the date, the amount, and the payor of each
such deposit. Mr. Oliveras’ summary of MZ Trading’s deposits
during 1993 showed total deposits during that year into MZ
Trading’s accounts of $544,934 and “Total Taxable” deposits of
$485,855. That summary also stated in pertinent part:
The T/P did not provide an accurate reconciliation of
the receipts received by the partnership [MZ Trading]
during the 9312 period.
The bank deposit analysis reflects less deposits than
the gross receipts reported on the return [MZ Trading’s
1993 Form 1065]. This is an indication of receipts
being shifted to other accounts or kept on hand by the
T/P. Based on the bank deposit analysis, gross re-
ceipts are accepted as reported per IRC Section 61
provisions.
By letter dated March 3, 1997, respondent issued an inade-
quate records notice to petitioner and Ms. Brodsky. That letter
stated in pertinent part:
Our review of your records shows they do not
adequately verify your Federal tax liability * * *.
You are required by law to keep permanent records
and supporting documents * * *. These records may
consist of documents such as invoices, bills, tapes,
and receipts, or a timely kept account book, diary or
statement of expenses and supporting receipts, paid
bills, or cancelled checks. These must be sufficiently
detailed and arranged so that your liability can be
- 48 -
accurately reported and verified.
Please send us, within the next 6 months, an
explanation of how you are correcting your
recordkeeping to meet the requirements of the law.
Notices of Deficiency
Respondent issued a notice to petitioner and Ms. Brodsky for
1991 and 1992 and a separate notice to them for 1993. In those
respective notices, respondent determined that petitioner and Ms.
Brodsky had unreported Schedule C gross receipts for 1991, 1992,
and 1993 in the respective amounts of $121,771, $348,205, and
$758,400. In order to make those determinations, respondent
reconstructed under the bank deposits method petitioner’s Sched-
ule C gross receipts for each of the years 1991, 1992, and 1993
(respondent’s bank deposits analysis). Respondent used that
indirect method of reconstructing those gross receipts because
petitioner and Ms. Brodsky had not maintained adequate books and
records for those years.
Each of the notices included schedules in which respondent
listed for each of the years at issue respondent’s position
regarding the sources of the deposits “Related to Schedule C
Income” into petitioner’s accounts during each such year and the
total amount of such deposits during each such year from each
such source. In reconstructing the income of petitioner and Ms.
Brodsky for the years at issue, respondent added to the results
produced by respondent’s bank deposits analysis certain addi-
- 49 -
tional amounts, such as the amounts that petitioner received when
he cashed, and did not deposit, in whole or in part certain
checks or when he used certain checks to purchase certain cash-
ier’s checks.
In the notices, respondent disallowed the cost of goods sold
claimed in Schedules C for 1991, 1992, and 1993 in the respective
amounts of $12,849, $113,935, and $54,337. In the notice for
1991 and 1992, respondent also disallowed for those two years
claimed Schedule C deductions of $24,796 and $16,278, respec-
tively.
In the notice for 1991 and 1992, respondent disallowed all
of the claimed Schedule E rental expenses for 1991 and 1992 in
the amounts of $20,980 and $6,817, respectively,
because it has not been established that they were
ordinary and necessary business expenses or were ex-
pended for the purpose designated. In addition, you
have not established an ownership interest in these
properties nor has it been established that you were at
risk per section 465 of the Internal Revenue Code.
* * *
As an alternative ground for disallowing the claimed Schedule E
rental expenses for 1991 and 1992, respondent determined that
the claimed losses are not allowable per Section 469 of
the Internal Revenue Code because you did not actively
participate in the management of the rental properties
and because you have no other passive income to offset
the passive losses.
In the notice for 1991 and 1992, respondent also determined
that, instead of the $27,000 loss which petitioner and Ms.
- 50 -
Brodsky reported in their 1992 joint return with respect to the
sale of the Church Street property, they have a gain of $23,000
from that sale, all of which must be recognized for 1992.
Respondent made that determination with respect to the sale of
the Church Street property because respondent determined that
petitioner and Ms. Brodsky had not established their basis in
that property when it was sold.12
In the notice for 1993, respondent determined that, instead
of the $11,315 gain which petitioner and Ms. Brodsky reported in
their 1993 joint return with respect to the sale of the Sanchez
Street property, they have a gain from that sale of $48,000.
Respondent made that determination because petitioner and Ms.
Brodsky had not established their basis in that property when it
was sold.13
In the notices, respondent further determined that peti-
tioner and Ms. Brodsky are liable for each of the years at issue
for the fraud penalty under section 6663(a) on the entire amount
of the underpayment for each such year of the tax that was
required to be shown in the return for each such year. In the
alternative, respondent determined in the notices that petitioner
12
Respondent also disallowed in the notice for 1991 and 1992
a claimed capital loss carryover to 1993.
13
Respondent also determined in the 1993 notice that peti-
tioner and Ms. Brodsky are not entitled to the $27,000 capital
loss carryover from 1992 that they claimed in their 1993 joint
return.
- 51 -
and Ms. Brodsky are liable for each of the years at issue for the
accuracy-related penalty under section 6662(a) because of negli-
gence or disregard of rules or regulations under section
6662(b)(1).
In the 1993 notice, respondent determined that petitioner
and Ms. Brodsky are liable for 1993 for the addition to tax under
section 6651(a)(1) because they did not timely file their 1993
joint return and did not show that that failure was due to
reasonable cause.
Amendment to Answer and Reply to that Amendment
On October 7, 1999, the Court had filed respondent’s amend-
ment to answer, which respondent had lodged on September 24,
1999, when respondent filed a motion for leave to file amendment
to answer. Respondent affirmatively alleged in the amendment to
answer, inter alia, that, in addition to the amount of the cost
of goods sold claimed in the 1993 Schedule C and disallowed in
the notice for 1993, petitioner is not entitled for that year to
$42,913 of the remaining amount of the cost of goods sold claimed
in that Schedule C.
On October 7, 1999, petitioner submitted a document entitled
“NOTICE OF OBJECTION”, in which petitioner replied to certain
affirmative allegations in respondent’s amendment to answer. The
Court had that document filed as a reply to the amendment to
answer (petitioner’s reply to respondent’s amendment to answer).
- 52 -
In that reply, petitioner denied various affirmative allegations
made by respondent in the amendment to answer but did not deny
any of the affirmative allegations in that amendment to answer
regarding the additional $42,913 of the cost of goods sold for
1993 that petitioner and Ms. Brodsky claimed in the 1993 Schedule
C and that respondent alleged in respondent’s amendment to answer
should be disallowed.
OPINION
Evidentiary Issues
The first evidentiary issue involves certain entries listed
in three separate workpapers prepared by certain of respondent’s
employees (respondent’s workpapers), one for each of the years at
issue. Each of those workpapers shows for each of those years
certain information that is listed under various headings with
respect to each of the deposits into petitioner’s accounts,
including each of the payments against the balances due on
petitioner’s credit accounts. One such heading is “Payor”. (We
shall refer to the persons listed in respondent’s workpapers
under the heading “Payor” as payors.)
Ms. Martin prepared the respective workpapers for 1991 and
1992, and one or more of respondent’s other employees prepared
the workpapers for 1993. Ms. Martin and one or more of respon-
dent’s other employees prepared respondent’s workpapers by using
information contained in certain documents that respondent
- 53 -
received in response to the summonses that respondent issued to
petitioner’s banks. Those documents included copies of (1) the
statements of petitioner’s accounts, (2) the deposit slips
showing deposits into petitioner’s bank accounts, and (3) the
checks deposited into petitioner’s bank accounts or used to make
payments against the balances due on petitioner’s credit ac-
counts.
At the further trial in this case, petitioner offered
respondent’s workpapers into evidence and sought to rely on
certain entries in those workpapers in order to establish the
identity of the persons who petitioner claims were the payors of
certain deposits into petitioner’s accounts. Respondent objected
under rule 1002 of the Federal Rules of Evidence (FRE) (the so-
called best evidence rule) to the admission into evidence of
those entries listed in respondent’s workpapers under the heading
“Payor” for which the underlying documents establishing the
respective payors listed in such entries are not part of the
record in this case (respondent’s evidentiary objection).
Respondent indicated at the further trial that, because peti-
tioner notified respondent only several days prior to the date of
the further trial that petitioner might offer respondent’s
workpapers as exhibits in this case, respondent had not had an
opportunity to compare the entries in respondent’s workpapers
with the stipulations and evidence introduced at the trial and to
- 54 -
be introduced at the further trial in order to determine the
entries to which respondent would object and the entries to which
respondent would not object.
At the further trial in this case, respondent requested, and
the Court granted, additional time in order for respondent to
identify for the Court the entries in respondent’s workpapers to
which respondent was objecting. The Court advised the parties at
the further trial that it would reserve ruling on the admissibil-
ity of the entries in respondent’s workpapers to which respondent
was objecting until respondent had the opportunity to identify
such entries and that it would admit conditionally any testimony
which the parties elicited at the further trial with respect to
respondent’s workpapers, subject to the Court’s ruling on the
admissibility of the entries in such workpapers to which respon-
dent was objecting. At the conclusion of the further trial in
this case, respondent had not had the opportunity to review
respondent’s workpapers in order to identify the entries in such
workpapers to which respondent was objecting. Consequently, the
Court permitted respondent to identify in respondent’s opening
brief any such entries and allowed the parties to present argu-
ments on brief with respect to the admissibility of the entries
in respondent’s workpapers to which respondent was objecting.
It is our understanding that, of the 51 entries in respon-
dent’s workpapers which relate to deposits that petitioner
- 55 -
contends remain at issue in this case, respondent objects under
FRE 1002 to 26 of them (the material entries that are the subject
of respondent’s evidentiary objection).14
FRE 1002 provides: “To prove the content of a writing,
recording, or photograph, the original writing, recording, or
photograph is required, except as otherwise provided in these
rules or by Act of Congress.” For purposes of FRE 1001 through
1008, entitled “Contents of Writings, Recordings and Photo-
graphs”, an “original” of a writing is defined as “the writing
* * * itself or any counterpart intended to have the same effect
by a person executing or issuing it.” FRE 1001(3). For those
purposes, a “duplicate” of a writing is defined as “a counterpart
produced by the same impression as the original, * * * or by
other equivalent techniques which accurately reproduces the
original.” FRE 1001(4). A duplicate is admissible to the same
extent as an original “unless (1) a genuine question is raised as
14
As indicated above, respondent objects to the admission of
only those entries in respondent’s workpapers for which the
underlying documents establishing the respective payors listed in
such entries are not part of the record in this case. Respondent
indicates on brief that respondent objects to 29 of the 51
entries that relate to deposits that petitioner contends remain
at issue in this case. However, three of those entries listed
payors which the parties stipulated and with respect to which the
underlying documents establishing the identities of such payors
are part of the record. We construe and shall treat respondent’s
evidentiary objection as pertaining to only 26 of the 51 entries
which relate to deposits that petitioner contends remain at issue
in this case. Respondent also objects under FRE 1002 to certain
other entries in respondent’s workpapers that do not pertain to
any of the deposits that petitioner contends remain at issue. We
shall not specifically address those other entries.
- 56 -
to the authenticity of the original or (2) in the circumstances
it would be unfair to admit the duplicate in lieu of the origi-
nal.” FRE 1003.
The material entries that are the subject of respondent’s
evidentiary objection are not “originals” or “counterparts”
within the meaning of FRE 1001(3), nor are they “duplicates”
within the meaning of FRE 1001(4). Rather, those entries reflect
information that certain of respondent’s employees obtained by
reviewing certain other documents obtained pursuant to respon-
dent’s summonses to petitioner’s banks. Unless the Federal Rules
of Evidence or an act of Congress provides an exception to FRE
1002 that is applicable to the material entries that are the
subject of respondent’s evidentiary objection, such entries are
not admissible.
Petitioner relies on two exceptions to FRE 1002 to support
his position that the material entries that are the subject of
respondent’s evidentiary objection are admissible to prove the
identity of the payors during the years at issue of certain items
that were deposited into petitioner’s accounts. The first
exception on which petitioner relies is FRE 1004(3), which
provides:
The original is not required, and other evidence
of the contents of a writing, recording, or photograph
is admissible if–-
* * * * * * *
(3) Original in Possession of Opponent. At a
time when an original was under the control of the
party against whom offered, that party was put on
- 57 -
notice, by the pleadings or otherwise, that the
contents would be a subject of proof at the hear-
ing, and that party does not produce the original
at the hearing; * * *
The advisory committee’s notes accompanying FRE 1004 explain the
purpose of the exception to FRE 1002 found in FRE 1004(3), as
follows:
Basically, the rule requiring the production of
the original as proof of contents has developed as a
rule of preference: if failure to produce the original
is satisfactorily explained, secondary evidence is
admissible. The instant rule specifies the circum-
stances under which production of the original is
excused.
It is petitioner’s position that respondent was in control
of the “originals” of the documents, i.e, 25 checks and 1 money
order,15 which certain of respondent’s employees reviewed in
preparing the material entries that are the subject of respon-
dent’s evidentiary objections and which listed the names of the
payors during the years at issue of certain items that were
deposited into petitioner’s accounts. According to petitioner,
because respondent was in control of those “originals”, FRE
1004(3) permits the use of other evidence, i.e., certain entries
in respondent’s workpapers, to prove the identity of those
payors. We disagree.
The “originals” of the documents that identify the payors
during the years at issue of the items that relate to the mate-
15
All but one of the items in question that were deposited
into petitioner’s accounts and that relate to the material
entries that are the subject of respondent’s evidentiary objec-
tion were checks of some type, and one of those items was a money
order.
- 58 -
rial entries that are the subject of respondent’s evidentiary
objection are the items themselves, i.e., the 25 checks and the
1 money order themselves. See United States v. Carroll, 860 F.2d
500, 506 n.13 (1st Cir. 1988). Certain of respondent’s employees
prepared the material entries that are the subject of respon-
dent’s evidentiary objection by using copies, which respondent
received after having issued summonses to petitioner’s banks, of
microfiche of such checks and money order, which microfiche those
banks maintained. For purposes of FRE 1001 through 1008, those
copies of such microfiche constitute duplicates, and not origi-
nals. See id. at 507.
On the record before us, we find that respondent was never
in control, as required by FRE 1004(3), of the “originals” of the
documents that identify the payors during the years at issue of
the items that relate to the material entries that are the
subject of respondent’s evidentiary objection.16 We further find
on the instant record that petitioner has not satisfactorily
16
On the instant record, we also have a question about
whether petitioner satisfies the requirement under FRE 1004(3)
that respondent have been “put on notice” that the contents of
respondent’s workpapers were to be a subject of proof at the
further trial in this case. In this connection, respondent
indicated at the further trial that petitioner did not notify
respondent until Aug. 15, 2000, less than one week before the
further trial in this case began, that petitioner might offer
respondent’s workpapers as exhibits in this case and that respon-
dent did not have an opportunity to determine which entries in
those workpapers are otherwise established by the stipulations
and evidence introduced at the trial and to be introduced at the
further trial and which entries he would object to at the further
trial.
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explained his failure to produce (1) the originals of the 25
checks and the 1 money order that relate to the material entries
that are the subject of respondent’s evidentiary objection or
(2) the duplicates (i.e., copies) of the microfiche of such
checks and money order, which microfiche petitioner’s banks
maintained. If petitioner had obtained such originals and
offered them at trial, they would have been admissible. See FRE
1002. If petitioner had obtained such duplicates and offered
them at trial, they would have been admissible to the same extent
as the originals. See FRE 1003. In either event, petitioner
would not have had to resort to secondary evidence consisting of
the material entries in respondent’s workpapers that are the
subject of respondent’s evidentiary objection in order to estab-
lish who the checks and the money order in question showed the
payors of such checks and money order to be. On the record
before us, we find that FRE 1004(3) does not permit petitioner to
use those entries to prove the identity of the payors of the
checks and the money order in question.
The second exception to FRE 1002 on which petitioner relies
is FRE 1006, which provides:
The contents of voluminous writings, recordings,
or photographs which cannot conveniently be examined in
court may be presented in the form of a chart, summary,
or calculation. The originals, or duplicates, shall be
made available for examination or copying, or both, by
other parties at a reasonable time and place. The
court may order that they are produced in court.
Petitioner claims that under FRE 1006 the material entries that
are the subject of respondent’s evidentiary objection are admis-
- 60 -
sible to prove the identity of the payors during the years at
issue of certain items that were deposited into petitioner’s
accounts. That is because, according to petitioner, the docu-
ments that showed those payors are voluminous and could not have
been conveniently examined by the Court. We disagree.
Only 51 of the entries in respondent’s workpapers relate to
deposits that petitioner contends remain at issue in this case.
Respondent objects to only 26 of those entries. See supra note
14. Respondent does not object to the remaining 25 entries
because the payors listed in those entries are established by
other evidence in the record without regard to the entries in
respondent’s workpapers. Of the 26 material entries that are the
subject of respondent’s evidentiary objection, only 25 actually
list payors.17 It appears that, instead of relying on those 25
material entries that are the subject of respondent’s evidentiary
objection, petitioner could have established the identity of the
payors listed in those 25 entries by offering into evidence the
originals or the duplicates of 24 checks and 1 money order. We
believe that we could have conveniently examined at the further
trial the originals or the duplicates of those 24 checks and 1
money order. In the instant case, we do not believe, and in any
event petitioner has failed to show, that those originals or
17
One material entry that is the subject of respondent’s
evidentiary objection does not show the payor of the deposit
relating to that entry. Instead of the name of the payor, the
words “Unable to locate” appear with respect to a deposit of
$20,119 made into petitioner’s equity line account on Mar. 19,
1991.
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those duplicates would have been voluminous. On the record
before us, we find that petitioner has failed to establish that
the documents that certain of respondent’s employees reviewed in
preparing the material entries that are the subject of respon-
dent’s evidentiary objection are voluminous and could not have
been conveniently examined in court. On that record, we find
that FRE 1006 does not permit petitioner to use those entries to
show the payors of the checks and the money order in question.
Although petitioner does not advance any argument under FRE
1007, we believe that that rule is applicable in resolving
respondent’s evidentiary objection. FRE 1007 provides:
Contents of writings, recordings, or photographs
may be proved by the testimony or deposition of the
party against whom offered or by that party’s written
admission, without accounting for the nonproduction of
the original.
On the record before us, we find that the material entries that
are the subject of respondent’s evidentiary objection constitute
respondent’s written admission that those entries reflect the
information contained in the documents used to create such
entries.18 On that record, we also find that other entries in
respondent’s workpapers to which respondent objects under FRE
1002 constitute respondent’s written admission that those entries
reflect the information contained in the documents used to create
such entries.
18
In this connection, we note that respondent does not
contend that the information contained in those entries is
inaccurate, nor do we question on the record before us the
accuracy of such information.
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On the record before us, we find that the material entries
that are the subject of respondent’s evidentiary objection are
admissible under FRE 1007, and we overrule respondent’s eviden-
tiary objection to those entries. On that record, we also
overrule respondent’s evidentiary objection to other entries in
respondent’s workpapers which do not pertain to any of the
deposits that petitioner contends remain at issue in this case.
Accordingly, we admit respondent’s workpapers into evidence and
make them part of the record in this case. We also admit uncon-
ditionally into the record in this case the testimony elicited by
the parties at the further trial with respect to such workpapers.
The next evidentiary issue before us involves petitioner’s
new position on brief as to the purpose for which he offered into
the record at the further trial Mr. Oliveras’ summary of MZ
Trading’s deposits during 1993 (Mr. Oliveras’ summary). Mr.
Oliveras prepared that summary in connection with respondent’s
examination of MZ Trading’s Form 1065 for 1993. Mr. Oliveras’
summary set forth, inter alia, Mr. Oliveras’ conclusions with
respect to certain information regarding each of the deposits
that was made into MZ Trading’s accounts during 1993, i.e., the
date, the amount, and the payor of each such deposit, as well as
the following statements of Mr. Oliveras (Mr. Oliveras’ state-
ments):
The T/P did not provide an accurate reconciliation of
the receipts received by the partnership during the
9312 period.
The bank deposit analysis reflects less deposits than
the gross receipts reported on the return. This is an
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indication of receipts being shifted to other accounts
or kept on hand by the T/P. Based on the bank deposit
analysis, gross receipts are accepted as reported per
IRC Section 61 provisions.
At the further trial, respondent objected under FRE 1002 to the
admission into the record of Mr. Oliveras’ summary. Respondent
further objected to the admission of Mr. Oliveras’ summary
because respondent claimed that Mr. Oliveras’ statements are
hearsay.
At the further trial in this case, in response to respon-
dent’s evidentiary objections to Mr. Oliveras’ summary, peti-
tioner clarified that he was not offering Mr. Oliveras’ summary
into the record for the truth of its content, but rather for the
limited purpose that it was a document prepared by Mr. Oliveras.
On that limited basis, we admitted Mr. Oliveras’ summary into
evidence and made it part of the record in this case.
