PRICE v. COMMISSIONER

T.C. Memo. 2001-307

UNITED STATES TAX COURT

KATRINA L. PRICE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5231-00. Filed November 30, 2001.

Katrina L. Price, pro se.

Jeffrey Johnson, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent determined deficiencies in

petitioner’s Federal income tax of $6,220 for 1993 and $3,532 for

1994, additions to tax of $1,555 for failure to file for 1993 and

$261 for failure to pay estimated tax for 1993, and an accuracy-

related penalty of $706 for 1994.
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The issues for decision are:

1. Whether petitioner is liable for income tax on her

salary of $13,000 per year in 1993 and 1994 and additional income

of $25,500 in 1993 and $5,486 in 1994. We hold that she is.

2. Whether petitioner is liable for additions to tax for

failure to file and failure to pay estimated tax for 1993. We

hold that she is.

3. Whether petitioner is liable for the accuracy-related

penalty for negligence for 1994. We hold that she is.

Section reference are to the Internal Revenue Code in effect

in the years in issue, and Rule references are to the Tax Court

Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

A. Petitioner

Petitioner resided in New York, New York, when she filed the

petition in this case. She had a savings and checking account at

Citibank and Chemical Bank. She had no other bank accounts

during the years in issue.

Petitioner had $100 or less of cash at the beginning of

1993. She did not receive any gifts, inheritances, or loans in

1993 or 1994, or own any certificates of deposit, stocks, or

bonds in those years.
 - 3 -

Petitioner worked for a one hour photo developing store

(photo store) in 1993 and 1994. In 1993 and 1994, she received a

salary of $250 per week or $13,000 per year in cash from the

photo store. Her employer did not withhold any tax from her

salary. Petitioner deposited some of her salary in her bank

accounts. She did not report her photo store salary in income

for 1993 or 1994.

Petitioner gambled in Atlantic City, New Jersey, almost

every weekend in 1993 and every other weekend in 1994. She

deposited some of her winnings in her bank accounts. She won a

$20,046 jackpot at a casino in Atlantic City in 1994.

B. Petitioner’s Bank Transactions

Petitioner deposited $38,865 in her bank accounts in 1993

and $43,764.47 in 1994. Those amounts include transfers from her

Chemical Bank savings account to her Chemical Bank checking

account of $1,000 in 1993 and $820 in 1994.

The following chart summarizes petitioner’s bank deposits

and withdrawals of $1,000 or more (hereinafter referred to as

large deposits or large withdrawals) from her Citibank checking,

Citibank savings, and Chemical Bank checking accounts in 1993 and

1994:
 - 4 -

Date
posted
by Large Large
bank Account deposits withdrawals

Feb. 1, 1993 C ck1 $2,000.00
Feb. 3, 1993 C ck 1,000.00
Feb. 4, 1993 C ck $500.00 Transfer to
MasterCard
Feb. 4, 1993 C ck 500.00 Transfer to
Bankcard
Feb. 11, 1993 C ck 1,608.18 Check to AGFA
Compugraf
Mar. 9, 1993 C sv2 6,000.00
Mar. 9, 1993 C sv 6,000.00 Petitioner
withdrew
cash
Mar. 19, 1993 C sv 4,000.00
Mar. 19, 1993 C sv 4,000.00 Petitioner
withdrew
cash
Mar. 23, 1993 C ck 2,000.00
Mar. 24, 1993 C ck 2,000.00 Check to
American
Exp.
Apr. 16, 1993 C sv 4,000.00
Apr. 16, 1993 C sv 4,000.00 Petitioner
withdrew
cash
Jun. 8, 1993 C ck 1,300.00
Jun. 9, 1993 C ck 1,326.00 Check to
unknown
payee
Jun. 21, 1993 C ck 1,200.00
Jun. 23, 1993 C ck 1,301.08 Check to Five
Deepe Place
Co.
Jul. 14, 1993 C ck 2,000.00 Check to
American
Exp.
Jul. 15, 1993 C ck 2,000.00
Dec. 23, 1993 Ch ck3 4,000.00
Dec. 28, 1993 Ch ck 1,323.00 Check to
American
Exp.
Dec. 28, 1993 Ch ck 665.00 Check to
Diner’s
Club
1
Petitioner’s Citibank checking account.
2
Petitioner’s Citibank savings account.
3
Petitioner’s Chemical Bank checking account.
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Date
posted
by Large Large
bank Account deposits withdrawals