On brief, petitioner asks us to allow him to change the
purpose for which he offered Mr. Oliveras’ summary into evidence
and to reconsider our evidentiary ruling with respect to that
summary. Although not altogether clear, petitioner appears to
take the position on brief that Mr. Oliveras’ summary should be
admitted into the record for the truth of its contents rather
than for the limited purpose for which petitioner requested that
that summary be admitted into the record at the further trial in
this case. Petitioner seeks on brief to have Mr. Oliveras’
summary admitted into the record for the truth of its contents in
order to establish through Mr. Oliveras’ statements on the second
page of that summary “that there were substantial deposits to
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petitioner’s line of credit account that had been included [in]
MZ Trading Company’s 1993 partnership taxable income.”19
We shall not allow petitioner to change on brief the purpose
for which he offered Mr. Oliveras’ summary at the further trial
in this case. Even if we were to admit Mr. Oliveras’ summary
into the record for the truth of its contents, that summary does
not establish as facts what petitioner contends it establishes.
Petitioner relies on the following statements of Mr. Oliveras
that appear at the bottom of the second page of Mr. Oliveras’
summary: “The bank deposit analysis reflects less deposits than
the gross receipts reported on the return. This is an indication
of receipts being shifted to other accounts or kept on hand by
* * * [MZ Trading]”. According to petitioner, the foregoing
statements establish that certain deposits into one or more of
petitioner’s accounts were included in MZ Trading’s taxable
income for 1993. We disagree. The statements of Mr. Oliveras on
which petitioner relies show only that Mr. Oliveras believed
that, because the bank deposits analysis that he performed for
1993 with respect to MZ Trading showed less deposits of MZ
19
On brief, petitioner also relies on Mr. Oliveras’ summary
in order to support petitioner’s contention that during 1993 he
made a capital contribution of approximately $38,000 to MZ
Trading. Mr. Oliveras’ summary does not support petitioner’s
contention. Mr. Oliveras’ summary identifies two amounts, i.e.,
$36,279 and $14,000, as capital contributions. That summary does
not identify who made such capital contributions or when such
capital contributions were made. Even if we were to admit Mr.
Oliveras’ summary into the record for the truth of its contents,
that summary does not establish that during 1993 petitioner made
a capital contribution of approximately $38,000 to MZ Trading.
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Trading than gross receipts reported in its 1993 Form 1065, it
was possible that some of MZ Trading’s gross receipts for 1993
were deposited into bank accounts other than MZ Trading’s bank
account(s) or that MZ Trading did not deposit some of those gross
receipts. The statements of Mr. Oliveras in Mr. Oliveras’
summary on which petitioner relies do not establish that any of
MZ Trading’s gross receipts for 1993 were shifted or deposited
into any of petitioner’s accounts during that year.
Issues Relating to the Burden of Proof
It is petitioner’s position that respondent has the burden
of proving that for each of the years 1991, 1992, and 1993 each
of the deposits into petitioner’s accounts that remains at issue
is taxable. In support of that position, petitioner asserts:
Section 7522 requires the notice of deficiency to
contain a description of the basis for the commis-
sioner’s tax determinations. Respondent’s notices of
deficiency are based on the bank deposits analysis, and
do not contain a detailed description of the deposits.
Specific items of deposit must be relied on to prove
whether the deposits are nontaxable, which requires the
presentation of different evidence to prove specific
items not in the notices of deficiency. At the same
time, respondent is the party objecting to the presen-
tation of the documents that it prepared detailing the
specific deposits. Therefore, it is respondent who
should have the burden of proof on these specific
deposit issues, as they are “new matters” within Rule
142(a), United States Tax Court Rules of Practice and
Procedure, and pursuant to the holding of Shea v.
Commissioner, 112 T.C. 14 (1999).
Section 7522(a) requires that a notice of deficiency “de-
scribe the basis” for the tax deficiency. A new matter is raised
when the basis or the theory on which the Commissioner of Inter-
nal Revenue (Commissioner) relies was not stated or described in
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the notice of deficiency and the new basis or the new theory
requires the presentation of different evidence. Shea v. Commis-
sioner, 112 T.C. 183, 197 (1999); Wayne Bolt & Nut Co. v. Commis-
sioner, 93 T.C. 500, 507 (1989). The rule for determining
whether the Commissioner has raised a new matter
is consistent with, and supported by, the statutory
requirement [in section 7522(a)] that the notice of
deficiency “describe the basis” for the Commissioner’s
determination. This rule also provides a reasonable
method for enforcing the requirements of section 7522.
Shea v. Commissioner, supra.
In the notice for 1991 and 1992 and in the notice for 1993,
respondent determined that petitioner20 had unreported Schedule C
gross receipts for each of the years at issue. In making those
determinations, respondent reconstructed under the bank deposits
method petitioner’s Schedule C gross receipts for each of those
years. Each of the notices included schedules in which respon-
dent listed for each of the years at issue respondent’s position
regarding the sources of the deposits into petitioner’s accounts
during each such year and the total amount of such deposits
during each such year from each such source. In reconstructing
the income of petitioner for the years at issue, respondent added
to the results produced by respondent’s bank deposits analysis
certain additional amounts, such as the amounts that petitioner
received when he cashed, and did not deposit, in whole or in part
certain checks or when he used certain checks to purchase certain
20
Although respondent issued the notice for 1991 and 1992 to
petitioner and Ms. Brodsky, for convenience, when referring to
that notice we shall refer only to petitioner.
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cashier’s checks.
On the record before us, we find that, as required by
section 7522(a), the notices describe the basis for respondent’s
determination to increase petitioner’s gross receipts for each of
the years at issue. The bank deposits method that respondent
used in order to determine whether petitioner had unreported
gross receipts for each of those years assumes that all money
deposited into a taxpayer’s bank account during a given period
constitutes taxable income, although the Commissioner must take
into account any nontaxable source or deductible expense of which
the Commissioner has knowledge. Clayton v. Commissioner, 102
T.C. 632, 645-646 (1994); DiLeo v. Commissioner, 96 T.C. 858, 868
(1991), affd. 959 F.2d 16 (2d Cir. 1992). Thus, bank deposits
are prima facie evidence of income. Clayton v. Commissioner,
supra at 645. The taxpayer has the burden of proving that the
bank deposits were derived from nontaxable sources, see id., or
constitute income that he previously reported, see Calhoun v.
United States, 591 F.2d 1243, 1245 (9th Cir. 1978); Nicholas v.
Commissioner, 70 T.C. 1057, 1064 (1978). Respondent is not
required to prove a likely source of a taxpayer’s bank deposits.
Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
In support of respondent’s determinations in the notices
that remain at issue with respect to petitioner’s Schedule C
gross receipts for 1991, 1992, and 1993, respondent is not
relying on a basis or a theory that is not described in the
notices. Respondent relied in the notices, at trial, and at
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further trial and relies on brief on the bank deposits method of
reconstructing income. We conclude that respondent is not
relying on a new basis or a new theory in support of respondent’s
determinations in the notices that remain at issue with respect
to petitioner’s Schedule C gross receipts for 1991, 1992, and
1993. We further conclude that the evidence required to prove
that for each of those years the total amount of deposits into
petitioner’s accounts from each source that remains at issue is
or is not taxable to petitioner is the same evidence required to
prove that the total amount of each deposit into petitioner’s
accounts that remains at issue is or is not taxable to him.
On the record before us, we reject petitioner’s position
that respondent has the burden of proving that each of the
deposits that remains at issue for each of the years 1991, 1992,
and 1993 is taxable. On that record, we find that petitioner has
the burden of proving that each of those deposits was derived
from a nontaxable source or constitutes income which he previ-
ously reported. See Rule 142(a); Calhoun v. United States,
supra; Clayton v. Commissioner, supra at 645.
It is also petitioner’s position that respondent has the
burden of proof with respect to the affirmative allegations in
respondent’s amendment to answer that, in addition to the amount
of the cost of goods sold claimed in the Schedule C for 1993 and
disallowed in the notice for that year, petitioner is not enti-
tled for that year to $42,913 of the remaining amount of the cost
of goods sold claimed in that Schedule C. We need not decide
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whether petitioner’s position is correct. That is because,
pursuant to Rule 37(c), petitioner is deemed to have admitted,
inter alia, each of the affirmative allegations in respondent’s
amendment to answer relating to the claimed cost of goods sold
for 1993.
Rule 37(c) provides that, where a reply is filed, every
affirmative allegation set out in the answer and not expressly
admitted or denied in the reply is deemed to be admitted.21 In
the instant case, petitioner filed a reply to respondent’s
amendment to answer which expressly denied certain of the affir-
mative allegations in that amendment to answer. That reply did
not expressly deny (or admit) the affirmative allegations in
respondent’s amendment to answer relating to the additional
amount of the claimed cost of goods sold for 1993 that respondent
alleged therein should be disallowed.22 We find that, pursuant
to Rule 37(c), petitioner is deemed to have admitted the affirma-
tive allegations in respondent’s amendment to answer relating to
the cost of goods sold for 1993.
We conclude that, except for the fraud penalty under section
21
Where a reply is not filed, the affirmative allegations in
the answer are deemed to be denied unless the Commissioner,
within 45 days after the expiration of the time for filing the
reply, files a motion that specified allegations in the answer be
deemed admitted. Rule 37(c). Such a motion may be granted
unless the required reply is filed within the time directed by
the Court. Id.
22
In fact, petitioner’s reply to respondent’s amendment to
answer did not contain any statement addressing any of the
affirmative allegations in respondent’s amendment to answer
relating to the claimed cost of goods sold for 1993.
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6663(a) on which respondent has the burden of proof, sec.
7454(a); Rule 142(b), petitioner has the burden of proof on the
determinations in the notices that remain at issue, see Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In this
connection, with respect to the deductions claimed by petitioner,
deductions are strictly a matter of legislative grace, and
petitioner bears the burden of proving that he is entitled to any
deductions claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992).
The Court’s Evaluation of Evidence
in the Record on Which the Parties Rely
Both petitioner and respondent rely on certain testimonial
and documentary evidence to support their respective positions on
the various issues in this case.
Testimonial Evidence
At the trial, respondent called Ms. Rodegeb and Ms. Martin
as witnesses, and petitioner called himself and Mr. DiBernardo as
witnesses. At the further trial, respondent called no witnesses,
and petitioner called himself, Dan J. Jordan (Mr. Jordan), Ms.
Rodegeb, Ms. Martin, Mr. Raja, Mr. Syelsky, Mr. Vulis, Mr.
Dubrovsky, Mr. Sutton, Mr. Oliveras, and Mr. Guterman as wit-
nesses.
We note initially that throughout much of the examination of
certain of petitioner’s witnesses at the further trial peti-
tioner’s counsel asked leading questions, to which respondent
objected on numerous occasions. The pervasiveness of such
leading questions during the examination of certain of peti-
- 71 -
tioner’s witnesses was such that the Court reminded petitioner’s
counsel on a number of occasions that the leading nature of the
questions asked impacted the Court’s evaluation of the testimony
of such witnesses.
The Testimony of Ms. Rodegeb,
Ms. Martin, and Mr. Oliveras
We found Ms. Rodegeb, Ms. Martin, and Mr. Oliveras to be
credible.
Petitioner’s Testimony
Based on our observation of petitioner both at the trial and
at the further trial, including our observation of his demeanor,
we did not find him to be credible. In addition, we found
petitioner’s testimony to be general, vague, conclusory, implau-
sible, inconsistent, and/or evasive in certain material respects.
Mr. DiBernardo’s Testimony
We found the testimony of Mr. DiBernardo to be largely
irrelevant to our resolving any of the issues in this case.
Mr. Jordan’s Testimony
The testimony of Mr. Jordan, a certified public accountant
who we concluded qualified as an accounting expert on behalf of
petitioner, consisted of his direct testimony, including his
expert report and an addendum to that report,23 and his testimony
23
In violation of the Court’s March 31, 2000 Order, peti-
tioner did not proffer the addendum to Mr. Jordan’s expert report
to the Court until Aug. 21, 2000, the first day of the further
trial in this case, and did not provide a copy of that addendum
to respondent until about 5 minutes before that addendum was
marked for identification at that further trial. Mr. Jordan
(continued...)
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on voir dire, cross-examination, redirect examination, and
recross-examination.
We evaluate the opinions of experts in light of the qualifi-
cations of each expert and all other evidence in the record. See
Estate of Christ v. Commissioner, 480 F.2d 171, 174 (9th Cir.
1973), affg. 54 T.C. 493 (1970); IT&S of Iowa, Inc. v. Commis-
sioner, 97 T.C. 496, 508 (1991). We have broad discretion to
evaluate “the overall cogency of each expert’s analysis.”
Sammons v. Commissioner, 838 F.2d 330, 334 (9th Cir. 1988)
(quoting Ebben v. Commissioner, 783 F.2d 906, 909 (9th Cir.
1986), affg. in part and revg. in part on another issue T.C.
Memo. 1986-318). We are not bound by the formulae and opinions
proffered by an expert, especially when they are contrary to our
own judgment. Orth v. Commissioner, 813 F.2d 837, 842 (7th Cir.
1987), affg. Lio v. Commissioner, 85 T.C. 56 (1985); Silverman v.
Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo.
1974-285. Instead, we may reach a decision based on our own
analysis of all the evidence in the record. Silverman v. Commis-
sioner, supra at 933. The persuasiveness of an expert’s opinion
depends largely upon the disclosed facts on which it is based.
Tripp v. Commissioner, 337 F.2d 432, 434 (7th Cir. 1964), affg.
T.C. Memo. 1963-244. While we may accept the opinion of an
expert in its entirety, see Buffalo Tool & Die Manufacturing Co.
v. Commissioner, 74 T.C. 441, 452 (1980), we may be selective in
23
(...continued)
prepared the addendum to his expert report on the day before the
first day of the further trial in this case.
- 73 -
the use of any portion of such an opinion, see Parker v. Commis-
sioner, 86 T.C. 547, 562 (1986). Furthermore, we may reject the
opinion of an expert in its entirety. Palmer v. Commissioner,
523 F.2d 1308, 1310 (8th Cir. 1975), affg. 62 T.C. 684 (1974);
Parker v. Commissioner, supra at 562-565.
In preparing his expert report and the addendum to that
report, Mr. Jordan had no personal knowledge about any facts with
respect to: (1) The items reported in (a) the joint returns of
petitioner and Ms. Brodsky for the years at issue and (b) MZ
Trading’s Form 1065 for 1993; (2) the accounts of (a) petitioner
and/or Ms. Brodsky during the years at issue and (b) MZ Trading
during 1993, including any deposits into and withdrawals from
those accounts; and (3)(a) the personal dealings and business
transactions of petitioner and/or Ms. Brodsky during the years at
issue and (b) the transactions of MZ Trading during 1993. During
his testimony, Mr. Jordan acknowledged that he accepted as facts
certain representations that petitioner, whom we did not find to
be credible, had made to him (petitioner’s representations) and
accepted as accurate certain documents, which we did not find to
be credible, that petitioner had provided to him (petitioner’s
documents) and that he based his analysis, opinions, and conclu-
sions upon those representations and those documents.24
Petiioner did not provide Mr. Jordan with general ledgers, books
of account, receipts, or other business records of petitioner,
24
We note that certain of petitioner’s representations and
petitioner’s documents on which Mr. Jordan relied are not part of
the record in this case.
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UVW, and MZ Trading, or he provided him with a few documents that
purported to be such types of records, which the Court did not
find to be credible and reliable.25 According to Mr. Jordan, at
least certain of his conduct in performing his analysis and
reaching his opinions and conclusions was not acceptable conduct
for him as an accountant, and the accounting profession would not
find such conduct to be acceptable. Mr. Jordan also admitted
during his testimony that if he had not relied upon petitioner’s
representations and petitioner’s documents, he would have reached
opinions and conclusions different from those that he had reached
in his expert report and the addendum to that report.
On the record before us, we did not find any of Mr. Jordan’s
testimony, including his analysis, opinions, and conclusions, to
be reliable or helpful in understanding the evidence, determining
the facts in dispute, or resolving the issues to which his
testimony related.
Mr. Raja’s Testimony
We found the testimony of Mr. Raja to have been based
largely upon his general business practices with petitioner, as
opposed to his personal knowledge of the facts with respect to a
particular transaction or activity about which he testified. For
25
For example, Mr. Jordan relied on a document that Mr.
DiBernardo had prepared and that purported to be general ledger
pages showing deposits during 1993 into MZ Trading’s bank account
of its receipts. Mr. DiBernardo did not prepare those pages,
which are not part of the instant record, until sometime after
respondent commenced the examination of MZ Trading’s Form 1065
for 1993.
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example, Mr. Raja testified that he recognized a certain cash-
ier’s check payable to Macy’s. However, Mr. Raja later admitted
that, when he testified about that cashier’s check, he was making
an assumption that petitioner used that check to purchase certain
goods for resale from Macy’s. Mr. Raja testified that he made
that assumption because M.P. Electronics and petitioner had
purchased that type of merchandise from Macy’s on other occa-
sions. We also found Mr. Raja’s testimony to be vague and/or
inconsistent at times.
Mr. Syelsky’s Testimony
Although generally we found Mr. Syelsky to be credible, at
times we found his testimony to be inconsistent and/or evasive.
Mr. Vulis’ Testimony
Although generally we found Mr. Vulis to be credible, at
times we found his testimony to be general, vague, and/or
conclusory. In addition, we found Mr. Vulis’ testimony to have
been sometimes based on his general business practices with
petitioner, as opposed to his personal knowledge of the facts
with respect to a particular transaction or activity about which
he testified.
Mr. Dubrovsky’s Testimony
Based on our observation of Mr. Dubrovsky at the further
trial, including our observation of his demeanor, we did not find
him to be credible. We also found Mr. Dubrovsky’s testimony to
be general, vague, conclusory, and/or inconsistent in certain
material respects.
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Mr. Sutton’s Testimony
We do not believe that Mr. Sutton had personal knowledge of
the facts surrounding the items which were reported in the joint
returns of petitioner and Ms. Brodsky for the years at issue and
about which he testified at the further trial in this case. In
this connection, Mr. Sutton acknowledged that certain of the
items that were reported in the joint returns for 1991 and 1992
were based upon summary documents that he did not prepare. In
addition, Mr. Sutton misrepresented during his testimony what
documents he had shown to respondent’s counsel and one of respon-
dent’s revenue agents sometime during the week before the further
trial in this case. It was only upon questioning by respondent’s
counsel and by the Court that Mr. Sutton acknowledged that he had
made such a misrepresentation.
Mr. Guterman’s Testimony
Based on our observation of Mr. Guterman at the further
trial, including our observation of his demeanor, we did not find
him to be credible. In addition, although Mr. Guterman claimed
to have personal knowledge with respect to each of the matters
about which he testified, we have serious reservations about that
claim.26
26
Mr. Guterman admitted that his testimony with respect to
at least one document was based upon the representations of
petitioner as to that document, and not on his personal knowl-
edge.
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Documentary Evidence
The record contains a considerable number of documents.27
In large measure, however, the record is devoid of any general
ledgers, books of account, receipts, or other records supporting
petitioner’s claims, which the Court finds to be credible.28 We
infer from petitioner’s failure to produce credible records to
substantiate his claims with respect to the issues that remain in
this case on which he has the burden of proof that such records
do not exist and that, if such records do exist, they do not
substantiate those claims. See Wichita Terminal Elevator Co. v.
Commissioner, 6 T.C. 1158, 1164-1165 (1946), affd. 162 F.2d 513
(10th Cir. 1947).29
Unreported Income
In the notices, respondent determined that petitioner has
27
The Court admitted certain of those documents into the
record only for a limited purpose. For example, the Court
admitted into evidence copies of the front sides of certain
checks only as copies of the front sides of such checks, and not
to show that those checks were in fact negotiated or, if negoti-
ated, that those checks were deposited and/or cashed by the
payees listed on the copies of the front sides of those checks.
28
For example, petitioner claims that during the years at
issue certain of the deposits into petitioner’s accounts, includ-
ing certain of the payments against the balances due on peti-
tioner’s credit accounts, were nontaxable loans or advances.
However, the record contains no credible documentary evidence to
support those claims, such as promissory notes.
29
The principle that we may infer from the failure of a
party, who has the burden of proof on a given matter, to offer
evidence that exists regarding such a matter that such evidence
would not have been favorable to that party’s position regarding
that matter is so well established that hereinafter we shall not
cite the case law supporting that principle.
- 78 -
unreported Schedule C gross receipts for each of the years at
issue by reconstructing such gross receipts for each of those
years pursuant to the bank deposits method. In reconstructing
petitioner’s income for each of the years at issue, respondent
added to the results produced by respondent’s bank deposit
analysis certain additional amounts, such as the amounts that
petitioner received when he cashed, and did not deposit, in whole
or in part certain checks or when he used certain checks to
purchase certain cashier’s checks.
We address first what we understand to be petitioner’s
contention that respondent’s bank deposits analysis for each of
the years at issue is inherently flawed. In support of that
contention, petitioner points out that respondent has conceded as
nontaxable certain deposits into petitioner’s accounts during
each of those years, including certain payments against the
balances due on petitioner’s credit accounts during each such
year, which respondent had determined in the notices to be
taxable.
On the record before us, we find respondent’s bank deposits
analysis for each of the years at issue to be reasonable.
Although respondent was required in performing respondent’s bank
deposits analysis for each of those years to take into account
any nontaxable source or deductible expense of which respondent
had knowledge, Clayton v. Commissioner, 102 T.C. at 645-646;
DiLeo v. Commissioner, 96 T.C. at 868, petitioner was generally
uncooperative during the course of the examination of the joint
- 79 -
returns for the years at issue in that, inter alia, he provided
respondent with relatively little documentation and other infor-
mation. In this connection, after Ms. Martin completed the 1991-
1992 deposits analysis, she mailed a copy of it to Mr. Sutton
along with another written request for documents and a written
request that petitioner and Ms. Brodsky identify any item listed
in that analysis which they believed to be nontaxable and provide
her with records to verify the source of any such item. Ms.
Martin did not receive any response to those requests. Thereaf-
ter, Ms. Martin unsuccessfully attempted to meet with petitioner
and Ms. Brodsky, and Ms. Martin was forced to issue summonses to
them in order to compel them to meet with her. After reschedul-
ing the date of the meeting stated in respondent’s summonses in
order to accommodate petitioner, Ms. Martin met with petitioner
and Ms. Brodsky on November 29, 1995. Although petitioner and
Ms. Brodsky made certain statements at that meeting regarding the
sources of certain deposits that were made into one or more of
their accounts during 1991 and 1992, they did not provide any
documentation to corroborate those statements. After the Novem-
ber 1995 conference, Ms. Martin asked petitioner and Ms. Brodsky
to provide her with documentation to corroborate the statements
that they had made at that conference regarding the sources of
certain deposits that were made into one or more of their ac-
counts during 1991 and 1992. Ms. Martin received no documents in
response to that request. Thereafter, Ms. Martin scheduled
several more conferences with petitioner and Ms. Brodsky, all of
- 80 -
which they canceled. Mr. Oliveras30 asked the representative of
petitioner and Ms. Brodsky with respect to respondent’s examina-
tion of their 1993 joint return whether there were any nontaxable
sources for any of the deposits reflected in the deposits analy-
sis prepared by respondent with respect to 1993. Although that
representative suggested to Mr. Oliveras that there might be
certain nontaxable items, that representative did not specify
which 1993 deposits are nontaxable, nor did such representative
provide Mr. Oliveras with any documentation or other information
showing that certain of such deposits are not taxable.
As described in the Court’s Order dated December 30, 1999,
petitioner remained generally uncooperative in working with
respondent in the stipulation process in preparing this case for
the scheduled trial on October 19, 1999. It was not until the
Court intervened at the request of respondent’s counsel that
petitioner finally participated in the stipulation process with
respondent’s counsel on October 13, 1999. After the trial in
this case took place and after petitioner filed in mid-December
1999 a motion to open the record and a motion for leave to allow
offer of proof, petitioner provided certain documentation and
information to respondent that he had not previously provided,
which enabled respondent to conclude that certain deposits into
petitioner’s accounts that remained at issue, including certain
payments against the balances due on petitioner’s credit ac-
30
Mr. Oliveras completed respondent’s examination of the
1993 joint return of petitioner and Ms. Brodsky after Ms. Martin
had commenced and worked on that examination.
- 81 -
counts, are not taxable.
On the record before us, we reject petitioner’s contention
that respondent’s bank deposits analysis for each of the years at
issue is inherently flawed.
We turn now to the specific deposits that remain at issue
for each of the years 1991, 1992, and 1993, including any pay-
ments against the balances due on petitioner’s credit accounts
that remain at issue for each of those years.31 Petitioner
contends that each of the deposits at issue is not taxable
because each such deposit constitutes one of the following:
(1) Personal loan; (2) business loan to UVW; (3) reimbursement
for certain expenses; (4) advance to purchase a personal item for
an acquaintance; (5) rental payment attributable to Konstantin
Reingatch (Mr. Reingatch); (6) income of, loan to, or reimburse-
ment with respect to MZ Trading; or (7) repayment of a loan.
Alleged Personal Loans
Petitioner contends that, of the following total deposits,
including total payments against the balance due on petitioner’s
equity line account, the amounts set forth below represented
personal loans to him:
31
Petitioner did not raise as an issue in petitioner’s
further trial memorandum, presented no evidence at trial and at
further trial, and makes no argument on brief as to certain
amounts of unreported income determined for 1991 and 1993 that
petitioner placed in dispute in the petition and that respondent
has not conceded. We conclude that petitioner has abandoned
contesting those amounts of unreported income. See Rybak v.
Commissioner, 91 T.C. 524, 566 n.19 (1988).
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Date of Total Amount of
Deposit Account Deposit Alleged Loan Alleged Lender
2/12/91 Petitioner’s UVW $14,195 $10,000 Mr. Dubrovsky and
account Ms. Dubrovsky
4/30/92 Petitioner’s equity 15,000 15,000 Mr. Ferrer
line account
6/26/92 Petitioner’s equity 7,000 7,000 Amuke Business
line account Association
8/28/92 Petitioner’s UVW 15,896 3,000 Mr. Averbach
account
12/15/92 Petitioner’s equity 20,000 20,000 Mr. Syelsky
line account
5/25/93 Petitioner’s equity 30,000 30,000 Roman Kirdan
line account
With respect to the February 12, 1991 deposit in question of
$14,195, petitioner contends that $10,000 of that deposit, which
we have found was derived from a $10,000 check from Mr. Dubrovsky
and Ms. Dubrovsky,32 represented a personal loan to him. In
support of that contention, petitioner relies on his self-serving
testimony, Mr. Dubrovsky’s testimony, and certain checks from
petitioner to Mr. Dubrovsky that petitioner contends represented
repayments of the alleged $10,000 loan.33 Based on the Court’s
evaluation of the testimony of petitioner and of Mr. Dubrovsky,
we are not required to, and we shall not, rely on their testimony
regarding the February 12, 1991 deposit in question. See Lerch
v. Commissioner, 877 F.2d 624, 631-632 (7th Cir. 1989), affg.
T.C. Memo. 1987-295; Geiger v. Commissioner, 440 F.2d 688, 689-
690 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-159;
32
Although petitioner claims that the $10,000 check in
question was from Mr. Dubrovsky, the record shows that the payors
of that check were Mr. Dubrovsky and Ms. Dubrovsky.
33
We note that the various checks that petitioner contends
represented repayments of the alleged $10,000 loan total $9,525.
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Tokarski v. Commissioner, 87 T.C. at 77.34 As for the checks
that petitioner claims represented repayments by him to Mr.
Dubrovsky of the alleged $10,000 loan, on the instant record, we
find that petitioner has failed to carry his burden of showing
the purpose of those checks.35 On the record before us, we find
that petitioner has failed to carry his burden of establishing
that $10,000 of the February 12, 1991 deposit in question repre-
sented a personal loan from Mr. Dubrovsky.
With respect to the April 30, 1992 deposit at issue of
$15,000, petitioner contends that that deposit, which we have
found was derived from a $15,000 cashier’s check issued by Great
Western Bank, represented a personal loan from Mr. Ferrer. In
support of his contention that Mr. Ferrer’s funds were used to
purchase that cashier’s check, petitioner relies on his self-
serving testimony, on which we are not required to, and we shall
34
The principle that we are not required to rely on testi-
mony, even if uncontradicted, that we find to be, inter alia, not
credible, questionable, unreasonable, general, and/or vague is so
well established that hereinafter we shall not cite the case law
supporting that principle.
35
Petitioner could have issued those checks, which total
$9,525, to Mr. Dubrovsky for purposes other than as repayments of
the alleged $10,000 loan. In this connection, petitioner failed
to offer into evidence any credible documentary evidence to
establish that $10,000 of the Feb. 12, 1991 deposit in question
represented a personal loan from Mr. Dubrovsky and Ms. Dubrovsky
and that the checks from petitioner to Mr. Dubrovsky on which
petitioner relies represented repayments of the alleged $10,000
loan. We infer from petitioner’s failure to proffer any such
documentary evidence that any such evidence does not exist and
that, if any such evidence does exist, it would not have substan-
tiated petitioner’s position with respect to $10,000 of the Feb.
12, 1991 deposit in question.
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not, rely.36 On the record before us, we find that petitioner
has failed to carry his burden of establishing that the April 30,
1992 deposit at issue represented a personal loan from Mr.
Ferrer.
With respect to the June 26, 1992 deposit at issue of
$7,000, petitioner contends that that deposit, which we have
found was derived from two checks from Amuke Business Association
totaling $7,000, represented a personal loan from Amuke Business
36
Assuming arguendo that petitioner had established that Mr.
Ferrer’s funds were used to purchase the $15,000 Great Western
Bank cashier’s check in question, on the instant record, we find
that petitioner has failed to carry his burden of showing that
that cashier’s check represented a loan to petitioner from Mr.
Ferrer. To support his contention that that check represented a
loan, petitioner relies on his self-serving testimony and the
testimony of Mr. Vulis. We are not required to, and we shall
not, rely on petitioner’s testimony. Although Mr. Vulis testi-
fied that Mr. Ferrer made a $15,000 loan to petitioner and
although we found Mr. Vulis to be credible on that point, his
testimony does not establish the date of that loan, nor does his
testimony show that the $15,000 Great Western Bank cashier’s
check that was used to make the Apr. 30, 1992 deposit at issue
represented the loan from Mr. Ferrer to which Mr. Vulis was
referring in his testimony. As stated above, the only evidence
in the record as to whether that deposit was made with the
proceeds of a $15,000 loan from Mr. Ferrer is petitioner’s self-
serving testimony, on which we are not required to, and we shall
not, rely. We note that petitioner did not call Mr. Ferrer as a
witness and did not offer into evidence any credible documentary
evidence regarding the alleged loan from Mr. Ferrer. We infer
from petitioner’s failure to call Mr. Ferrer that Mr. Ferrer’s
testimony would not have been favorable to petitioner’s conten-
tion that the $15,000 Great Western Bank cashier’s check that was
used to make the Apr. 30, 1992 deposit at issue represented a
loan from Mr. Ferrer. We infer from petitioner’s failure to
proffer any credible documentary evidence regarding the alleged
$15,000 loan from Mr. Ferrer that any such evidence does not
exist and that, if any such evidence does exist, it would not
have substantiated petitioner’s position regarding that alleged
loan.
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Association that he later repaid. In support of that contention,
petitioner relies on his self-serving testimony, on which we are
not required to, and we shall not, rely.37 On the record before
us, we find that petitioner has failed to carry his burden of
establishing that the June 26, 1992 deposit at issue represented
a personal loan from Amuke Business Association.
With respect to the August 28, 1992 deposit at issue of
$15,896, petitioner contends that $3,000 of that deposit, which
we have found was derived from a $3,000 check from Commonwealth
Enterprises dated August 27, 1992, represented a personal loan
from Mr. Averbach who, along with Mr. Ferrer, participated with
Mr. Vulis in operating Amuke Group. In support of that conten-
tion, petitioner relies on his self-serving testimony, on which
we are not required to, and we shall not, rely.38 On the record
37
We note that, when questioned about the two checks total-
ing $7,000 from Amuke Business Association to petitioner, Mr.
Vulis, who at all relevant times was familiar with the activities
of that association, was unable to recall the purpose for which
Amuke Business Association issued those checks.
Petitioner failed to offer into evidence any credible
documentary evidence regarding the alleged $7,000 loan from Amuke
Business Association. We infer from petitioner’s failure to
proffer any such documentary evidence that any such evidence does
not exist and that, if any such evidence does exist, it would not
have substantiated petitioner’s position regarding that alleged
loan.
38
We note that petitioner did not call Mr. Averbach as a
witness and did not elicit any testimony from Mr. Vulis, who at
all relevant times was associated with Commonwealth Enterprises,
with respect to the purpose for which Commonwealth Enterprises
issued the $3,000 check to petitioner. Nor did petitioner offer
into evidence any credible documentary evidence regarding the
(continued...)
- 86 -
before us, we find that petitioner has failed to carry his burden
of establishing that $3,000 of the August 28, 1992 deposit at
issue represented a personal loan from Mr. Averbach.
With respect to the December 15, 1992 deposit at issue of
$20,000, petitioner contends that that deposit, which we have
found was derived from a $20,000 check from Mr. Syelsky, repre-
sented a personal loan from Mr. Syelsky.39 In support of that
contention, petitioner relies on his self-serving testimony and
Mr. Syelsky’s testimony. We are not required to, and we shall
not, rely on petitioner’s testimony. Mr. Syelsky testified that
he lent $20,000 to petitioner. Although Mr. Syelsky was unable
to remember whether he had made that loan to petitioner in 1991
38
(...continued)
alleged $3,000 loan from Mr. Averbach. We infer from peti-
tioner’s failure to call Mr. Averbach and to elicit any such
testimony from Mr. Vulis that their testimony would not have been
favorable to petitioner’s position with respect to that alleged
loan. We infer from petitioner’s failure to proffer any credible
documentary evidence regarding the alleged $3,000 loan from Mr.
Averbach that any such evidence does not exist and that, if any
such evidence does exist, it would not have substantiated peti-
tioner’s position regarding the alleged $3,000 loan from Mr.
Averbach.
39
On brief, respondent raises a question as to how Mr.
Syelsky could have issued a $20,000 check to petitioner in
December 1992, since during that month Mr. Syelsky was involved
in bankruptcy proceedings that he had commenced earlier during
1992 and had represented to the Bankruptcy Court on Sept. 15,
1992, that he had only $100 in assets. However, the parties
stipulated that Mr. Syelsky gave petitioner his $20,000 check
that was used to make the Dec. 15, 1992 deposit at issue. To the
extent that respondent is arguing that we should disregard that
stipulation, we decline to do so because we do not find it to be
clearly contrary to the facts that we have found are established
by the record. See Cal-Maine Foods, Inc. v. Commissioner, 93
T.C. at 195.
- 87 -
or 1992, he testified that the only transactions in which he had
engaged with petitioner consisted of a $20,000 loan and a $30,000
advance. Moreover, as discussed supra note 39, the parties
stipulated that Mr. Syelsky gave petitioner his $20,000 check
that was used to make the December 15, 1992 deposit at issue.
Based on Mr. Syelsky’s testimony with respect to a $20,000 loan
to petitioner, which we found to be credible, and that stipula-
tion, we are persuaded that Mr. Syelsky lent $20,000 to peti-
tioner that was used to make the December 15, 1992 deposit at
issue. On the record before us, we find that the December 15,
1992 deposit at issue represented a personal loan from Mr.
Syelsky.
With respect to the May 25, 1993 deposit at issue consisting
of a $30,000 cash payment against the balance due on petitioner’s
equity line account, petitioner contends that that deposit
represented a personal loan from Roman Kirdan (Mr. Kirdan)40 for
the purchase of electronic equipment such as TVs and VCRs.
Petitioner also contends inconsistently that the $30,000 used to
40
Petitioner contends that the source of the May 25, 1993
deposit at issue was Mr. Kirdan, who petitioner claims operated
East-West at all relevant times and who used that business’ bank
account to withdraw the funds used in making that deposit.
However, the parties stipulated, and we have found, that on May
25, 1993, petitioner deposited $30,000 into petitioner’s equity
line account as a payment against the balance due on that account
and that the sources of that payment were East-West and Mr.
Guterman. To the extent that petitioner is arguing that we
should disregard that stipulation, we decline to do so because we
do not find it to be clearly contrary to the facts that we have
found are established by the record. See Cal-Maine Foods, Inc.
v. Commissioner, supra at 195.
- 88 -
make the May 25, 1993 deposit at issue was from East-West and
that those funds represented a gross receipt of MZ Trading. In
support of his contentions, petitioner relies on his self-serving
testimony and Mr. Guterman’s testimony. We are not required to,
and we shall not, rely on petitioner’s testimony regarding the
May 25, 1993 deposit at issue.41 Based on the Court’s evaluation
of Mr. Guterman’s testimony, we are not required to, and we shall
not, rely on his testimony with respect to that deposit. On the
record before us, we find that petitioner has failed to carry his
burden of establishing that the May 25, 1993 deposit at issue
represented either a personal loan from Mr. Kirdan or a gross
receipt of MZ Trading that it reported in its Form 1065 for 1993.
Alleged Business Loans to UVW
Petitioner contends that, of the following total deposits,
including total payments against the balance due on petitioner’s
equity line account, and total cash that he received in connec-
tion with three of those deposits, the amounts set forth below
represented business loans to him:
41
Petitioner failed to call Mr. Kirdan as a witness. We
infer from petitioner’s failure to call Mr. Kirdan that his
testimony would not have been favorable to petitioner’s position
regarding the May 25, 1993 deposit at issue. Petitioner also
failed to offer into evidence any credible documentary evidence
to establish that the May 25, 1993 deposit represented either a
personal loan to petitioner from Mr. Kirdan to purchase elec-
tronic equipment or a gross receipt of MZ Trading. We infer from
petitioner’s failure to proffer any such documentary evidence
that any such evidence does not exist and that, if it does exist,
it would not have substantiated either of petitioner’s inconsis-
tent positions with respect to that deposit.
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Amount
Date of Total of Cash Amount of
Deposit Account Deposit Received Alleged Loan Alleged Lender
3/23/92 Petitioner’s $50,000 --- $50,000 Mr. Kroma
UVW account
5/12/92 Petitioner’s 36,000 --- 31,167.50 Amuke Business
equity line Association
account
6/30/92 Petitioner’s 26,000 $250 26,250 Amuke Business
equity line Association
account
8/7/92 Petitioner’s 7,720 150 7,870 Amuke organiza-
UVW account tions
9/11/921 Petitioner’s 3,850 --- 3,850 Mr. Vulis
UVW account
2
9/23/92 Petitioner’s 30,000 375 30,375 Amuke organiza-
equity line tions
account
12/15/92 Petitioner’s 30,100 --- 30,000 Mr. Syelsky
UVW account
12/16/92 Petitioner’s 10,500 --- 10,500 Commonwealth
UVW account Enterprises
1/14/93 Petitioner’s 5,000 --- 5,000 Amuke organiza-
equity line tions
account
1
Petitioner contends that the date on which the $3,850 check was
deposited into petitioner’s UVW account was Sept. 1, 1992. However, the
record shows that a $3,850 check from Commonwealth Enterprises was deposited
into petitioner’s UVW account on Sept. 11, 1992, and not on Sept. 1, 1992. We
presume that petitioner’s reference to Sept. 1, 1992, was unintentional.
2
Although the record does not establish that the difference between the
amount of the alleged loan claimed by petitioner ($30,375) and the amount of
the Sept. 23, 1992 payment against the balance due on petitioner’s equity line
account ($30,000) was cash received by petitioner, petitioner appears to take
that position, and respondent does not dispute it.
Petitioner also contends that a $15,000 cashier’s check payable
to him that was issued by Home Savings of America and that he
cashed on December 4, 1991, represented a business loan from Mr.
Reingatch.
With respect to the March 23, 1992 deposit at issue of
$50,000, petitioner contends that that deposit, which we have
found was derived from a $50,000 check from Mr. Kroma, repre-
- 90 -
sented a business loan from Mr. Kroma. In support of that
contention, petitioner relies on (1) his self-serving testimony,
(2) a copy of the front side of the purchaser’s copy of a $20,000
Bank of America cashier’s check dated June 30, 1992, that peti-
tioner purchased and that was payable to Mr. Kroma, which peti-
tioner claims was a repayment of the alleged $50,000 loan, and
(3) a copy of the front side of a $1,250 check dated July 13,
1992, that was payable to Mr. Kroma, which petitioner contends
was a payment of 2 months’ interest on that alleged loan. We are
not required to, and we shall not, rely on petitioner’s testimony
regarding the alleged $50,000 loan from Mr. Kroma. Moreover, on
the instant record, we are not satisfied that Mr. Kroma42 re-
ceived the proceeds of the $20,000 Bank of America cashier’s
check dated June 30, 1992, and the $1,250 check dated July 13,
1992.43 That is because the record contains only the front sides
42
We note that petitioner did not call Mr. Kroma as a wit-
ness with respect to the Mar. 23, 1992 deposit at issue. We
infer from petitioner’s failure to call Mr. Kroma that Mr.
Kroma’s testimony would not have been favorable to petitioner’s
position with respect to that deposit. We also note that peti-
tioner did not offer into evidence any credible documentary
evidence regarding the Mar. 23, 1992 deposit at issue. We infer
from petitioner’s failure to offer any such documentary evidence
that any such evidence does not exist and that, if any such
evidence does exist, it would not have substantiated petitioner’s
position with respect to the alleged loan from Mr. Kroma.
43
Assuming arguendo that petitioner had established that Mr.
Kroma received the proceeds of the $20,000 Bank of America
cashier’s check dated June 30, 1992, and the $1,250 check dated
July 13, 1992, on the instant record, we find that petitioner has
failed to carry his burden of showing that the proceeds of those
two checks constituted a repayment of the alleged $50,000 loan in
question and 2 months’ interest on that alleged loan, respec-
(continued...)
- 91 -
of those checks.44 On the record before us, we find that peti-
tioner has failed to carry his burden of establishing that the
March 23, 1992 deposit represented a business loan from Mr.
Kroma.
With respect to the May 12, 1992 deposit in question of
$36,000, petitioner contends that $31,167.50 of that deposit,
which we have found was derived from Amuke Business Association,
represented a business loan from that association. Petitioner
failed to raise as an issue in petitioner’s further trial memo-
randum that $31,167.50 of the May 12, 1992 deposit in question
represented a business loan from Amuke Business Association.
Accordingly, pursuant to the Court’s March 31, 2000 Order, we
shall not address that matter.45
43
(...continued)
tively. See our discussion supra note 42.
44
For example, Mr. Kroma could have endorsed both the
$20,000 cashier’s check and the $1,250 check to petitioner, who
in turn deposited and/or cashed them. In this connection, the
record shows that on Apr. 28, 1992, petitioner deposited into one
of petitioner’s accounts a Bank of America cashier’s check for
$12,000 that was payable to Marcel Feldberg.