Jan. 10, 1994 Ch ck1 $1,250.00
Jan. 12, 1994 Ch ck $1,247.00 Check to
American
Exp.
Jan. 13, 1994 C ck2 1,390.00
Jan. 21, 1994 C ck 1,390.00 Check to
Beckville
Mgt. for
rent
Apr. 14, 1994 C ck 4,000.00
Apr. 15, 1994 C ck 4,000.00 Check to
petitioner
3
Sept. 2, 1994 C ck 19,000.00
Sept. 2, 1994 C ck 19,000.00 Cashier’s
ck.
Sept. 22, 1994 C ck 1,746.00 Check to
Dept. of
Motor
Vehicles
Sept. 29, 1994 C ck 1,746.00
Nov. 1, 1994 C ck 1,200.00
Nov. 4, 1994 C ck 1,781.00 Check to
petitioner
Dec. 27, 1994 C ck 1,681.47
Dec. 20, 1994 C ck 671.50 Check to
W.H. Roth
for car
ins.
Jan. 3, 1995 C ck 1,000.00 Check to
Discover
Card
1
Petitioner’s Chemical Bank checking account.
2
Petitioner’s Citibank checking account.
3
Petitioner’s gambling winnings.

C. Petitioner’s Income Tax Returns

Petitioner did not file an income tax return for 1993. She

timely filed a 1994 income tax return. She reported that she had

won $20,046 from gambling, but she reported no other income. She

deducted $7,435 for gambling losses.
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D. Respondent’s Reconstruction of Petitioner’s Income

The examination began on April 23, 1997. Alex Malichiwski

(Malichiwski), respondent’s revenue agent, examined petitioner’s

1993 and 1994 returns. He issued summonses to petitioner’s banks

for petitioner’s records. Citibank and Chemical Bank gave

Malichiwski copies of petitioner’s bank statements and checks for

1993, 1994, and 1995.1 Malichiwski reconstructed petitioner’s

income for 1993 and 1994 because petitioner did not have records.

He used a modified bank deposits method in which he assumed that

deposits of less than $1,000 (hereinafter referred to as small

deposits), totaling $12,363 in 1993 and $12,677 in 1994, were

petitioner’s wages from the photo shop. He did not include the

deposit from the reported gambling winnings in 1994 as income in

the modified bank deposits method because petitioner had reported

the $20,046 on her 1994 return.

Malichiwski concluded that 10 of petitioner’s bank deposits

of $1,000 or more in 1993 (totaling $25,500) were unreported

income because petitioner did not establish to his satisfaction

during the examination that those funds were not taxable income

to her. He concluded that, of petitioner’s six bank deposits of

$1,000 or more in 1994 (totaling 11,267.47), deposits of $4,000

1
The banks did not have copies of all of petitioner’s
checks.
 - 7 -

and $1,781 were not taxable income because petitioner had written

checks to herself in those amounts, and he wanted to eliminate

any possibility of double counting any deposits. Thus, he

concluded that $5,486.47 was unreported income for 1994.

OPINION

A. Whether Petitioner Is Liable for Income Tax on Her Salary of
$13,000 Per Year in 1993 and 1994

Petitioner contends that she is not liable for income tax on

the $13,000 salary that she received in 1993. We disagree.

Petitioner bears the burden of proof. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).2 Petitioner stipulated and

testified that she received a salary of $13,000 per year in 1993

and 1994. In her posttrial brief, she asks us to disregard the

stipulation and her testimony. A stipulation of fact is

generally binding on the parties. Rule 91(e). We may modify or

set aside a stipulation if it is contrary to the record. Cal-

Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989). We

do not set aside the stipulation here because there is no

evidence contrary to petitioner’s stipulation and testimony that

she received a salary of $13,000 per year in 1993 and 1994.