45
Assuming arguendo that petitioner’s further trial memoran-
dum had raised as an issue that $31,167.50 of the May 12, 1992
deposit in question represented a business loan from Amuke
Business Association, on the instant record, we find that peti-
tioner has failed to carry his burden of establishing that that
amount did in fact represent such a loan. On that record, we
have found that the May 12, 1992 deposit was made with a $36,000
Bank of America cashier’s check payable to Star Electronics that
petitioner purchased with, inter alia, a $31,167.50 check dated
May 11, 1992, from Amuke Business Association. According to
petitioner, the $31,167.50 check represented a business loan that
Amuke Business Association made to him for the purchase of
certain jewelry from Star Electronics, but that purchase did not
(continued...)
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With respect to the June 30, 1992 transaction at issue
consisting of a $26,000 deposit and $250 in cash that petitioner
received, petitioner contends that that deposit and that cash,
which we have found were derived from a $26,250 check from Amuke
Business Association, represented a business loan from that
association with respect to his purchase of certain cigarette
lighters on July 20, 1992, when he tendered $16,000 to Carvey’s
Discount. In support of that contention, petitioner relies on
(1) his self-serving testimony, (2) a document entitled “COMMER-
45
(...continued)
occur, and he repaid Amuke Business Association $31,167.50 as
evidenced by a check dated May 19, 1992. To support petitioner’s
contentions, petitioner relies on his self-serving testimony and
on an entry in a statement for petitioner’s equity line account,
which shows that on May 19, 1992, a check for $31,167.50 was
drawn on that account (May 19, 1992 withdrawal). We are not
required to, and we shall not, rely on petitioner’s testimony
regarding the May 12, 1992 deposit in question. On the instant
record, we find that petitioner has failed to carry his burden of
showing that Amuke Business Association received the May 19, 1992
withdrawal that is reflected in a statement for petitioner’s
equity line account. Even if petitioner had made such a showing,
we find on the record before us that petitioner has failed to
carry his burden of establishing that that withdrawal represented
a repayment to Amuke Business Association of a business loan that
it had made to petitioner. We note that petitioner did not
elicit any testimony from Mr. Vulis regarding petitioner’s
contention that Amuke Business Association made a $31,167.50
business loan to petitioner on May 11, 1992. We infer from
petitioner’s failure to elicit any such testimony with respect to
the alleged business loan that any such testimony would not have
been favorable to petitioner’s position regarding that alleged
loan. We also note that petitioner did not offer into evidence
any credible documentary evidence supporting his position that
$31,167.50 of the May 12, 1992 deposit in question represented a
business loan from Amuke Business Association. We infer from
petitioner’s failure to proffer any such documentary evidence
that any such evidence does not exist and that, if any such
evidence does exist, it would not have substantiated petitioner’s
position regarding that alleged loan.
- 93 -
CIAL INVOICE” dated July 11, 1992, that shows “AMUKE Group of
Companies” under the heading “Importer/Exporter” and the sale of,
inter alia, 12,144 “Lighters” for $24,288, and (3) a copy of the
front side of the purchaser’s copy of a $16,000 Bank of America
cashier’s check dated July 20, 1992, that was payable to Carvis
Discount. We are not required to, and we shall not, rely on the
testimony of petitioner regarding the alleged $26,250 business
loan.46 Moreover, we find that the document entitled “COMMERCIAL
INVOICE” does not show (1) that petitioner (or UVW) was involved
in the purchase of the lighters reflected in that document and
(2) that Amuke Business Association lent money to petitioner to
purchase such lighters. Nor do we find that the copy of the
front side of the purchaser’s copy of the $16,000 Bank of America
cashier’s check dated July 20, 1992, that was payable to Carvis
Discount,47 establishes petitioner’s position with respect to the
46
We note that Mr. Vulis testified that he had no recollec-
tion of the purpose of the $26,250 check from Amuke Business
Association to petitioner. We also note that petitioner did not
offer into evidence any credible documentary evidence showing
that the $26,250 check from Amuke Business Association repre-
sented a business loan from that association. We infer from
petitioner’s failure to proffer any such documentary evidence
that any such evidence does not exist and that, if any such
evidence does exist, it would not have substantiated petitioner’s
position with respect to that alleged loan.
47
We are not satisfied from that copy, inter alia, that
Carvis Discount deposited and/or cashed the $16,000 Bank of
America cashier’s check payable to it dated July 20, 1992. For
example, Carvis Discount could have endorsed that cashier’s check
to petitioner, who in turn deposited and/or cashed it. In this
regard, as noted above, the record shows that on Apr. 28, 1992,
petitioner deposited into petitioner’s UVW account a $12,000 Bank
of America cashier’s check that was payable to Marcel Feldberg.
(continued...)
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alleged $26,250 business loan from Amuke Business Association.
On the record before us, we find that petitioner has failed to
carry his burden of establishing that the June 30, 1992 transac-
tion at issue represented a business loan from Amuke Business
Association.
With respect to the August 7, 1992 transaction at issue
consisting of a $7,720 deposit and $150 in cash that petitioner
received, petitioner contends that that deposit and that cash,
which we have found were derived from a $7,870 check from Amuke
Group, represented a business loan from that organization for the
purchase of certain candy. In support of that contention,
petitioner relies on his self-serving testimony, on which we are
not required to, and we shall not, rely.48 On the record before
47
(...continued)
Assuming arguendo that the record had established that
Carvis Discount deposited and/or cashed the $16,000 Bank of
America cashier’s check payable to it, on that record, we find
that petitioner has failed to carry his burden of establishing
that Carvis Discount received the proceeds of that check in
connection with the purchase of certain cigarette lighters with
respect to which Amuke Business Association allegedly lent
petitioner $26,250.
48
We note that petitioner failed to elicit from Mr. Vulis,
who at all relevant times was involved in the operations of Amuke
Group, any testimony with respect to the alleged $7,870 loan from
Amuke Group. We infer from petitioner’s failure to elicit any
such testimony that any such testimony would not have been
favorable to petitioner’s position regarding that alleged loan.
We also note that petitioner did not offer into evidence any
credible documentary evidence supporting his position regarding
the alleged $7,870 loan from Amuke Group. We infer from peti-
tioner’s failure to proffer any such documentary evidence that
any such documentary evidence does not exist and that, if any
such evidence does exist, it would not have substantiated peti-
tioner’s position with respect to that alleged loan.
- 95 -
us, we find that petitioner has failed to carry his burden of
establishing that the August 7, 1992 transaction at issue repre-
sented a business loan from Amuke Group.
With respect to the September 11, 1992 deposit at issue of
$3,850, petitioner contends that that deposit, which we have
found was derived from a $3,850 check from Commonwealth Enter-
prises, represented a business loan from Mr. Vulis. In support
of that contention, petitioner relies on Mr. Vulis’ general and
conclusory testimony regarding the general business practice
between Commonwealth Enterprises and petitioner, namely, gener-
ally Commonwealth Enterprises advanced petitioner the funds
needed for petitioner to purchase merchandise that he had located
on its behalf and that it wanted to acquire for resale. We are
not persuaded by that testimony of Mr. Vulis on which petitioner
relies that the $3,850 check from Commonwealth Enterprises
represented a business loan from Mr. Vulis.49 On the record
before us, we find that petitioner has failed to establish that
the September 11, 1992 deposit at issue represented a business
loan from Commonwealth Enterprises.
49
We note that petitioner failed to question Mr. Vulis
specifically with respect to the alleged $3,850 loan at issue.
We infer from petitioner’s failure to elicit any such testimony
that any such testimony would not have been favorable to peti-
tioner’s position regarding that alleged loan. We also note that
petitioner failed to introduce any credible documentary evidence
showing that the $3,850 check from Commonwealth Enterprises
represented a business loan from Mr. Vulis. We infer from
petitioner’s failure to offer any such documentary evidence that
any such documentary evidence does not exist and that, if any
such evidence does exist, it would not have substantiated peti-
tioner’s position with respect to that alleged loan.
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With respect to the September 23, 1992 transaction at issue
consisting of a $30,000 deposit and $375 in cash that petitioner
received, petitioner contends that that deposit and that cash,
which we have found were derived from a $30,375 check from Amuke
Group, represented a business loan from that organization for the
purchase of certain water filters. In support of that conten-
tion, petitioner relies on the testimony of Mr. Vulis. Mr. Vulis
identified the $30,375 check from Amuke Group and testified that
that check represented a loan to petitioner for the purchase of
water filters. We found that testimony of Mr. Vulis to be
credible. On the record before us, we find that petitioner has
satisfied his burden of showing that the September 23, 1992
transaction at issue represented a business loan from Amuke
Group.
With respect to the December 15, 1992 deposit in question of
$30,100, petitioner contends that $30,000 of that deposit, which
we have found was derived from a $30,000 check from Mr. Syelsky,
represented a business loan from Mr. Syelsky. In support of that
contention, petitioner relies on his self-serving testimony and
the testimony of Mr. Syelsky and of Mr. Vulis. We are not
required to, and we shall not, rely on petitioner’s testimony
regarding the $30,000 alleged loan. Mr. Syelsky testified that
the $30,000 check that he issued to petitioner constituted a
business loan, which Mr. Vulis guarantied and the proceeds of
which petitioner was to use to purchase certain candy on behalf
of Mr. Syelsky. Mr. Syelsky further testified that, after he
- 97 -
issued the $30,000 check to petitioner, he canceled his order for
the candy in question and requested petitioner to repay the
$30,000 loan. According to Mr. Syelsky, because petitioner did
not have the money with which to repay that loan, Mr. Vulis
repaid it pursuant to Mr. Vulis’ guaranty of that loan. Mr.
Vulis confirmed during his testimony at the further trial that he
paid $30,000 to Mr. Syelsky on petitioner’s behalf. We found the
testimony of Mr. Syelsky and of Mr. Vulis with respect to the
alleged $30,000 business loan from Mr. Syelsky to petitioner to
be credible. On the record before us, we find that the peti-
tioner has satisfied his burden of establishing that $30,000 of
the December 15, 1992 deposit in question represented a business
loan from Mr. Syelsky.
With respect to the December 16, 1992 deposit at issue of
$10,500, petitioner contends that that deposit, which we have
found was derived from a $10,500 check from Commonwealth Enter-
prises, represented a business loan from Commonwealth Enterprises
for the purchase of certain unspecified merchandise. In support
of that contention, petitioner relies on the general and
conclusory testimony of Mr. Vulis with respect to the general
business practice of Commonwealth Enterprises and petitioner,
namely, generally Commonwealth Enterprises advanced petitioner
the funds needed for petitioner to purchase merchandise that he
had located on its behalf and that it wanted to acquire for
resale. We are not persuaded by that testimony of Mr. Vulis on
which petitioner relies that the $10,500 check from Commonwealth
- 98 -
Enterprises represented a business loan from Commonwealth Enter-
prises.50 On the record before us, we find that petitioner has
failed to carry his burden of establishing that the December 16,
1992 deposit at issue represented a business loan from Common-
wealth Enterprises.
With respect to the January 14, 1993 deposit of $5,000,
petitioner contends that that deposit, which we have found was
derived from a $5,000 check from Amuke Group, represented a
business loan from Amuke Group for the purchase of certain
cordless telephones. Petitioner failed to raise as an issue in
petitioner’s further trial memorandum that the January 14, 1993
deposit in question represented a business loan from Amuke Group.
Accordingly, pursuant to the Court’s March 31, 2000 Order, we
shall not address that matter.51
50
We note that petitioner failed to question Mr. Vulis
specifically with respect to the alleged $10,500 loan at issue.
We infer from petitioner’s failure to elicit any such testimony
that any such testimony would not have been favorable to peti-
tioner’s position regarding that alleged loan. We also note that
petitioner failed to offer into evidence any credible documentary
evidence showing that the $10,500 from Commonwealth Enterprises
represented a business loan from that company. We infer from
petitioner’s failure to proffer any such documentary evidence
that any such documentary evidence does not exist and that, if
any such evidence does exist, it would not have substantiated
petitioner’s position with respect to that alleged loan.
51
Assuming arguendo that petitioner’s further trial memoran-
dum had raised as an issue that the Jan. 14, 1993 deposit repre-
sented a business loan from Amuke Group, we find on the record
before us that petitioner has failed to establish that that
deposit constituted a business loan from that organization. To
support his position on that matter, petitioner relies on his
self-serving testimony, on which we are not required to, and we
shall not, rely. We note that petitioner did not elicit any
(continued...)
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With respect to the $15,000 cashier’s check issued by Home
Savings of America cashed by petitioner on December 4, 1991,
petitioner contends that that check represented a business loan
from Mr. Reingatch.52 In support of that contention, petitioner
relies on his self-serving testimony and three checks in the
respective amounts of $7,500, $5,000, and $1,742, which he issued
to Mr. Reingatch and which he contends represented repayments of
the alleged $15,000 business loan from Mr. Reingatch. We are not
required to, and we shall not, rely on petitioner’s testimony
regarding the $15,000 cashier’s check in question. On the
instant record, we are not persuaded that Mr. Reingatch provided
the funds used to purchase that cashier’s check and that the
three checks from petitioner to Mr. Reingatch, which total
$14,242, represented repayments of the alleged $15,000 business
loan from Mr. Reingatch.53 On the record before us, we find that
51
(...continued)
testimony from Mr. Vulis regarding the $5,000 check from that
organization that petitioner contends represented a business loan
from it. We infer from petitioner’s failure to elicit any such
testimony that any such testimony would not have been favorable
to petitioner’s position with respect to that alleged business
loan. We also note that petitioner did not offer into evidence
any credible documentary evidence establishing that the Jan. 14,
1994 deposit of $5,000 represented a business loan from Amuke
Group. We infer from petitioner’s failure to proffer any such
documentary evidence that any such documentary evidence does not
exist and that, if any such documentary evidence did exist, it
would not have substantiated petitioner’s position with respect
to that alleged loan.
52
According to petitioner, Mr. Reingatch was deceased as of
the time of the further trial in this case.
53
Petitioner could have issued the three checks to Mr.
(continued...)
- 100 -
petitioner has failed to satisfy his burden of establishing that
the $15,000 cashier’s check issued by Home Savings of America and
payable to him represented a business loan from Mr. Reingatch.
Alleged Reimbursements
Petitioner contends that during 1993 $27,474 of the deposits
into petitioner’s accounts, including payments against the
balances due on petitioner’s credit accounts and cash received in
connection with certain of those deposits, represented reimburse-
ments from MZ Trading for certain expenses that he had paid on
its behalf. According to petitioner, $25,362 of the $27,474 at
issue related to 15 checks from MZ Trading,54 and the balance of
that total amount at issue ($2,112) related to five checks from
Mr. Guterman.55
53
(...continued)
Reingatch for purposes other than as repayments of a loan. In
this connection, petitioner failed to offer into evidence any
credible documentary evidence, such as a promissory note, showing
that the $15,000 cashier’s check issued by Home Savings of
America and payable to petitioner represented a business loan
from Mr. Reingatch. We infer from petitioner’s failure to
proffer any such evidence that any such documentary evidence does
not exist and that, if it does exist, it would not have substan-
tiated petitioner’s position regarding that check.
54
With respect to the 15 checks from MZ Trading totaling
$25,362, petitioner contends in the alternative that those checks
represented nontaxable returns of his capital in MZ Trading. On
the instant record, we find that petitioner has failed to carry
his burden of showing that MZ Trading issued those checks to him
as returns of his capital therein. Nor has petitioner estab-
lished on the record before us his adjusted basis in his partner-
ship interest in MZ Trading immediately before he received each
of those checks. See sec. 731(a)(1).
55
Petitioner failed to offer into evidence any credible
documentary evidence supporting his position with respect to the
(continued...)
- 101 -
With respect to the checks totaling the $27,474 at issue,
the only evidence in the record about the purpose of any of those
checks is petitioner’s self-serving testimony as to 14 of them
and Mr. Guterman’s testimony as to 1 of those 14 checks. We are
not required to, and we shall not, rely on their testimony
regarding those checks.56 On the record before us, we find that
petitioner has failed to carry his burden of establishing that
during 1993 $27,474 of the deposits into petitioner’s accounts,
including payments against the balances due on petitioner’s
credit accounts and cash received in connection with certain of
those deposits, represented reimbursements from MZ Trading for
certain expenses that he had paid on its behalf.
Alleged Advances To Purchase Personal Items
Petitioner contends that the individuals shown below ad-
vanced him the following amounts that were part of the following
deposits, including the payment against the balance due on
55
(...continued)
$27,474 at issue. We infer from petitioner’s failure to proffer
any such documentary evidence that any such evidence does not
exist and that, if it does exist, it would not have substantiated
petitioner’s position with respect to those deposits.
56
With respect to the five checks from Mr. Guterman totaling
$2,112, petitioner testified that he never purchased anything for
Mr. Guterman. We presume that petitioner wants us to infer from
that testimony that the $2,112 in checks that he received during
1993 from Mr. Guterman represented reimbursements by Mr. Guterman
for certain expenses that petitioner had paid on behalf of MZ
Trading. Even if we had believed petitioner’s testimony that he
never purchased anything for Mr. Guterman, we would not draw any
such inference from any such testimony. In any event, we are not
required to, and we shall not, rely on petitioner’s testimony
that he never purchased anything for Mr. Guterman.
- 102 -
petitioner’s equity line account shown below:
Date of Amount of Al- Alleged Payor of
Deposit Account Total Deposit leged Advance Alleged Advance
3/11/91 Petitioner’s $2,515 $975 Mr. Dubrovsky
UVW account
3/19/91 Petitioner’s 20,119 119 Mr. Reingatch
equity line
account
8/22/91 Petitioner’s 2,734 1,224 Mr. Dubrovsky
UVW account
With respect to the March 11, 1991 deposit of $2,515,
petitioner contends that $975 of that deposit, which we have
found was derived from a $975 money order from Mr. Dubrovsky,
represented an advance from Mr. Dubrovsky for the purchase at
cost of a facsimile machine for Mr. Dubrovsky. In support of
that contention, petitioner relies on his self-serving testimony,
on which we are not required to, and we shall not, rely.57 On
the record before us, we find that petitioner has failed to carry
his burden of establishing that $975 of the March 11, 1991
deposit represented an advance from Mr. Dubrovsky for the pur-
chase of a facsimile machine on Mr. Dubrovsky’s behalf.
With respect to the March 19, 1991 deposit of $20,119,
petitioner contends that $119 of that deposit represented an
advance from Mr. Reingatch for the purchase at cost of a walkman
57
We note that the record does not establish through credi-
ble documentary evidence that petitioner purchased a facsimile
machine for Mr. Dubrovsky. Furthermore, petitioner did not
question Mr. Dubrovsky about whether Mr. Dubrovsky had advanced
$975 to petitioner for the purchase of a facsimile machine. We
infer from petitioner’s failure to do so that any such testimony
would not have been favorable to petitioner’s position regarding
that alleged advance. In any event, we would not have been
required to rely on any of Mr. Dubrovsky’s testimony with respect
to the alleged $975 advance in question.
- 103 -
for Mr. Reingatch’s daughter. In support of that contention,
petitioner relies on his self-serving testimony, on which we are
not required to, and we shall not, rely.58 On the record before
us, we find that petitioner has failed to satisfy his burden of
establishing that $119 of the March 19, 1991 deposit represented
an advance from Mr. Reingatch for the purchase of a walkman for
Mr. Reingatch’s daughter.
With respect to the August 22, 1991 deposit of $2,734,
petitioner contends that $1,224 of that deposit, which we have
found was derived from a $1,224 check from S&J Co., represented
an advance from Mr. Dubrovsky for the purchase at cost of a
television for Mr. Dubrovsky.59 In support of that contention,
petitioner relies on his self-serving testimony, on which we are
not required to, and we shall not, rely. On the record before
58
The record contains no credible documentary evidence
showing that any portion of the Mar. 19, 1991 deposit of $20,119
was made with funds received from Mr. Reingatch or that peti-
tioner purchased a walkman for Mr. Reingatch’s daughter. We
infer that no such documentary evidence exists and that, if any
such evidence does exist, it would not have substantiated peti-
tioner’s claims regarding the alleged $119 advance in question.
59
Although the record establishes that, during 1986 and as
of the time of the further trial in this case, Mr. Dubrovsky was
a part owner of S&J Co., the record does not disclose whether Mr.
Dubrovsky owned any part of that company on Aug. 22, 1991. We
note that, when questioned about the $1,224 check in question,
Mr. Dubrovsky did not remember any such check. The record
contains no credible documentary evidence showing that petitioner
purchased a television for Mr. Dubrovsky. We infer that no such
documentary evidence exists and that, if any such evidence does
exist, it would not have substantiated petitioner’s claim that
$1,224 of the Aug. 22, 1991 deposit of $2,734 represented an
advance from Mr. Dubrovsky for the purchase of a television for
Mr. Dubrovsky.
- 104 -
us, we find that petitioner has failed to carry his burden of
establishing that $1,224 of the August 22, 1991 deposit repre-
sented an advance from Mr. Dubrovsky for the purchase of a
television on his behalf.
Alleged Rental Payments
Petitioner contends that the following deposits consisting
of payments against the balance due on petitioner’s equity line
account and the following cash that he received in connection
with one of those deposits, which we have found were derived from
two checks issued by First Marin Realty, Inc. (First Marin), are
not taxable.