2
Respondent does not bear the burden of proof under sec.
7491 because the examination in this case began on Apr. 23, 1997.
Sec. 7491 applies to examinations commenced after July 22, 1998.
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3001(c), 112 Stat. 727.
 - 8 -

On brief, petitioner contends that she is liable for income

tax on $4,333 (one-third of $13,000) from the photo shop in 1994

because she worked for and had earnings from the photo shop for

only 4 months in 1994. We disagree. Petitioner testified that

she had problems with pregnancies in 1991 and 1992, and that she

worked only the first 6 months of 1994 because she was pregnant

with twins. Petitioner later testified that she worked

throughout 1994 but only 6 months in 1995. Petitioner made small

deposits throughout 1994 as she had throughout 1993. These small

deposits totaled $12,363 in 1993 and $12,677 in 1994. This

suggests that she worked throughout 1993 and 1994. We conclude

that petitioner earned $13,000 working for the photo shop in 1993

and in 1994, and that she is liable for income tax on those

amounts.

B. Whether Petitioner Failed To Report Income of $25,500 for
1993 and $5,486 for 1994

We must decide whether, as respondent contends, petitioner

failed to report income (in addition to her $13,000 salary from

the photo shop) of $25,5003 for 1993 and $5,486 for 1994.

Respondent reconstructed petitioner's income using a modified

bank deposits method in which respondent counted deposits of

3
Petitioner contends that she did not receive a lump-sum
payment of $25,500. Respondent does not contend that petitioner
received $25,500 in a lump sum. Rather, respondent contends that
petitioner received and deposited that amount in her bank
accounts throughout 1993, used it for personal expenses, and did
not report it on her income tax return.
 - 9 -

$1,000 or more as income. Petitioner did not have adequate books

and records. If a taxpayer does not maintain adequate books and

records, the Commissioner may reconstruct a taxpayer's income by

any reasonable method which clearly reflects income, sec. 446(b);

Holland v. United States, 348 U.S. 121, 130-132 (1954), including

the bank deposits method, Parks v. Commissioner, 94 T.C. 654, 658

(1990); Estate of Mason v. Commissioner, 64 T.C. 651, 656 (1975),

affd. 566 F.2d 2 (6th Cir. 1977). Bank deposits are prima facie

evidence of income. Clayton v. Commissioner, 102 T.C. 632, 645

(1994); Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Estate

of Mason v. Commissioner, supra. If the taxpayer suggests a

nontaxable source, the Commissioner must either connect the bank

deposits to a likely source of taxable income or negate the

nontaxable source alleged by the taxpayer. Kramer v.

Commissioner, 389 F.2d 236, 239 (7th Cir. 1968), affg. T.C. Memo.

1966-234. Respondent has connected the bank deposits to a likely

source of taxable income because petitioner admits that she

deposited gambling winnings in her bank accounts. We conclude

that respondent properly reconstructed petitioner’s additional

income for 1993 and 1994 using the modified bank deposits method.

Thus, petitioner bears the burden of proving that the deposits

were not taxable income to her but were instead derived from a

nontaxable source. Welch v. Commissioner, 204 F.3d 1228, 1230

(9th Cir. 2000), affg. T.C. Memo. 1998-121; Calhoun v. United
 - 10 -

States, 591 F.2d 1243, 1245 (9th Cir. 1978); Clayton v.

Commissioner, supra; DiLeo v. Commissioner, 96 T.C. 858, 869

(1991), affd. on other grounds 959 F.2d 16 (2d Cir. 1992); Parks

v. Commissioner, supra.

Petitioner contends that some of the funds that she

deposited in her bank accounts were not taxable to her because

those funds belonged to the photo shop and not to her. She

contends that, as a favor to the photo shop, she deposited photo

shop funds in her bank accounts at the close of the day and

withdrew them the next business day to return those funds to the

photo shop. We disagree.

Petitioner’s testimony is the only evidence supporting her

contention. We decide whether a witness is credible based on

objective facts, the reasonableness of the testimony, and the

demeanor and consistency of statements made by the witness.

Quock Ting v. United States, 140 U.S. 417, 420-421 (1891); Wood

v. Commissioner, 338 F.2d 602, 605 (9th Cir. 1964), affg. 41 T.C.

593 (1964); Pinder v. United States, 330 F.2d 119, 124-125 (5th

Cir. 1964); Concord Consumers Hous. Coop. v. Commissioner, 89

T.C. 105, 124 n.21 (1987). We may discount testimony which we

find to be unworthy of belief, but we may not arbitrarily

disregard testimony that is competent, relevant, and

uncontradicted, Conti v. Commissioner, 39 F.3d 658, 664 (6th Cir.