Date of De- Payor of Amount
posit Item Deposited Amount of Deposit Negotiated for Cash
6/1/93 First Marin $3,344 $70
6/11/93 First Marin 2,025 ---
According to petitioner, the two checks that First Marin
issued to him that were the source of the foregoing deposits and
cash represented rent paid on Mr. Reingatch’s house that peti-
tioner collected, pursuant to a power of attorney, on behalf of
Mr. Reingatch while Mr. Reingatch was out of the United States
and that petitioner used to make payments on Mr. Reingatch’s
mortgage loan. In support of those contentions, petitioner
relies on his self-serving testimony, on which we are not re-
quired to, and we shall not, rely.60 On the record before us, we
60
Petitioner failed to offer into evidence any credible
documentary evidence to support his contentions regarding the
checks issued to him by First Marin, such as a power of attorney
from Mr. Reingatch authorizing petitioner to act on Mr.
(continued...)
- 105 -
find that petitioner has failed to carry his burden of establish-
ing that the June 1, 1993 transaction at issue and the June 11,
1993 deposit at issue represented rent on Mr. Reingatch’s house
that petitioner used to pay Mr. Reingatch’s mortgage loan.
Alleged Items of MZ Trading
Petitioner contends that the following deposits consisting
of payments during 1993 against the balance due on petitioner’s
equity line account represented certain gross receipts of MZ
Trading that MZ Trading had reported in its Form 1065 for 1993,
certain loans to MZ Trading, or a reimbursement with respect to a
transaction of MZ Trading:
Date of Deposit Amount of Deposit Payor
2/10/93 $23,891 Commonwealth Enterprises
4/26/93 22,500 Mr. Vulis
4/26/93 77,580 East-West
5/3/93 37,680 Mr. Vulis
5/3/93 30,000 East-West
5/12/93 41,950 East-West
7/9/93 6,450 Commonwealth Enterprises
8/30/93 22,000 East-West
1
9/14/93 17,700 Mr. Kirdan
1
Prior to the trial in this case, respondent conceded that $16,700 of
the $17,700 deposit is not taxable to petitioner.
(We shall sometimes refer to the foregoing deposits as alleged MZ
Trading-related deposits.)
60
(...continued)
Reingatch’s behalf with respect to Mr. Reingatch’s funds and
canceled checks showing that petitioner made any payments on Mr.
Reingatch’s mortgage loan. We infer from petitioner’s failure to
proffer any such documentary evidence that any such evidence does
not exist and that, if it does exist, it would not have substan-
tiated petitioner’s position with respect to the two checks
issued to him by First Marin.
- 106 -
In support of petitioner’s claims regarding the alleged MZ
Trading-related deposits, petitioner relies on his self-serving
testimony, Mr. Guterman’s testimony, Mr. Jordan’s testimony
including his expert report and the addendum to that report, MZ
Trading’s purported 1993 transaction summary, and Mr. Oliveras’
summary of MZ Trading’s deposits during 1993. We are not re-
quired to, and we shall not, rely on the testimony of petitioner
and of Mr. Guterman regarding those alleged deposits. Based on
the Court’s evaluation of the testimony of Mr. Jordan, we also
are not required to, and we shall not, rely on his testimony,
including his expert report and the addendum to that report,61
regarding certain of the alleged MZ Trading-related deposits.
The testimony of petitioner, of Mr. Guterman, and of Mr.
Jordan with respect to certain of the alleged MZ Trading-related
deposits referred to and relied on MZ Trading’s purported 1993
transaction summary. MZ Trading’s purported 1993 transaction
summary is a handwritten document dated August 5, 1999, most, if
not all, of which petitioner and Mr. Guterman prepared, which
listed a series of transactions in which petitioner claims MZ
Trading engaged during 1993. For each transaction listed in MZ
61
In violation of the Court’s March 31, 2000 Order, which
required each party to submit to the Court and to serve on the
opposing party a copy of any expert report on or before June 30,
2000, petitioner did not proffer the addendum to Mr. Jordan’s
expert report to the Court until Aug. 21, 2000, the first day of
the further trial in this case, and did not provide a copy of
that addendum to respondent until about 5 minutes before it was
marked for identification at that further trial. On the record
before us, we find that respondent was prejudiced by that viola-
tion by petitioner of the Court’s March 31, 2000 Order.
- 107 -
Trading’s purported 1993 transaction summary, entries appeared
under columns headed “cost”, “sold”, “profit”, and “expenses”.
Numbers and handwriting that is largely illegible appeared in
that purported summary under each of those columns. We are not
satisfied that MZ Trading’s purported 1993 transaction summary is
a credible document reflecting transactions in which MZ Trading
engaged during 1993. At trial, we admitted MZ Trading’s pur-
ported 1993 transaction summary into the record solely for the
limited purpose that it was a document which showed what the
preparers of that document claimed to be transactions of MZ
Trading during 1993. Based on the Court’s evaluation of MZ
Trading’s purported 1993 transaction summary, including the
Court’s evaluation of the testimony of petitioner and of Mr.
Guterman, both of whom prepared most, if not all, of that pur-
ported summary and both of whom we did not find to be credible,
we are not required to, and we shall not, rely on it.
With respect to petitioner’s reliance on Mr. Oliveras’
summary of MZ Trading’s deposits during 1993 in support of his
position regarding the alleged MZ Trading-related deposits, as we
stated above, even if we were to have admitted that summary into
the record for the truth of its content, it does not establish
petitioner’s claim that certain of MZ Trading’s gross receipts
for 1993, which it reported in its Form 1065 for 1993 and which
petitioner claims were not deposited during that year into MZ
Trading’s bank account, were deposited into petitioner’s equity
line account.
- 108 -
We turn now to petitioner’s contentions with respect to each
of the alleged MZ Trading-related deposits.62 With respect to
the first such deposit at issue on February 10, 1993 of $23,891,
petitioner contends that that deposit, which we have found was
derived from a $23,891 check from Commonwealth Enterprises,
represented a gross receipt of MZ Trading that MZ Trading re-
ported in its Form 1065 for 1993 and that “relates to MZ Trading
trade number 2 [a transaction for the purchase of shoes reflected
in MZ Trading’s purported 1993 transaction summary], less ship-
ping costs”. In support of that contention, petitioner relies on
Mr. Guterman’s testimony, on which we are not required to, and we
shall not, rely.63 On the record before us, we find that peti-
tioner has failed to carry his burden of establishing that that
62
In considering petitioner’s contentions with respect to
each of the alleged MZ Trading-related deposits, we shall not
restate that we are not required to, and we shall not, rely on
Mr. Jordan’s testimony, including his expert report and the
addendum to that report, and MZ Trading’s purported 1993 transac-
tion summary. Nor shall we restate that Mr. Oliveras’ summary of
MZ Trading’s deposits during 1993 does not establish petitioner’s
claim that certain of MZ Trading’s gross receipts for 1993, which
it reported in its Form 1065 for 1993 and which petitioner claims
were deposited during that year into MZ Trading’s bank account,
were deposited into certain of petitioner’s accounts.
63
Mr. Vulis, who at all relevant times was associated with
Commonwealth Enterprises, did not recall the purpose of the
$23,891 check that Commonwealth Enterprises issued to petitioner.
Petitioner failed to offer into evidence any credible
documentary evidence that supports petitioner’s contention that
the purpose of the $23,891 check from Commonwealth Enterprises
was to pay MZ Trading for a transaction relating to shoes. We
infer from petitioner’s failure to proffer any such documentary
evidence that any such evidence does not exist and that, if it
does exist, it would not have substantiated petitioner’s position
with respect to the Feb. 10, 1993 deposit at issue.
- 109 -
deposit represented a gross receipt of MZ Trading that it re-
ported in its Form 1065 for 1993.
With respect to the April 26, 1993 alleged MZ Trading-
related deposit at issue of $22,500, petitioner contends that
that deposit, which we have found was derived from a $22,500
check from Mr. Vulis, represented a loan to MZ Trading for the
purchase of beer. Petitioner failed to raise the April 26, 1993
alleged MZ Trading-related deposit of $22,500 as an issue in
petitioner’s further trial memorandum. Accordingly, pursuant to
the Court’s March 31, 2000 Order, we shall not address that
matter.64
With respect to the April 26, 1993 alleged MZ Trading-
related deposit at issue of $77,580, petitioner contends that
that deposit, which we have found was derived from a $77,580
check from East-West, represented a gross receipt of MZ Trading
64
Assuming arguendo that petitioner had raised as an issue
in petitioner’s further trial memorandum the Apr. 26, 1993
alleged MZ Trading-related deposit of $22,500, on the instant
record, we find that petitioner has failed to carry his burden of
showing that that deposit represented a loan from Mr. Vulis to MZ
Trading. Petitioner relies on Mr. Guterman’s testimony to
support that contention, on which we are not required to, and we
shall not, rely. We note that petitioner did not question Mr.
Vulis specifically about the $22,500 loan that he allegedly made
to MZ Trading. We infer from petitioner’s failure to elicit any
such testimony from Mr. Vulis that any such testimony would not
have been favorable to petitioner’s position regarding that
alleged loan. Petitioner failed to offer into evidence any
credible documentary evidence supporting his position that the
$22,500 check from Mr. Vulis represented a loan to MZ Trading.
We infer from petitioner’s failure to proffer any such documen-
tary evidence that any such evidence does not exist and that, if
it does exist, it would not have substantiated petitioner’s
position with respect to that alleged loan.
- 110 -
for 1993 that it reported in its Form 1065 for 1993 and that
relates to trade number 11, a transaction for candies, reflected
in MZ Trading’s purported 1993 transaction summary. In support
of that contention, petitioner relies on his self-serving testi-
mony and Mr. Guterman’s testimony, on which we are not required
to, and we shall not, rely.65 On the record before us, we find
that petitioner has failed to carry his burden of establishing
that the April 26, 1993 alleged MZ Trading-related deposit at
65
We note that the testimony of petitioner and of Mr.
Guterman that the $77,580 check from East-West was a gross
receipt of MZ Trading relating to trade number 11 reflected in MZ
Trading’s purported 1993 transaction summary is inconsistent with
their testimony regarding the May 3, 1993 alleged MZ Trading-
related deposit. Petitioner and Mr. Guterman testified (1) that
the $77,580 check from East-West that was used to make the Apr.
26, 1993 alleged MZ Trading-related deposit of $77,580 repre-
sented a gross receipt of MZ Trading for the transaction for
“candies” shown as trade number 11 in MZ Trading’s purported 1993
transaction summary and (2) that the May 3, 1993 alleged MZ
Trading-related deposit of $37,680 represented a loan for that
alleged transaction. In addition to the internal inconsistencies
in the respective testimony of petitioner and of Mr. Guterman,
their testimony is contradicted by certain entries for trade
number 11 reflected in MZ Trading’s purported 1993 transaction
summary, which show what appear to be the amount “$47,976" under
the column headed “cost” and the amount “$58,500" under the
column headed “sold”.
Petitioner failed to call as a witness Mr. Kirdan, who
petitioner contends operated East-West at all relevant times, and
failed to offer into evidence any credible documentary evidence
regarding the Apr. 26, 1993 alleged MZ Trading-related deposit.
We infer from petitioner’s failure to call Mr. Kirdan that his
testimony would not have been favorable to petitioner’s position
regarding that deposit. We infer from petitioner’s failure to
proffer any credible documentary evidence regarding the Apr. 26,
1993 alleged MZ Trading-related deposit that any such evidence
does not exist and that, if it does exist, it would not have
substantiated petitioner’s position regarding that alleged
deposit.
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issue represented a gross receipt of MZ Trading for 1993 that it
reported in its Form 1065 for that year.
With respect to the May 3, 1993 alleged MZ Trading-related
deposit at issue of $37,680, petitioner contends that that
deposit, which we have found was derived from a $37,680 check
from Mr. Vulis, represented a loan to MZ Trading relating to
trade number 11, a transaction for candies, reflected in MZ
Trading’s purported 1993 transaction summary. According to
petitioner, on May 4, 1993, the day after the May 3, 1993 alleged
MZ Trading-related deposit, a $37,680 check payable to PNH
International in New York was posted on petitioner’s equity line
account in order to acquire on behalf of MZ Trading the candies
reflected in that purported summary. In support of those conten-
tions, petitioner relies on his self-serving testimony and the
testimony of Mr. Guterman, on which we are not required to, and
we shall not, rely.66 As for the evidence showing a $37,680
check payable to PNH International in New York on petitioner’s
equity line account on May 4, 1993, the only evidence in the
record with respect to that check, except for petitioner’s
testimony, is a copy of the statement for petitioner’s equity
line account. The copy of that statement in the record does not
establish the payee or the purpose of the $37,680 check which was
66
See our discussion supra note 65. We note that, when
asked at the further trial in this case, Mr. Vulis was unable to
remember the purpose of the $37,680 check that was used to make
the May 3, 1993 alleged MZ Trading-related deposit of $37,680.
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posted on that statement on May 4, 1993.67 On the record before
us, we find that petitioner has failed to carry his burden of
establishing that the May 3, 1993 alleged MZ Trading-related
deposit at issue represented a loan to MZ Trading.
With respect to the May 3, 1993 alleged MZ Trading-related
deposit at issue of $30,000, petitioner contends that that
deposit, which we have found was derived from a $30,000 check
from East-West, represented a gross receipt of MZ Trading that MZ
Trading reported in its Form 1065 for 1993 and that related to a
transaction for Miller beer (Miller beer transaction). In
support of that contention, petitioner relies on his self-serving
testimony and Mr. Guterman’s testimony, on which we are not
required to, and we shall not, rely.68 On the record before us,
we find that petitioner has failed to carry his burden of estab-
lishing that the May 3, 1993 alleged MZ Trading-related deposit
67
Petitioner failed to offer into evidence any credible
documentary evidence establishing his contentions with respect to
the May 3, 1993 alleged MZ Trading-related deposit at issue. We
infer from petitioner’s failure to proffer any such documentary
evidence that any such evidence does not exist and that, if it
does exist, it would not have substantiated petitioner’s position
with respect to that deposit.
68
Petitioner failed to call as a witness Mr. Kirdan and
failed to offer into evidence any credible documentary evidence
in support of his position with respect to the May 3, 1993
alleged MZ Trading-related deposit of $30,000. We infer from
petitioner’s failure to call Mr. Kirdan that his testimony would
not have been favorable to petitioner’s position regarding that
deposit. We infer from petitioner’s failure to proffer any
credible documentary evidence regarding the May 3, 1993 alleged
MZ Trading-related deposit of $30,000 that any such evidence does
not exist and that, if it does exist, it would not have substan-
tiated petitioner’s position with respect to that deposit.
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at issue represented a gross receipt of MZ Trading for 1993 that
it reported in its Form 1065 for that year.
With respect to the May 12, 1993 alleged MZ Trading-related
deposit at issue of $41,950, petitioner contends that that
deposit, which we have found was derived from a $41,950 check
from East-West, represented (1) a gross receipt of MZ Trading
relating to the balance for the Miller beer transaction to which
petitioner claims the May 3, 1993 alleged MZ Trading-related
deposit of $30,000 pertained and (2) a gross receipt of MZ
Trading relating to trade number 14, a transaction for lollipop
“candies”, reflected in MZ Trading’s purported 1993 transaction
summary, both of which MZ Trading reported in its Form 1065 for
1993. In support of that contention, petitioner relies on his
self-serving testimony and Mr. Guterman’s testimony, on which we
are not required to, and we shall not, rely.69 On the record
before us, we find that petitioner has failed to carry his burden
of establishing that the May 12, 1993 alleged MZ Trading-related
deposit at issue represented gross receipts of MZ Trading for
1993 that it reported in its Form 1065 for that year.
69
Petitioner failed to call as a witness Mr. Kirdan, who
petitioner claims operated East-West at all relevant times, and
failed to offer into evidence any credible documentary evidence
in support of his position with respect to the May 12, 1993
alleged MZ Trading-related deposit at issue. We infer from
petitioner’s failure to call Mr. Kirdan that his testimony would
not have been favorable to petitioner’s position regarding that
deposit. We infer from petitioner’s failure to proffer any
credible documentary evidence regarding the May 12, 1993 MZ
Trading-related deposit that any such evidence does not exist and
that, if it does exist, it would not have substantiated peti-
tioner’s position with respect to that deposit.
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With respect to the July 9, 1993 alleged MZ Trading-related
deposit at issue of $6,450, petitioner contends that that de-
posit, which we have found was derived from a $6,450 check from
Commonwealth Enterprises, represented “a reimbursement for the
shipping of candies to Mr. Ivenin relating to MZ Trading trade
number 6" reflected in MZ Trading’s purported 1993 transaction
summary.70 In support of that contention, petitioner relies on
his self-serving testimony, on which we are not required to, and
we shall not, rely.71 On the record before us, we find that
70
The nature of the alleged transaction number 6 reflected
in MZ Trading’s purported 1993 transaction summary is not legi-
ble.
71
Petitioner failed to offer into evidence any credible
documentary evidence regarding the July 9, 1993 alleged MZ
Trading-related deposit at issue. We infer from petitioner’s
failure to proffer any such documentary evidence that any such
evidence does not exist and that, if it does exist, it would not
have substantiated petitioner’s position with respect to that
deposit.
Petitioner questioned Mr. Vulis about the $6,450 check from
Commonwealth Enterprises that was the source of the July 9, 1993
alleged MZ Trading-related deposit at issue. Mr. Vulis testified
as follows with respect to that check:
A * * * It’s a check drawn on Commonwealth Enter-
prise [sic] checkbook. I have very bad copy, but
it’s for $6,450, I guess.
Q And was payable to whom?
A To Mr. Brodsky.
Q For what purpose?
A Well, as far as I can recall, looking at that
check, it says J.B., 25 percent 25,000, which
means jelly-beans, 25 percent out of $25,000.
(continued...)
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petitioner has failed to carry his burden of establishing that
the July 9, 1993 alleged MZ Trading-related deposit at issue
represented a reimbursement for the shipping of candies to a Mr.
Ivenin relating to a transaction of MZ Trading.
With respect to both the August 30 and September 14, 1993
alleged MZ Trading-related deposits of $22,000 and $17,700,
respectively, petitioner contends that those deposits, which we
have found were derived from East-West and from Mr. Kirdan,72
respectively, represented gross receipts of MZ Trading that it
reported in its Form 1065 for 1993 and that related to trade
number 14, a transaction for “coffee”, reflected in MZ Trading’s
purported 1993 transaction summary.
71
(...continued)
Q And so what does that represent?
A That to the best of my ability to recall it, it’s
just after the deal was concluded it was a distri-
bution.
Q Distribution of what?
A Of the entire funds, of the initial investment,
plus most probably, interest and/or profit.
The foregoing testimony of Mr. Vulis regarding the $6,450 check
from Commonwealth Enterprises that was the source of the July 9,
1993 alleged MZ Trading-related deposit at issue does not support
petitioner’s contention that that deposit represented a reim-
bursement for the cost of shipping certain candies to a Mr.
Ivenin relating to a transaction of MZ Trading.
72
Petitioner contends that the $22,000 received from East-
West was paid by check as was the $17,700 received from Mr.
Kirdan. The record does not support petitioner’s contention. We
have found that the $22,000 received from East-West and the
$17,700 received from Mr. Kirdan were paid in cash.
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With respect to the August 30, 1993 alleged MZ Trading-
related deposit at issue of $22,000, petitioner relies on his
self-serving testimony and Mr. Guterman’s testimony, on which we
are not required to, and we shall not, rely.73 On the record
before us, we find that petitioner has failed to carry his burden
of establishing that the August 30, 1993 alleged MZ Trading-
related deposit at issue represented a gross receipt of MZ
Trading for 1993 that it reported in its Form 1065 for that year.
With respect to the September 14, 1993 alleged MZ Trading-
related deposit of $17,700, as noted above, prior to the trial in
this case, respondent conceded that $16,700 of that deposit is
not taxable to petitioner. Prior to that trial, petitioner
conceded that the remaining $1,000 of the September 14, 1993
alleged MZ Trading-related deposit of $17,700 constituted a
taxable commission to him. Petitioner reaffirmed at the further
trial in this case that he had made that concession. Despite his
concession, petitioner contends on brief that no portion of the
September 14, 1993 alleged MZ Trading-related deposit is taxable
to him. On the record before us, we conclude that petitioner
73
Petitioner failed to call as a witness Mr. Kirdan regard-
ing the Aug. 30, 1993 alleged MZ Trading-related deposit at
issue. We infer from petitioner’s failure to call Mr. Kirdan
that his testimony with respect to that deposit would not have
been favorable to petitioner’s position with respect to that
alleged deposit. Petitioner also failed to offer into evidence
any credible documentary evidence in support of his position
regarding the Aug. 30, 1993 alleged MZ Trading-related deposit.
We infer from petitioner’s failure to proffer any such documen-
tary evidence that any such evidence does not exist and that, if
it does exist, it would not have substantiated petitioner’s
contention with respect to that deposit.
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conceded that he is taxable on $1,000 of that deposit and that
that concession, taken together with respondent’s concession of
$16,700 of that deposit, leaves no portion of the September 14,
1993 alleged MZ Trading-related deposit that remains at issue in
this case.74
Alleged Repayments of Loans
Petitioner contends that $20,000 of the March 19, 1991
deposit of $20,119 and the entire September 7, 1993 deposit at
issue of $3,000 represented repayments of certain loans that he
had made to certain individuals.
With respect to the March 19, 1991 deposit of $20,119,
petitioner contends that $20,000 of that deposit constituted a
repayment by Mr. Reingatch of a loan that petitioner had made to
him. In support of that contention, petitioner relies on his
self-serving testimony, on which we are not required to, and we
shall not, rely. Petitioner also relies on a copy of the front
side of a $20,000 check dated May 20, 1990, that was signed by
petitioner and payable to Mr. Reingatch. Petitioner claims that
that check represented the $20,000 that he lent Mr. Reingatch.
Although we are satisfied from the copy of the front side of the
May 20, 1990 check on which petitioner relies that that check was
negotiated, we are not satisfied from that copy, inter alia, that
74
Even if we had not concluded that, prior to the trial in
this case, petitioner conceded $1,000 of the Sept. 14, 1993
alleged MZ Trading-related deposit, on the instant record, we
find that petitioner has failed to carry his burden of establish-
ing that $1,000 of that deposit is not taxable to him.
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Mr. Reingatch deposited and/or cashed that check. For example,
Mr. Reingatch could have endorsed the check in question to
petitioner, who in turn deposited and/or cashed it. Nor are we
satisfied from the instant record what the purpose of the May 20,
1990 check was.
Assuming arguendo that we had found on the instant record
that Mr. Reingatch deposited and/or cashed the $20,000 check in
question, the only evidence in the record supporting petitioner’s
position that that check represented a loan to Mr. Reingatch is
petitioner’s self-serving testimony, on which we are not required
to, and we shall not, rely.75 On the record before us, we find
that petitioner has failed to carry his burden of establishing
that $20,000 of the March 19, 1991 deposit represented a repay-
ment by Mr. Reingatch of a loan that petitioner had made to him.
With respect to the September 7, 1993 deposit at issue of
$3,000, petitioner contends that that deposit, which we have
found was derived from a $3,000 check from Mr. Guterman, repre-
sented a repayment by Mr. Guterman of a loan that petitioner had
made to Mr. Guterman’s wife. In support of that contention,
petitioner relies on his self-serving testimony, on which we are
75
Petitioner failed to offer into evidence any credible
documentary evidence showing that he lent $20,000 to Mr.
Reingatch in 1990 or at any other time prior to the date on which
petitioner claims Mr. Reingatch repaid that alleged loan. We
infer from petitioner’s failure to proffer any such documentary
evidence that any such evidence does not exist and that, if any
such evidence does exist, it would not have substantiated peti-
tioner’s position with respect to $20,000 of the Mar. 19, 1991
deposit at issue.
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not required to, and we shall not, rely.76 On the record before
us, we find that petitioner has failed to carry his burden of
establishing that the September 7, 1993 deposit at issue repre-
sented a repayment of a loan that petitioner had made to Mr.
Guterman’s wife.
Claimed Cost of Goods Sold
In the notice for 1991 and 1992 and the notice for 1993,
respondent disallowed for those three years claimed Schedule C
cost of goods sold of $12,849, $113,935, and $54,337, respec-
tively.
Petitioner contends that respondent erred in disallowing
$12,130 and $57,084 of claimed Schedule C cost of goods sold for
1991 and 1992, respectively.77
76
Petitioner failed to question Mr. Guterman about why he
made the $3,000 payment to petitioner, which was the source of
the Sept. 7, 1993 deposit at issue. Even if petitioner had
questioned Mr. Guterman about that payment, we would not have
been required to rely on Mr. Guterman’s testimony. Petitioner
failed to call Mr. Guterman’s wife regarding petitioner’s allega-
tion that he lent her $3,000. We infer from petitioner’s failure
to call Mr. Guterman’s wife that her testimony would not have
been favorable to petitioner’s position. Petitioner failed to
offer into evidence any credible documentary evidence showing
that he lent $3,000 to Mr. Guterman’s wife prior to the date on
which petitioner claims Mr. Guterman repaid that alleged loan.
We infer from petitioner’s failure to proffer any such documen-
tary evidence that any such evidence does not exist and that, if
any such evidence does exist, it would not have substantiated
petitioner’s position with respect to the Sept. 7, 1993 deposit
at issue.
77
Petitioner also argues that respondent failed to sustain
respondent’s burden of proof with respect to the additional
$42,913 of the cost of goods sold for 1993 that respondent
alleged should be disallowed in respondent’s amendment to answer.
(continued...)
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In order to compute gross income, gross receipts are reduced
by cost of goods sold. Sec. 1.61-3(a), Income Tax Regs. A
taxpayer must show his entitlement to the cost of goods sold
claimed and keep sufficient records to substantiate such cost.
See sec. 1.6001-1(a), Income Tax Regs.; see also Rule 142(a).
In support of petitioner’s position with respect to the cost
of goods sold at issue, petitioner contends that the following
canceled checks, cashier’s checks, and credit card charges
represented amounts paid to the payees shown below in order to
acquire certain merchandise for resale in UVW’s business:
77
(...continued)
We disagree. We have found that, pursuant to Rule 37(c), peti-
tioner is deemed to have admitted the affirmative allegations in
that amendment to answer relating to the claimed cost of goods
sold for 1993.
Petitioner did not raise as an issue in petitioner’s further
trial memorandum, presented no evidence at trial and at further
trial, and makes no argument on brief as to certain amounts of
claimed cost of goods sold disallowed for 1991, 1992, and 1993
that petitioner placed in dispute in the petition and that
respondent has not conceded. We conclude that petitioner has
abandoned contesting those disallowed amounts of claimed cost of
goods sold. See Rybak v. Commissioner, 91 T.C. at 566 n.19.
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Date Description Payee Amount
8/27/91 Check drawn on petitioner’s UVW ac- Fashions store $212
count
8/28/91 Check drawn on petitioner’s UVW ac- Fashions store 584
count
9/2/91 Check drawn on petitioner’s UVW ac- Fashions store 1,100
count
9/5/91 Check drawn on petitioner’s UVW ac- Fashions store 334
count
12/17/91 Bank of America cashier’s check Circuit City 9,900
2/10/92 Charge on acct. Carvis Discount 2,134
No. 5273-0298-0010-0917
3/2/92 Charge on acct. Carvis Discount 2,550
No. 5273-0298-0010-0917
3/3/92 Bank of America cashier’s check Macy’s California 10,000
4/15/92 Check drawn on petitioner’s UVW ac- Cash 12,000
count
4/21/92 Bank of America cashier’s check M.P. Electronics 11,400
4/22/92 Check drawn on petitioner’s UVW ac- M.P. Electronics 5,000
count
5/18/92 Bank of America cashier’s check Macy’s California 14,000
In support of petitioner’s contention regarding the forego-
ing items, petitioner relies on his self-serving testimony, on
which we are not required to, and we shall not, rely. Petitioner
also relies on the testimony of Mr. Raja.78 Based on the Court’s
evaluation of Mr. Raja’s testimony, we are not required to, and
we shall not, rely on his testimony regarding the items listed
above. We found Mr. Raja’s testimony to have been based largely
on his general business practices with petitioner, as opposed to
78
Petitioner failed to offer into evidence any credible
documentary evidence, such as receipts, invoices, or any other
credible business records of UVW, that establishes petitioner’s
position regarding the claimed cost of goods sold at issue for
1991 and 1992. We infer from petitioner’s failure to proffer any
such documentary evidence that any such evidence does not exist
and that, if it does exist, it would not have substantiated
petitioner’s position regarding that claimed cost of goods sold.
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his personal knowledge of the facts with respect to a particular
transaction or activity about which he testified. We also found
Mr. Raja’s testimony to be vague and/or inconsistent at times.
On the record before us, we find that petitioner has failed
to carry his burden of establishing that, in computing his gross
income from UVW’s business, he is entitled to reduce gross
receipts by the respective amounts of cost of goods sold to which
he claims he is entitled for 1991 and 1992.
Claimed Schedule C Deductions
In the notice for 1991 and 1992, respondent disallowed for
those two years claimed Schedule C deductions of $24,796 and
$16,278, respectively.
Petitioner contends that he is entitled to the following
amounts of Schedule C deductions for interest and telephone
expenses that respondent disallowed in the notice for 1991 and
1992:79
79
Petitioner did not raise as an issue in petitioner’s
further trial memorandum, presented no evidence at trial and at
further trial, and makes no argument on brief as to certain
amounts of claimed Schedule C deductions disallowed for 1991 and
1992 that petitioner placed in dispute in the petition and that
respondent has not conceded. We conclude that petitioner has
abandoned contesting those disallowed amounts of claimed Schedule
C expenses. See Rybak v. Commissioner, supra at 566 n.19.
Although petitioner raised as an issue in petitioner’s
further trial memorandum that he is entitled to certain Schedule
C deductions for 1993, petitioner indicates on brief that there
are no Schedule C deductions in dispute for that year.
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Claimed Claimed Telephone
Year Interest Deduction Expense Deduction
1991 $1,632.18 $2,122.52
1992 2,426.48 1,963.19
Petitioner further contends for the first time in petitioner’s
further trial memorandum and on brief that he is entitled to a
Schedule C deduction for 1992 for his payment in that year of an
alleged loan guaranty of $20,000.80
Section 162(a) generally allows a deduction for ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. The determination of whether an
expenditure satisfies the requirements for deductibility under
section 162 is a question of fact. Commissioner v. Heininger,
320 U.S. 467, 475 (1943). In general, an expense is ordinary if
it is considered normal, usual, or customary in the context of
the particular business out of which it arose. Deputy v. du
Pont, 308 U.S. 488, 495 (1940). Ordinarily, an expense is
necessary if it is appropriate and helpful to the operation of
the taxpayer's trade or business. Commissioner v. Tellier, 383
U.S. 687, 689 (1966); Carbine v. Commissioner, 83 T.C. 356, 363
(1984), affd. 777 F.2d 662 (11th Cir. 1985).
Section 212(1) allows a deduction for ordinary and necessary
expenses paid or incurred during the taxable year, inter alia,
80
In petitioner’s further trial memorandum and on brief,
petitioner claims that he deducted the $20,000 payment at issue
for 1992 in Schedule C of the joint return for that year. The
record does not support petitioner’s claim. The 1992 joint
return of petitioner and Ms. Brodsky does not claim any $20,000
deduction relating to an alleged payment on a loan guaranty in
Schedule C or anywhere else in that return.
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for the production or collection of income.
Section 163(a) generally allows a deduction for all interest
paid or accrued during the taxable year on indebtedness. How-
ever, in the case of a taxpayer other than a corporation, section
163(h) generally disallows any deduction for "personal interest".
The term “personal interest” is defined to mean any interest
allowable as a deduction under chapter 1 of the Code other than,
inter alia, interest paid or accrued on indebtedness properly
allocable to a trade or business (other than the trade or busi-
ness of performing services as an employee), any investment
interest, and any interest which is taken into account under
section 469 in computing income or loss from a passive activity
of the taxpayer. Sec. 163(h)(2)(A), (B), and (C). The term
“investment interest” means, in general, any interest allowable
as a deduction under chapter 1 of the Code which is paid or
accrued on indebtedness properly allocable to property held for
investment. See 163(d)(3)(A). Investment interest does not
include, inter alia, any interest which is taken into account
under section 469 in computing income or loss from a passive
activity of the taxpayer. Sec. 163(d)(3)(B)(ii). Although
investment interest and interest which is taken into account
under section 469 in computing income or loss from a passive
activity of the taxpayer are excepted from the definition of the
term “personal interest”, the deductibility of the first two
types of interest is subject to certain other limitations. See
secs. 163(d)(1), 469(a).
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Section 166 allows a taxpayer to deduct any business debt
which becomes wholly or partially worthless during the taxable
year. Sec. 166(a), (d)(1)(A). Section 166 also allows a tax-
payer who guaranties a debt and makes a payment pursuant to that
guaranty to deduct that payment, provided that the taxpayer
satisfies the requirements of section 1.166-9, Income Tax Regs.
Claimed Interest Deductions
Petitioner contends that he is entitled to deduct for 1991
and 1992 interest payments that he made on petitioner’s equity
line account during those years in the amounts of $1,632.18 and
$1,176.48, respectively. Petitioner also contends that he is
entitled to deduct for 1992 interest of $1,250 that he claims he
paid on an alleged business loan from Mr. Kroma.
With respect to the interest payments on petitioner’s equity
line account that are at issue, we have found that petitioner
paid interest in the respective amounts of $1,632.18 and
$1,176.48 on that account during 1991 and 1992. Prior to the
filing of petitioner’s opening brief, petitioner took the posi-
tion that he is entitled to deduct 50 percent of those interest
payments because he “incurred these expenses in conducting his
business”. On brief, petitioner contends that he is entitled to
deduct all of the interest payments that he made during 1991 and
1992 on petitioner’s equity line account because that account
“was used primarily for business and the production of income.”
We infer, and we conclude, from petitioner’s argument that he
used petitioner’s equity line account “primarily” for business
- 126 -
and the production of income that petitioner concedes that he
used that account at least partially for personal purposes.
In support of his contention that he used petitioner’s
equity line account primarily for business and the production of
income, petitioner relies on his self-serving testimony, on which
we are not required to, and we shall not, rely. Assuming
arguendo that petitioner had established that he used peti-
tioner’s equity line account primarily for business and the
production of income, on the instant record, we find that peti-
tioner has failed to carry his burden of showing that he is
entitled to deduct the respective amounts of interest payments on
petitioner’s equity line account that he made during 1991 and
1992. In this connection, we find on that record that petitioner
has failed to establish the portion, if any, of petitioner’s
equity line account that he used during 1991 and 1992 for busi-
ness and/or income-producing activities and to allocate the
interest payments at issue for purposes of applying sections
163(d) and (h) and 469. See sec. 1.163-8T, Temporary Income Tax
Regs., 52 Fed. Reg. 24999 (July 2, 1987).
With respect to the $1,250 of alleged interest that remains
at issue, petitioner contends that his $1,250 check dated July
13, 1992, which was payable to Mr. Kroma, drawn on petitioner’s
equity line account, and signed by petitioner (petitioner’s July
13, 1992 check), represented a payment of 2 months’ interest on a
$50,000 loan from Mr. Kroma to UVW. In support of that conten-
tion, petitioner relies on his self-serving testimony, on which
- 127 -
we are not required to, and we shall not, rely. We have found
that petitioner has failed to carry his burden of establishing
(1) that Mr. Kroma made a $50,000 loan to UVW, (2) that Mr. Kroma
received the proceeds of petitioner’s July 13, 1992 check, and
(3) that, even if Mr. Kroma had received the proceeds of that
check, those proceeds represented 2 months’ interest on the
alleged $50,000 loan from Mr. Kroma to UVW.
On the record before us, we find that petitioner has failed
to carry his burden of establishing that he is entitled under
section 163 to deduct (1) for 1991 and 1992 interest payments of
$1,632.18 and $1,176.48, respectively, that he made during those
years on petitioner’s equity line account and (2) for 1992 the
claimed interest payment of $1,250.
Claimed Telephone Expense Deductions
Petitioner contends that he is entitled to deduct for 1991
and 1992 certain telephone expenses that he paid during those
years. During 1991 and 1992, petitioner maintained (1) separate
home telephone lines, one of which was supposed to be used for
personal purposes and one of which was supposed to be used for
business purposes, and (2) separate cellular telephone lines, one
of which was supposed to be used for personal purposes and one of
which was supposed to be used for business purposes. With
respect to petitioner’s home telephone lines, petitioner claims
that he is entitled to deduct for 1991 and 1992 telephone ex-
penses of $1,393.24 and $1,059.27 that he paid during those
respective years, which he contends are the amounts of telephone
- 128 -
expenses for his home telephone line that was supposed to be used
for business purposes. With respect to petitioner’s cellular
telephone lines, petitioner claims that he is entitled to deduct
for 1991 and 1992 telephone expenses of $729.28 and $903.92 that
he paid during those respective years, which he contends are the
amounts of telephone expenses for his cellular telephone line
that was supposed to be used for business purposes.
With respect to the home telephone expenses at issue for
1991 and 1992, the only dispute between the parties with respect
to the deductibility of those expenses is whether petitioner, who
we have found paid those expenses during those years, has estab-
lished that those expenses are ordinary and necessary expenses
paid in carrying on his Schedule C business. Petitioner contends
that they are. In support of that contention, petitioner relies
on his self-serving testimony, on which we are not required to,
and we shall not, rely. On the instant record, we find that
petitioner has failed to carry his burden of showing that the
telephone expenses of $1,393.24 and $1,059.27 that he paid during
1991 and 1992, respectively, for his home telephone lines repre-
sented expenses paid solely for his home telephone line that was
supposed to be used for business purposes. Even if petitioner
had made such a showing, on the instant record, we find that
petitioner has failed to carry his burden of showing that he used
his home telephone line that was supposed to be used for business
purposes solely in carrying on his Schedule C business, and not
for personal purposes. On the record before us, we find that
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petitioner has failed to carry his burden of establishing that
the home telephone expenses of $1,393.24 and $1,059.27 that he
paid during 1991 and 1992, respectively, constitute ordinary and
necessary business expenses paid in carrying on his Schedule C
business.
With respect to the cellular telephone expenses at issue for
1991 and 1992, the disputes between the parties with respect to
the deductibility of those expenses are whether petitioner, who
we have found paid those expenses during those years, has estab-
lished (1) that he paid those expenses during those years in
carrying on his Schedule C business and (2) that he satisfies the
substantiation requirements of section 274(d)(4). As to the
parties’ first dispute, petitioner relies on his self-serving
testimony to support his contention that the cellular telephone
expenses at issue are ordinary and necessary expenses paid in
carrying on his Schedule C business. We are not required to, and
we shall not, rely on that testimony. On the instant record, we
find that petitioner has failed to carry his burden of showing
that the telephone expenses of $729.28 and $903.92 that he paid
during 1991 and 1992, respectively, for his cellular telephone
lines represented expenses paid solely for his cellular telephone
line that was supposed to be used for business purposes. Even if
petitioner had made such a showing, on the instant record, we
find that petitioner has failed to carry his burden of showing
that he used his cellular telephone line that was supposed to be
used for business purposes solely in carrying on his Schedule C
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business, and not for personal purposes. On the record before
us, we find that petitioner has failed to carry his burden of
establishing that the cellular telephone expenses of $729.28 and
$903.92 that he paid during 1991 and 1992, respectively, consti-
tute ordinary and necessary business expenses paid in carrying on
his Schedule C business.
As to the parties’ second dispute with respect to the
cellular telephone expenses at issue, which we address only
because we assume arguendo that petitioner had established that
the cellular telephone expenses at issue constitute ordinary and
necessary expenses paid in carrying on his Schedule C business,
as pertinent here, section 274(d)(4) operates to disallow any
deduction otherwise allowable under section 162(a) with respect
to any “listed property”, unless the taxpayer satisfies the
substantiation requirements of section 274(d)(4).81 The term
81
Sec. 274(d) provides in pertinent part:
SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC.,
EXPENSES.
(d) Substantiation Required.--No deduction or credit
shall be allowed--
* * * * * * *
(4) with respect to any listed property (as de-
fined in section 280F(d)(4)),
unless the taxpayer substantiates by adequate records
or by sufficient evidence corroborating the taxpayer’s
own statement (A) the amount of such expense or other
item, (B) the time and place of the * * * use of the
facility or property * * *, (C) the business purpose of
(continued...)
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“listed property” is defined in section 280F(d)(4) to include
cellular telephones. Sec. 280F(d)(4)(A)(v). Although, as
required by section 274(d)(4), petitioner substantiated the
respective amounts of the cellular telephone expenses that he
paid during 1991 and 1992, on the instant record, we find that
petitioner has failed to show that he satisfies the remaining
substantiation requirements of section 274(d)(4) and the regula-
tions thereunder. Petitioner did not introduce into evidence
adequate records to satisfy those requirements. Consequently,
petitioner may satisfy those requirements only by introducing
into the record in this case sufficient evidence corroborating
his own statements. Sec. 274(d)(4); sec. 1.274-5T(c)(1), Tempo-
rary Income Tax Regs., 50 Fed. Reg. 46016-46017 (Nov. 6, 1985).
As discussed above, petitioner relies on his self-serving testi-
mony to support his contention that the cellular telephone
expenses at issue constitute ordinary and necessary expenses paid
in carrying on his Schedule C business. We are not required to,
and we shall not, rely on that testimony. On the instant record,
we find that petitioner has failed to carry his burden of intro-
ducing into the record in this case sufficient evidence corrobo-
rating his statements with respect to his alleged business use of
his cellular telephone lines during 1991 and 1992. On the record
before us, we find that petitioner has failed to carry his burden
of establishing that he satisfies all of the substantiation
81
(...continued)
the expense or other item * * *.
- 132 -
requirements of section 274(d)(4).
On the record before us, we find that petitioner has failed
to carry his burden of establishing that he is entitled under
section 162(a) to deduct for 1991 and 1992 any of the telephone
expenses that he paid during those years.82
Claimed Bad Debt Deduction
Petitioner contends that he is entitled to deduct for 1992
the $20,000 payment that he made to Commonwealth Enterprises,
which he claims he made pursuant to an alleged loan guaranty.
According to petitioner, he guarantied a $20,000 loan from Mr.
Vulis to MP Electronics, and the $20,000 check dated December 18,
1992, which was payable to Commonwealth Enterprises, drawn on
petitioner’s UVW account, and signed by petitioner (UVW’s Decem-
ber 18, 1992 check), represented petitioner’s payment of that
loan pursuant to his guaranty. In support of his contentions,
petitioner relies on his self-serving testimony, on which we are
not required to, and we shall not, rely.83 On the instant re
82
Although not altogether clear, it appears that petitioner
contends in the alternative to deducting the telephone expenses
at issue for 1991 and 1992 under sec. 162(a) that those expenses
are deductible under sec. 212. On the instant record, we find
that petitioner has failed to carry his burden of showing that
the respective telephone expenses that he paid during 1991 and
1992 are ordinary and necessary expenses paid during those years
for the production or collection of income. On the record before
us, we find that petitioner has failed to carry his burden of
establishing that he is entitled under sec. 212 to deduct for
1991 and 1992 any of the telephone expenses that he paid during
those years.
83
Petitioner failed to offer into evidence any credible
documentary evidence to establish that Mr. Vulis made a loan to
(continued...)
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cord, we find that petitioner has failed to carry his burden of
showing that UVW’s December 18, 1992 check was paid pursuant to a
guaranty that petitioner provided on a loan from Mr. Vulis to MP
Electronics.84 On the record before us, we find that petitioner
has failed to carry his burden of establishing that he is enti-
tled for 1992 to a $20,000 deduction under section 166 for the
payment of a loan guaranty.
83
(...continued)
MP Electronics and that petitioner was a guarantor on any such
loan. We infer from petitioner’s failure to proffer any such
documentary evidence that any such evidence does not exist and
that, if it does exist, it would not have substantiated peti-
tioner’s position with respect to UVW’s December 18, 1992 check.
We also note that, when Mr. Raja was questioned about the claimed
loan and guaranty in question, he gave inconsistent testimony.
We further note that, when Mr. Vulis was questioned about UVW’s
December 18, 1992 check, he had no recollection of either that
check or the name MP Electronics. Nor could Mr. Vulis recall
whether Commonwealth Enterprises had entered into any transac-
tions with Mr. Raja.
84
Assuming arguendo that petitioner had established that
UVW’s December 18, 1992 check was paid to satisfy his guaranty of
a loan from Mr. Vulis to M.P. Electronics, on the record before
us, we find that petitioner has failed to carry his burden of
establishing that he satisfies the requirements of sec. 1.166-9,
Income Tax Regs., and that therefore he is entitled under sec.
166 to a business bad debt deduction for 1992 with respect to
that payment.
Although not altogether clear, it appears that petitioner
contends in the alternative to deducting the $20,000 payment
under sec. 166 that that payment is deductible under sec. 162(a).
On the instant record, we find that petitioner has failed to
carry his burden of showing that the $20,000 payment at issue is
an ordinary and necessary expense paid during 1992 in carrying on
his Schedule C business. On the record before us, we find that
petitioner has failed to carry his burden of establishing that he
is entitled under sec. 162(a) to a deduction for 1992 for the
$20,000 payment at issue.
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Claimed Capital Loss: Church Street Property
In the notice for 1991 and 1992, respondent determined that,
instead of the $27,000 loss which petitioner and Ms. Brodsky
reported in their 1992 joint return with respect to the sale of
the Church Street property, they have a gain of $23,000, all of
which they must recognize for 1992.85 Respondent made those
determinations because petitioner had not established his basis
in the Church Street property at the time of its sale in 1992.
Petitioner contends on brief that in 1992 he sold a 25-
percent interest in the Church Street property for $23,000, that
his basis in that property at the time of that sale was
$47,600,86 and that he realized a capital loss of $24,600 on that
sale.87
85
Respondent also disallowed in the 1991 and 1992 notice a
claimed capital loss carryover to 1993 that was attributable to
the $27,000 loss that petitioner and Ms. Brodsky claimed for
1992.
86
In the 1992 Schedule D, petitioner and Ms. Brodsky claimed
a $50,000 basis in the Church Street property as of the date of
the sale of that property.
87
Petitioner contends in the alternative that, because there
are no documents establishing that petitioner was in fact a legal
owner of the Church Street property at the time of its sale in
1992, “petitioner is not obligated or required to report any
capital gain or loss on the sale of” that property. On the
record before us, we reject petitioner’s alternative contention
that he was not a legal owner of the Church Street property. We
have found on that record that, at least during part of 1991 and
1992 until the date of the sale of the Church Street property,
petitioner owned an interest in that property, although the
extent of that interest is not disclosed by credible evidence in
the record. In this connection, in addition to other evidence in
the record, the 1991 and 1992 joint returns filed by petitioner
(continued...)
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The gain from the sale or other disposition of property is
the excess of the amount realized over the adjusted basis of the
property provided in section 1011 for determining gain, and the
loss is the excess of the adjusted basis provided in that section
for determining loss over the amount realized. Sec. 1001(a).
Petitioner must establish his adjusted basis in the Church Street
property for purposes of determining the gain or the loss that he
realized, and must recognize, on its sale. O’Neill v. Commis-
sioner, 271 F.2d 44, 50 (9th Cir. 1959), affg. T.C. Memo. 1957-
193; see Burnet v. Houston, 283 U.S. 223, 227-228 (1931). As
pertinent here, (1) petitioner’s adjusted basis in determining
the gain or the loss from the sale of the Church Street property
is his basis in that property determined under section 1012,
adjusted as provided in section 1016,88 see sec. 1011(a); and
87
(...continued)
and Ms. Brodsky support that finding. Petitioner and Ms. Brodsky
included Schedule E in each of those returns. In each such
Schedule E, they reported the Church Street property as rental
property. In the 1991 Schedule E, they claimed rental expenses
with respect to that property, in the 1992 Schedule E, they
listed the Church Street property as a rental property, and in
the 1992 Schedule D they claimed a capital loss with respect to
that property. We find that the 1991 and 1992 returns contain
admissions by petitioner and Ms. Brodsky that one or both of them
had an ownership interest in the Church Street property at least
during part of 1991 and 1992 until the date of the sale of that
property. Those admissions may not be overcome without cogent
evidence that they are wrong. See FRE 801(d)(2); Waring v.
Commissioner, 412 F.2d 800, 801 (3d Cir. 1969), affg. per curiam
T.C. Memo. 1968-126; Estate of Hall v. Commissioner, 92 T.C. 312,
337-338 (1989).
88
With respect to the adjustments to basis under sec. 1016
that are required by sec. 1011(a), petitioner testified at the
(continued...)
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(2) his basis in the Church Street property is the cost of such
property, sec. 1012.
Petitioner contends that the copies of the front sides of
two checks totaling $47,600 dated May 2 and May 18, 1990, respec-
tively, which show that they were payable to Markfel Realty
(petitioner’s two checks to Markfel Realty), represented “peti-
tioner’s cost basis in the [Church Street] property.” We are not
persuaded by those copies, which the Court admitted into the
record in this case solely as the front sides of those two
checks,89 that they are the front sides of two checks that
88
(...continued)
trial in this case that the Church Street property was land that
was to be developed. Petitioner also described the Church Street
property in petitioner’s answering brief as a “vacant lot”.
However, in the 1991 and 1992 joint returns filed by petitioner
and Ms. Brodsky, they reported the Church Street property as
rental property. Petitioner also took the position that the
Church Street property was rental property at the further trial
in this case and in petitioner’s opening brief. If we were to
accept petitioner’s position at the trial that the Church Street
property was land to be developed and not rental property, on the
instant record, we find that petitioner has failed to carry his
burden of showing what, if any, adjustments to basis under sec.
1016 petitioner is required to make under sec. 1011(a) in order
to determine his adjusted basis in that property. If we were to
accept petitioner’s position in Schedules E of the 1991 and 1992
joint returns and at the further trial that the Church Street
property was rental property and not land to be developed, on the
instant record, we find that petitioner has failed to carry his
burden of showing the decrease required by sec. 1016(a)(2) in his
basis in that property, determined under sec. 1012 (i.e., the
cost), for depreciation allowed or allowable, whichever is
greater, under sec. 167(a). See Reithmeyer v. Commissioner, 26
T.C. 804, 815 (1956).
89
Although we are satisfied from the copy of the front side
of petitioner’s check to Markfel Realty dated May 2, 1990, that
that check was negotiated, we are not satisfied from that copy or
(continued...)
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Markfel Realty negotiated.90 On the instant record, we find that
petitioner has failed to carry his burden of establishing his
basis in the Church Street property within the meaning of section
1012 and his adjusted basis in that property within the meaning
of section 1011(a). On the record before us, we find that
petitioner has failed to carry his burden of establishing
89
(...continued)
from any other evidence in the record that Markfel Realty depos-
ited and/or cashed that check, nor do we know from the record the
date on which that check was negotiated. For example, Markfel
Realty could have endorsed that check to petitioner, who in turn
deposited and/or cashed it. We are not satisfied from the copy
of the front side of petitioner’s check to Markfel Realty dated
May 18, 1990, or from any other evidence in the record that that
check was ever negotiated.
90
Assuming arguendo that we had been persuaded that peti-
tioner’s two checks to Markfel Realty were negotiated by Markfel
Realty, on the instant record, we find that petitioner has failed
to carry his burden of showing that those checks represented
funds paid by petitioner with respect to the Church Street
property. We have found that during the course of petitioner’s
dealings with Markfel Realty petitioner invested in several real
properties and that any checks which petitioner wrote to Markfel
Realty were for one or more of the following purposes: Initial
respective investments in certain real properties, respective
increases in his investment interests in certain real properties,
and/or respective payments of his proportionate share of any
expenditures with respect to such interests. Assuming arguendo
that we had found that the copies of the front sides of peti-
tioner’s two checks to Markfel Realty were negotiated by Markfel
Realty, petitioner could have paid the proceeds of those checks
to Markfel Realty with respect to real properties other than the
Church Street property. Even if we had been satisfied from the
instant record that the copies of the front sides of petitioner’s
two checks to Markfel Realty were negotiated by Markfel Realty
and that the proceeds of those checks were paid to Markfel Realty
with respect to the Church Street property, petitioner could have
paid those proceeds in order to invest in, to increase his
investment in, and/or to pay his proportionate share of any
expenditures with respect to that property.
- 138 -
(1) that he is entitled to the capital loss that he claimed for
1992 with respect to the sale of the Church Street property and
(2) that he is not required to recognize for that year the gain
of $23,000 that respondent determined in the notice for 1991 and
1992.91
Claimed Capital Gain: Sanchez Street Property
In the notice for 1993, respondent determined that, instead
of the $11,315 gain that petitioner and Ms. Brodsky reported in
their 1993 return with respect to the sale of the Sanchez Street
property, they have a gain from that sale of $48,000, all of
which they must recognize for 1993. Respondent made that deter-
mination because petitioner and Ms. Brodsky had not established
their basis in the Sanchez Street property when it was sold.92
In the 1993 joint return, petitioner and Ms. Brodsky re-
ported that they sold their interest in the Sanchez Street
property for $48,000, that their adjusted basis in that property
at the time of that sale was $36,685, and that they realized a
gain of $11,315 on that sale.
On brief, petitioner abandons the position that he and Ms.
Brodsky took in the 1993 joint return. Instead, petitioner
advances the following contentions on brief with respect to the
91
On the record before us, we further find that petitioner
has failed to carry his burden of establishing that he is enti-
tled to the capital loss carryover to 1993 that he claimed in the
1993 joint return and that respondent disallowed.
92
Respondent also determined in the 1993 notice, as respon-
dent had determined in the 1991 and 1992 notice, that petitioner
and Ms. Brodsky are not entitled to the $27,000 capital loss
carryover from 1992 that they claimed in their 1993 joint return.
We sustain that determination. See supra note 91.
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Sanchez Street property:93
Joseph Dubrovsky testified that petitioner in-
vested $57,000 in 1987, in property located on El
Camino del Mar, San Francisco. * * *
Mr. Dubrovsky testified that he returned $30,000
of petitioner’s investment to him on June 3, 1988.[1]
Therefore, petitioner’s adjusted basis was $27,000 at
that point in time. Thereafter, it is unclear whether
there was a sale or like-kind exchange for the property
located at 287 Sanchez Street. What is clear is Joseph
Dubrovsky testified that all the owners of El Camino
del Mar remained the owners of 287 Sanchez Street,
including petitioner. Edward Sutton, the tax return
preparer, testified that his records reflected a pur-
chase price of $400,000 for 287 Sanchez Street in 1989,
which would be the cost basis. Joseph Dubrovsky testi-
fied that petitioner was a 10% owner of the property.
Edward Sutton, the tax return preparer, reported
that petitioner’s gain on a sale of the property in
93
Petitioner contends in the alternative that, because there
are no documents establishing that petitioner was in fact a legal
owner of the Sanchez Street property at the time of its sale in
1993, “petitioner is not obligated or required to report any
capital gain or loss on the sale of” that property. On the
record before us, we reject petitioner’s contention that he was
not a legal owner of the Sanchez Street property. We have found
on that record that, at least during the period beginning in 1991
and ending on the date of the sale of the Sanchez Street property
in 1993, petitioner and Ms. Brodsky owned an interest in that
property, although the extent of that interest is not disclosed
by credible evidence in the record. In this connection, in
addition to other evidence in the record, the 1991, 1992, and
1993 joint returns filed by petitioner and Ms. Brodsky support
that finding. Petitioner and Ms. Brodsky included Schedule E in
each of those returns. In each such Schedule E, they reported
the Sanchez Street property as rental property, and they claimed
rental expenses with respect to that property. In Schedule D and
Form 4797 that petitioner and Ms. Brodsky included in the 1993
joint return, they claimed a capital gain with respect to the
Sanchez Street property. We find that the 1991, 1992, and 1993
joint returns contain admissions by petitioner and Ms. Brodsky
that they had an ownership interest in the Sanchez Street prop-
erty at least during the period beginning in 1991 and ending on
the date of the sale of that property in 1993. Those admissions
may not be overcome without cogent evidence that they are wrong.
See FRE 801(d)(2); Waring v. Commissioner, 412 F.2d at 801;
Estate of Hall v. Commissioner, 92 T.C. at 337-338.
- 140 -
1992 was $48,000.[3] However, at trial Mr. Sutton
testified that the property was not sold until 1995.
If petitioner sold his interest in the property in 1992
for $48,000, then with an adjusted basis of $27,000,
petitioner would have a gain of $21,000. * * *
However, petitioner did not receive any cash or
proceeds on any sale. * * * Petitioner only reported a
gain as a result of being relieved from the assumption
of the debt by the buyer.
1
Contrary to petitioner’s claim on brief, Mr. Dubrovsky did
not testify that he distributed $30,000 to petitioner on June 3,
1988, as a return of petitioner’s investment in the Camino prop-
erty. Mr. Dubrovsky testified that he distributed $63,000 to
petitioner on June 3, 1988, as a return of petitioner’s investment
in that property. The record contains a copy of a check dated
June 3, 1988, from Mr. Dubrovsky to petitioner in the amount of
$63,000, which petitioner negotiated. Although we are not re-
quired to, and we shall not, rely on Mr. Dubrovsky’s testimony to
establish the purpose of that check, the parties do not dispute
that the $63,000 check from Mr. Dubrovsky to petitioner repre-
sented a distribution with respect to the Camino property. Even
if we were to rely on Mr. Dubrovsky’s testimony and/or accept the
parties’ agreement as to the purpose of that check, neither that
testimony nor that agreement establishes petitioner’s basis in the
Sanchez Street property.
3
Contrary to petitioner’s claim on brief, petitioner and Ms.
Brodsky reported the sale of the Sanchez Street property in the
1993 joint return, Mr. Sutton did not prepare that return or
calculate the gain on the sale of that property that they reported
in that return, and $48,000 was the gross sales price, not the
gain, that they reported from that sale in that return.
Although not altogether clear, it appears from the foregoing
excerpt that petitioner takes the position on brief (1) that he
held a 10-percent ownership interest in the Sanchez Street
property since the date of the purchase of that property,
(2) that his basis at all times in that ownership interest was
$27,000, and (3) that that property (a) was sold in 1993 for
$48,000 as reported in the 1993 joint return or (b) in the
alternative was sold in 1995 for an undisclosed amount. In
support of petitioner’s position regarding his ownership interest
- 141 -
and basis in the Sanchez Street property, petitioner relies on
the testimony of Mr. Dubrovsky, on which we are not required to,
and we shall not, rely. In support of petitioner’s alternative
position regarding the sale of the Sanchez Street property,
petitioner relies on the testimony of Mr. Sutton. Based on the
Court’s evaluation of Mr. Sutton’s testimony, we are not required
to, and we shall not, rely on his testimony regarding the sale of
the Sanchez Street property.
On the instant record, we find that petitioner has failed to
carry his burden of establishing his basis in the Sanchez Street
property within the meaning of section 1012 and his adjusted
basis in that property within the meaning of section 1011(a).94
We further find on that record that petitioner has failed to
carry his burden of establishing that he did not sell his inter-
est in that property in 1993 for $48,000.95 On the record before
us, we find that petitioner has failed to carry his burden of
establishing that he is not required to recognize for 1993 the
gain of $48,000 that respondent determined in the 1993 notice.
Claimed Schedule E Deductions
94
Because petitioner does not dispute that the Sanchez
Street property was rental property, on the instant record, we
find that petitioner has failed to carry his burden of showing
the decrease required by sec. 1016(a)(2) in his basis in that
property, determined under sec. 1012 (i.e., the cost), for
depreciation allowed or allowable, whichever is greater, under
sec. 167(a). See Reithmeyer v. Commissioner, 26 T.C. at 815.
95
On the instant record, we find that petitioner has failed
to carry his burden of showing in the alternative that the
Sanchez Street property was sold in 1995.
- 142 -
In the notice for 1991 and 1992, respondent disallowed
(1) for 1991 all of the claimed Schedule E expenses with respect
to the Church Street property and the Sanchez Street property and
(2) for 1992 all of the claimed Schedule E expenses with respect
to the Sanchez Street property. Respondent made that determina-
tion because, inter alia,96
it has not been established that * * * [the claimed
Schedule E expenses] were ordinary and necessary busi-
ness expenses or were expended for the purpose desig-
nated. * * * nor has it been established that you were
at risk per section 465 of the Internal Revenue Code.
* * *
As an alternative ground for disallowing the claimed Schedule E
expenses for 1991 and 1992, respondent determined that
the claimed losses are not allowable per Section 469 of
the Internal Revenue Code because you did not actively
participate in the management of the rental properties
and because you have no other passive income to offset
the passive losses.
With respect to $1,611.10 of the claimed Schedule E expenses
96
An additional ground set forth by respondent in the notice
for 1991 and 1992 for disallowing all of the claimed Schedule E
expenses for those years was that petitioner and Ms. Brodsky had
not established an ownership interest in the Church Street
property and the Sanchez Street property. On the record before
us, we reject that ground. On that record, we have found that at
least during part of 1991 and 1992 until the date of the sale of
the Church Street property, petitioner owned an interest in that
property, although the extent of that interest is not disclosed
by credible evidence in the record. We have further found on the
record before us that at least during the period beginning in
1991 and ending on the date of the sale of the Sanchez Street
property in 1993, petitioner and Ms. Brodsky owned an interest in
that property, although the extent of that interest is not
disclosed by credible evidence in the record.
- 143 -
for 1991 relating to the Church Street property,97 petitioner
contends that he has substantiated those expenses. In support of
that contention, petitioner relies on a copy of the front side of
a check for $1,611.10 dated September 27, 1990, that was payable
to Markfel Realty and that petitioner signed (petitioner’s
September 27, 1990 check to Markfel Realty). We are not satis-
fied from that copy that that check was ever negotiated, let
alone negotiated by Markfel Realty.98 Even if we were to find
that petitioner’s September 27, 1990 check to Markfel Realty was
negotiated by Markfel Realty, on the instant record, we find that
petitioner has failed to carry his burden of showing that that
check represented an amount that petitioner paid in 1991 for
expenses relating to the Church Street property. On the record
before us, we find that petitioner has failed to carry his burden
of establishing that he is entitled to deduct for 1991 any of the
claimed Schedule E expenses relating to the Church Street prop-
97
Petitioner makes no argument on brief as to $503.90 of the
disallowed claimed Schedule E expenses for 1991 relating to the
Church Street property that petitioner placed in dispute in the
petition and that respondent has not conceded. We conclude that
petitioner has abandoned contesting $503.90 of the claimed
Schedule E expenses for 1991 that respondent disallowed in the
notice for 1991 and 1992. See Rybak v. Commissioner, 91 T.C. at
566 n.19.
98
Assuming arguendo that we had been satisfied from the copy
of the front side of petitioner’s September 27, 1990 check to
Markfel Realty that that check was negotiated, we are not satis-
fied from that copy or from any other evidence in the record that
Markfel Realty deposited and/or cashed that check, nor do we know
from the record the date on which that check was negotiated. For
example, Markfel Realty could have endorsed that check to peti-
tioner, who in turn deposited and/or cashed it.
- 144 -
erty.99
With respect to the claimed Schedule E expenses for 1991 and
1992 relating to the Sanchez Street property, petitioner contends
that respondent conceded prior to the further trial that peti-
tioner had substantiated the total amounts of expenses with
respect to that property that were paid during those respective
years. Petitioner claims that respondent’s counsel made that
concession during a meeting held less than a week before the
further trial in this case (meeting in question), which peti-
tioner’s counsel Martin A. Schainbaum, Mr. Sutton, respondent’s
counsel, and Mr. Oliveras attended. At the meeting in question,
respondent’s counsel and Mr. Oliveras reviewed certain documents
(petitioner’s documents) that petitioner’s representatives
brought to that meeting, which petitioner contends substantiate
the total amounts of expenses relating to the Sanchez Street
property that were paid during 1991 and 1992, respectively.
During the testimony of Mr. Sutton at the further trial in
this case, petitioner attempted to introduce into the record
99
Because we have found that petitioner has failed to carry
his burden of establishing that he is entitled to deduct for 1991
any of the claimed Schedule E expenses relating to the Church
Street property, petitioner does not have a loss for that year
relating to that property. Assuming arguendo that we had found
that petitioner did have a loss for 1991 relating to the Church
Street property, we find on the record before us that petitioner
has failed to carry his burden of establishing the amount with
respect to which he was at risk under sec. 465 for that property
for that year. See sec. 465(a) and (b). We further find on that
record that petitioner has failed to carry his burden of estab-
lishing that any loss relating to the Church Street property for
1991 did not constitute a passive activity loss under sec. 469
for that year. See sec. 469(a), (c).
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petitioner’s documents for the purpose of establishing that
respondent, through respondent’s counsel, conceded prior to the
further trial that petitioner had substantiated the total amounts
of expenses relating to the Sanchez Street property that were
paid during 1991 and 1992, respectively, and that the only issue
remaining for the further trial with respect to those expenses
was the extent of petitioner’s ownership interest in that prop-
erty.100 Petitioner’s documents consisted primarily of bank
statements and canceled checks from two different bank
accounts,101 as well as a spreadsheet prepared by Mr. Sutton on a
date not disclosed by the record that purported to summarize the
100
On brief, petitioner changes the position that he took at
the further trial regarding the purpose for admitting peti-
tioner’s documents into evidence. Petitioner claims on brief
that those documents substantiate the total amounts of expenses
with respect to the Sanchez Street property that were paid during
1991 and 1992, respectively. Petitioner does not claim on brief,
as he contended at the further trial, that petitioner’s documents
establish that respondent conceded at the meeting in question
that petitioner had substantiated that those amounts of expenses
were paid. We do not know why petitioner abandons on brief the
purpose that he advanced at the further trial for the admission
of petitioner’s documents into the record. In this regard, it is
noteworthy that Mr. Sutton testified at the further trial that
neither respondent’s counsel nor Mr. Oliveras stated at the
meeting in question that petitioner’s documents established that
petitioner was entitled to deduct the claimed Schedule E expenses
for 1991 and 1992 relating to the Sanchez Street property.
101
The first set of bank statements and canceled checks were
statements and checks dated between December 1990 and September
1992 with respect to an account owned by Mr. Dubrovsky and two
other individuals who were identified on such statements and such
checks as Anatoly Kosoy (Mr. Kosoy) and Simon Khachatrian. The
second set of bank statements and canceled checks were statements
and checks dated between August 1992 and January 1993 with
respect to an account owned by Mr. Kosoy and an association
identified as the “287 Sanchez St Association”.
- 146 -
information set forth in those statements and checks. Respondent
objected to petitioner’s attempt to establish through peti-
tioner’s documents that respondent conceded prior to the further
trial that petitioner had substantiated the total amounts of
expenses relating to the Sanchez Street property that were paid
during 1991 and 1992, respectively. As grounds for that objec-
tion, respondent’s counsel indicated that any such attempt would
prejudice respondent. That was because, in order to refute
petitioner’s position that respondent’s counsel made such a
concession at the meeting in question, respondent’s counsel would
have to testify at the further trial and consequently would be
prohibited under the applicable rules of professional responsi-
bility, see Rule 24(g), from representing respondent at the
further trial, thereby leaving respondent with no counsel to
represent respondent at that further trial.
The Court did not admit petitioner’s documents into the
record because (1) in violation of the Court’s March 31, 2000
Order, petitioner did not provide those documents to respondent
on or before July 20, 2000;102 (2) the Court found that petitioner
had not shown good cause for that violation of the Court’s March
31, 2000 Order; and (3) the Court found that admitting peti-
tioner’s documents into the record would cause substantial
prejudice to respondent.
Assuming arguendo that the Court had admitted petitioner’s
102
Petitioner first provided those documents to respondent on
or about Aug. 17, 2000.
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documents into evidence, we find that those documents do not show
that respondent conceded at the meeting in question that peti-
tioner substantiated the total amounts of expenses relating to
the Sanchez Street property that were paid during 1991 and 1992,
respectively. We further find that petitioner’s documents do not
establish such amounts, and consequently we reject petitioner’s
position on brief that those documents substantiate the total
amount of expenses relating to the Sanchez Street property that
were paid during 1991 and 1992, respectively. Although peti-
tioner’s documents establish that certain amounts were paid
during 1991 and 1992, respectively, and although it appears that
some of those amounts were paid with respect to the Sanchez
Street property, we find that petitioner’s documents do not
establish (1) that any of the amounts reflected in those docu-
ments were paid by petitioner103 and (2) that all of those amounts
constitute deductible expenses, as opposed to expenditures (e.g.,
capital improvements) that must be capitalized.104
103
In this connection, all of the canceled checks that are
included in petitioner’s documents were drawn on accounts owned
by persons other than petitioner and were signed by individuals
other than petitioner. On the instant record, we find that
petitioner has failed to carry his burden of showing that any of
his funds were deposited during 1991 and 1992 into the bank
accounts on which those checks were drawn or that he otherwise
provided during those years the funds to pay certain of any
expenditures relating to the Sanchez Street property.
104
In support of his position that he is entitled to deduct
for 1991 and 1992 the respective claimed Schedule E expenses
relating to the Sanchez Street property, petitioner relies, inter
alia, on Mr. Dubrovsky’s testimony that petitioner was liable for
his share of the expenses on the Sanchez Street property. We are
not required to, and we shall not, rely on Mr. Dubrovsky’s
testimony. In this connection, Mr. Dubrovsky gave conflicting
(continued...)
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On the record before us, we find that petitioner has failed
to carry his burden of establishing that he is entitled to deduct
any of the claimed Schedule E expenses for 1991 and 1992 relating
to the Sanchez Street property.105
Fraud Penalty Under Section 6663(a)
Respondent determined that petitioner is liable for each of
104
(...continued)
testimony regarding the method by which the expenditures relating
to the Sanchez Street property were paid. Mr. Dubrovsky ini-
tially testified that all of the investors in the Sanchez Street
property gave him money, which he deposited into a bank account,
and that he paid the expenses relating to that property from that
account. Mr. Dubrovsky later testified that the rent collected
from the Sanchez Street property was used to pay all of the
expenses relating to that property. In this regard, petitioner
and Ms. Brodsky claimed in each of the 1991 and 1992 Schedules E
with respect to the Sanchez Street property a total amount of
deductions, excluding depreciation, that exceeded the total
amount of rent that they reported. Even if we were to rely on
Mr. Dubrovsky’s testimony that petitioner was liable for his
share of the expenses on the Sanchez Street property, that
testimony does not establish the extent of petitioner’s ownership
in that property, the amount, if any, of expenditures relating to
that property for which petitioner was responsible during those
years, and that petitioner paid the expenditures that he and Ms.
Brodsky claimed in the 1991 and 1992 Schedules E with respect to
that property.
105
Because we have found that petitioner has failed to carry
his burden of establishing that he is entitled to deduct any of
the claimed Schedule E expenses for 1991 and 1992 relating to the
Sanchez Street property, petitioner does not have a loss for
either of those years relating to that property. Assuming
arguendo that we had found that petitioner did have a loss for
1991 and 1992 relating to the Sanchez Street property, we find on
the record before us that petitioner has failed to carry his
burden of establishing the amount with respect to which he was at
risk under sec. 465 for that property for those years. See sec.
465(a) and (b). We further find on that record that petitioner
has failed to carry his burden of establishing that any loss
relating to the Sanchez Street property for 1991 and 1992 did not
constitute a passive activity loss under sec. 469 for those
years. See sec. 469(a), (c).
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the years at issue for the fraud penalty under section 6663(a) on
the entire amount of the underpayment for each of those years.
Section 6663(a) imposes a penalty equal to 75 percent of the
portion of any underpayment that is attributable to fraud. For
purposes of section 6663(a), if the Commissioner establishes that
any portion of an underpayment is attributable to fraud, the
entire underpayment is to be treated as attributable to fraud,
except with respect to any portion of the underpayment that the
taxpayer establishes by a preponderance of the evidence is not
attributable to fraud. Sec. 6663(b). In order for the fraud
penalty to apply, the Commissioner must prove by clear and
convincing evidence, sec. 7454(a); Rule 142(b), that an underpay-
ment exists and that some portion of such underpayment is attrib-
utable to fraud. Niedringhaus v. Commissioner, 99 T.C. 202, 210
(1992).
Underpayment
To prove the existence of an underpayment, the Commissioner
may not rely on a taxpayer’s failure to carry his or her burden
of proof with respect to the underlying deficiency. Parks v.
Commissioner, 94 T.C. 654, 660-661 (1990); Petzoldt v. Commis-
sioner, 92 T.C. 661, 700 (1989). The Commissioner must prove
only that an underpayment exists, and not the precise amount of
such underpayment. DiLeo v. Commissioner, 96 T.C. at 873;
Petzoldt v. Commissioner, supra at 699. When an allegation of
fraud is intertwined with reconstructed unreported income, as it
is in the present case, the Commissioner may satisfy the burden
- 150 -
of establishing an underpayment by either: (1) Proving a likely
source of the unreported income or (2) disproving the nontaxable
source(s) that the taxpayer alleges for the unreported income.
Parks v. Commissioner, supra at 661.
On the instant record, we find that respondent has estab-
lished by clear and convincing evidence a likely source of
petitioner’s unreported income for each of the years at issue,
viz., the various Schedule C and other income-producing activi-
ties in which petitioner engaged during each of those years.106
On the record before us, we find that respondent has established
by clear and convincing evidence that there was an underpayment
of petitioner’s tax for each of the years 1991 through 1993.
Fraudulent Intent
To prove fraudulent intent, the Commissioner must prove by
clear and convincing evidence that the taxpayer intended to evade
tax, which he or she believed to be owing, by conduct intended to
conceal, mislead, or otherwise prevent the collection of such
tax. Laurins v. Commissioner, 889 F.2d 910, 913 (9th Cir. 1989),
affg. Norman v. Commissioner, T.C. Memo. 1987-265; Parks v.
Commissioner, supra at 661. The existence of fraud is a question
of fact to be resolved upon consideration of the entire record.
DiLeo v. Commissioner, supra at 874; Gajewski v. Commissioner, 67
106
Petitioner’s failure to contest certain amounts of unre-
ported income determined for 1991 and 1993, certain amounts of
claimed cost of goods sold disallowed for 1991, 1992, and 1993,
and certain amounts of claimed Schedule C expenses disallowed for
1991 and 1992, which we have found constitutes an abandonment by
petitioner of those items, also establishes by clear and convinc-
ing evidence that an underpayment exists for each of the years at
issue.
- 151 -
T.C. 181, 199 (1976), affd. without published opinion 578 F.2d
1383 (8th Cir. 1978). Fraud is never presumed or imputed and
should not be found in circumstances which create at most only
suspicion. Toussaint v. Commissioner, 743 F.2d 309, 312 (5th
Cir. 1984), affg. T.C. Memo. 1984-25; Petzoldt v. Commissioner,
supra at 700. Direct evidence of the requisite fraudulent intent
is seldom available. Petzoldt v. Commissioner, supra at 699;
Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). Consequently,
the Commissioner may prove fraud by circumstantial evidence.
Toussaint v. Commissioner, supra at 312; Rowlee v. Commissioner,
supra at 1123; see Marsellus v. Commissioner, 544 F.2d 883, 885
(5th Cir. 1977), affg. T.C. Memo. 1975-368.
The courts have identified a number of badges of fraud from
which fraudulent intent may be inferred, including (1) consistent
and substantial understatement of income, (2) failure to maintain
adequate records, (3) incomplete and erroneous information
provided to tax return preparer or bookkeeper, (4) destruction of
books and records, (5) implausible explanation of behavior,
(6) failure to cooperate with tax authorities, and (7) lack of
credibility of the taxpayer’s testimony. See Bradford v. Commis-
sioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C. Memo.
1984-601; Parks v. Commissioner, supra at 664-665. In addition,
the taxpayer’s background and the context of the events in
question may be considered circumstantial evidence of fraud.
Plunkett v. Commissioner, 465 F.2d 299, 303 (7th Cir. 1972),
affg. T.C. Memo. 1970-274; Niedringhaus v. Commissioner, supra at
- 152 -
211. Although no single factor is necessarily sufficient to
establish fraud, the existence of several indicia constitutes
persuasive circumstantial evidence of fraud. Bradford v. Commis-
sioner, supra at 307; Petzoldt v. Commissioner, supra at 700.
In support of respondent’s position that petitioner intended
to evade tax for each of the years at issue, which he believed to
be owing, by conduct intended to conceal, mislead, or otherwise
prevent the collection of such tax, respondent relies on the
following factors: Petitioner’s consistent and substantial
understatement of income for the years at issue; petitioner’s
failure to maintain adequate books and records; petitioner’s
failure to cooperate with respondent’s agents during the examina-
tion of the years at issue, including his lack of credibility in
certain of his dealings with those agents.
Although we agree with respondent that the factors on which
respondent relies to prove fraudulent intent are present in the
instant case, based on our examination of the entire record
before us, we find that petitioner’s actions raise only a suspi-
cion, albeit a strong suspicion, of fraud for each of those
years. See Toussaint v. Commissioner, supra at 312; Petzoldt v.
Commissioner, supra at 700. We are not persuaded by clear and
convincing evidence that petitioner’s actions of substantially
underreporting his income for each of the years at issue and
failing to maintain adequate books and records for each of those
years were attributable to his fraudulent intent to evade tax
when he filed the joint return for each such year, as opposed to
his negligence and his disregard of tax rules and regulations.
- 153 -
Nor are we persuaded by clear and convincing evidence that
petitioner’s actions of failing to cooperate with respondent’s
agents and his lack of credibility in certain of his dealings
with those agents, as well as with the Court, were attributable
to petitioner’s fraudulent intent to evade tax when he filed the
joint return for each of the years at issue, as opposed to his
desire to conceal his negligence and his disregard of tax rules
and regulations. Based on our examination of the entire record
before us, we find that respondent has failed to carry respon-
dent’s burden of establishing by clear and convincing evidence
that petitioner intended to evade tax for each of the years at
issue, which he believed to be owing, by conduct intended to
conceal, mislead, or otherwise prevent the collection of such
tax.
On the record before us, we find that petitioner is not
liable for any of the years at issue for the fraud penalty under
section 6663(a).
Accuracy-Related Penalty Under Section 6662(a)
Respondent determined in the alternative to the fraud
penalty under section 6663(a) that petitioner is liable for each
of the years at issue for the accuracy-related penalty under
section 6662(a) because of negligence or disregard of rules or
regulations under section 6662(b)(1).
Section 6662(a) imposes an accuracy-related penalty equal to
20 percent of the underpayment resulting from, inter alia,
negligence or disregard of rules or regulations. Sec.
- 154 -
6662(b)(1). For purposes of section 6662(a), the term "negli-
gence" includes any failure to make a reasonable attempt to
comply with the Code, and the term "disregard" includes any
careless, reckless, or intentional disregard. Sec. 6662(c).
Negligence has also been defined as a lack of due care or failure
to do what a reasonable person would do under the circumstances.
Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),
affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C.
686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990). Failure to
maintain adequate books and records or to substantiate items
properly constitutes negligence. Sec. 1.6662-3(b)(1), Income Tax
Regs.
The accuracy-related penalty under section 6662(a) does not
apply 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. Sec. 6664(c)(1). The determination of whether
the taxpayer acted with reasonable cause and in good faith
depends on the pertinent facts and circumstances, including the
taxpayer’s efforts to assess his or her proper tax liability, the
knowledge and experience of the taxpayer, and the reliance on the
advice of a professional, such as an accountant. Sec. 1.6664-
4(b)(1), Income Tax Regs. In the case of claimed reliance on the
accountant who prepared the taxpayer’s tax return, the taxpayer
must establish that correct information was provided to the
accountant and that the item incorrectly omitted, claimed, or
reported in the return was the result of the accountant’s error.
- 155 -
Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173 (1978).
Petitioner contends that he is not liable for the accuracy-
related penalty under section 6662(a) because he relied on Mr.
Sutton, who prepared the joint returns of petitioner and Ms.
Brodsky for 1991 and 1992, and on Mr. DiBernardo, who prepared
their joint return for 1993, to whom he provided all of his
financial information. On the instant record, we reject that
contention. On that record, we find that petitioner has failed
to carry his burden of establishing (1) that he provided correct
and complete information to Mr. Sutton and Mr. DiBernardo in
connection with their return preparation on his behalf and
(2) that any item incorrectly omitted, claimed, or reported in
the joint returns for the years at issue was the result of the
error of one of those return preparers. On the instant record,
we also find that petitioner failed to maintain adequate books
and records and to substantiate properly items claimed on the
joint returns for the years at issue.
On the record before us, we find that petitioner has failed
to carry his burden of showing (1) that the underpayment for each
of the years at issue was not due to negligence or disregard of
rules or regulations and (2) that he acted with reasonable cause
and in good faith with respect to the underpayment for each of
those years. On that record, we find that petitioner has failed
to carry his burden of establishing that he is not liable for
each of the years at issue for the accuracy-related penalty under
section 6662(a).
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Addition to Tax Under Section 6651(a)(1)
Respondent determined that petitioner is liable for 1993 for
the addition to tax under section 6651(a)(1) because respondent
did not receive the 1993 joint return of petitioner and Ms.
Brodsky until May 14, 1995.
Section 6651(a)(1) imposes an addition to tax for failure to
file timely a tax return. The addition to tax does not apply if
the failure is due to reasonable cause and not to willful ne-
glect. Sec. 6651(a)(1).
Petitioner contends that respondent erred in determining
that he is liable for 1993 for the addition to tax under section
6651(a)(1) because he had reasonable cause for not timely filing
the joint return for that year. According to petitioner, reason-
able cause existed because at the time that he was preparing that
joint return: (1) He was engaged in his various business activi-
ties; (2) respondent was conducting an examination of his joint
returns for 1987 through 1990; (3) he was in the process of
changing representatives during the course of that examination,107
107
Mr. Sutton, who was shown on the joint returns of peti-
tioner and Ms. Brodsky for 1991 and 1992 as return preparer,
represented petitioner with respect to respondent’s examination
of those years and certain prior years. In December 1994,
respondent received a power of attorney authorizing Ms. Schwiff
to represent petitioner and Ms. Brodsky with respect to respon-
dent’s examination of their taxable years 1991 and 1992. Some-
time between the end of May 1995 and the beginning of July 1995,
respondent received a power of attorney authorizing Mr.
DiBernardo, who was shown in the joint return of petitioner and
Ms. Brodsky for 1993 as return preparer, to represent petitioner
and Ms. Brodsky with respect to respondent’s examination of their
(continued...)
- 157 -
and one or more of his representatives advised him not to file
the joint return for 1993 until the conclusion of the examination
of taxable years 1987 through 1990; and (4) he was caring for his
sick mother.
In support of his position regarding the late filing of the
1993 joint return in question, petitioner relies on his self-
serving testimony, on which we are not required to, and we shall
not, rely.108 Even if we had believed the excuses offered by
petitioner for his failure to file timely that return, on the
record before us, we find that those excuses are not adequate to
show reasonable cause for petitioner’s failure to file timely.109
107
(...continued)
taxable years 1991 and 1992.
108
With respect to petitioner’s claim that he relied on one
or more of his representatives, who advised him not to file the
1993 joint return until after the completion by respondent of the
examination of certain prior taxable years, petitioner did not
question Mr. Sutton and Mr. DiBernardo, or call Ms. Schwiff as a
witness, regarding what they advised him with respect to the
filing of that return. We infer from petitioner’s failure to
question Mr. Sutton and Mr. DiBernardo and to call Ms. Schwiff in
that regard that their testimony would not have been favorable to
petitioner’s contention that one or more of them advised him not
to file the 1993 joint return until after the conclusion of
respondent’s examination of certain prior taxable years. We also
note that Mr. DiBernardo first met petitioner in 1995, sometime
prior to the date (May 14, 1995) on which respondent received the
1993 joint return in question.
109
With respect to petitioner’s claim that he did not file
timely the 1993 joint return because he was caring for his sick
mother, petitioner testified that his mother passed away on Aug.
20, 1994. However, respondent did not receive the 1993 joint
return until May 14, 1995. Petitioner did not explain how his
caring for his sick mother contributed to his not filing the 1993
joint return until almost 9 months after she died.
- 158 -
See United States v. Boyle, 469 U.S. 241 (1985).
On the record before us, we find that petitioner has failed
to satisfy his burden of establishing that he had reasonable
cause for his failure to file timely the 1993 joint return in
question. On that record, we find that petitioner is liable for
1993 for the addition to tax under section 6651(a)(1).
We have given due consideration to all of the parties’
contentions and arguments, even though we have not addressed each
of them herein.
To reflect the foregoing, the concessions of respondent, and
the matters abandoned by petitioner,
Decision will be entered under
Rule 155.
Brodsky v. Comm'r
Court: United States Tax Court
Date filed: 2001-09-14
Citations: 2001 T.C. Memo. 240, 82 T.C.M. 505, 2001 Tax Ct. Memo LEXIS 274
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