1994), affg. and remanding on another ground 99 T.C. 370 (1992)
 - 11 -

and T.C. Memo. 1992-616; Banks v. Commissioner, 322 F.2d 530, 537

(8th Cir. 1963), affg. in part and remanding in part on another

ground T.C. Memo. 1961-237.

Petitioner’s testimony was implausible. She was not

consistent in explaining how she allegedly deposited and repaid

photo shop funds. She testified about only one instance in which

she repaid the photo shop. Describing that instance, she

testified that she repaid the photo shop with a $2,000 check that

was paid on March 24, 1993. However, that check was paid to

American Express rather than to the photo shop. The record

contains no checks written by petitioner to the photo store.4

Petitioner contends for the first time in her answering

brief that the payments and transfers to credit card and bank

card companies that correspond to her large deposits were for the

photo store because the charges on those cards were for photo

store expenses. She contends that the photo store gave her the

money that she deposited in her accounts to pay those bank and

credit card bills. Petitioner’s statement in her answering brief

is not evidence; we can base our findings only on properly

admitted evidence. Sec. 7453; Rule 143; Kronish v. Commissioner,

90 T.C. 684, 695-696 (1988); United States v. State of

4
Even if there were checks written to petitioner that she
cashed for the photo store, the result would not change because
respondent did not include in the bank deposits analysis any
deposits for which there were corresponding checks to petitioner.
 - 12 -

Washington, 459 F. Supp. 1020, 1095 (W.D. Wash. 1978). There is

no evidence to support petitioner’s contention. Petitioner did

not testify that the photo shop charged expenses on her credit

cards, and her claim after trial that the photo shop charged its

expenses on her credit cards is reason to disbelieve her trial

testimony.

Another reason for disbelieving petitioner’s trial testimony

is the fact that she said in her answering brief that we should

disregard her trial testimony relating to her photo store salary.

It is not clear what parts of petitioner’s testimony we should

believe under these circumstances.

Petitioner contends that some of the money that she

deposited was her own money that she had withdrawn for gambling

and redeposited afterwards. Petitioner’s testimony in this

regard was very general. She provided us no basis to decide

which of the bank deposits were redeposits of money she had

withdrawn.

We conclude that, in addition to the $13,000 salary that

petitioner earned each year from the photo store, petitioner had

unreported income of $25,500 for 1993 and $5,486 for 1994.

C. Whether Petitioner Is Liable for the Addition to Tax for
Failure To File Her 1993 Income Tax Return

Respondent determined that petitioner is liable for the

addition to tax under section 6651(a) for failure to file a
 - 13 -

return for 1993. Petitioner contends that she timely filed her

1993 return. We disagree.

Petitioner stipulated and testified that she did not file a

1993 return. She contends that we should ignore her stipulation

and trial testimony. We disagree. There is no evidence contrary

to her stipulation and testimony that she did not file a 1993

return.5

Petitioner attached to her answering brief a copy of a form

letter from respondent which shows her account information for

1993. She contends that the form letter establishes that she

filed a return in 1993. We disagree. The form letter was not

admitted into evidence, and, even if it had been, it would not

establish that she filed a 1993 return. The form letter shows

that she did not report any income, deductions, or tax for 1993.

It does not state that petitioner filed a return for 1993.

Petitioner contends that respondent’s agent who sent her the

form letter told her that someone had erased all the numbers for

1993 to make it appear that she had not filed a 1993 return.

There is no evidence to support this contention. Petitioner has

5
At trial, petitioner did not present any substantiation
or financial records. In her answering brief, petitioner
contends that she does not have records for 1993 because her
basement, where she stored her files, flooded in 1993. There is
no testimony or other evidence to support this statement. We do
not consider assertions of fact made in a party’s brief that are
not in evidence. Rule 143(b); Kronish v. Commissioner, 90 T.C.
684, 695-696 (1988).
 - 14 -

not convinced us that we should disregard her stipulation or

trial testimony that she did not file a 1993 return. We conclude

that petitioner did not file a return for 1993.

A taxpayer is not liable for the addition to tax if his or

her failure to file a return was due to reasonable cause and not

willful neglect. Sec. 6651(a)(1); Rule 142(a); United States v.

Boyle, 469 U.S. 241, 245 (1985). Petitioner contends that, if

she did not file her 1993 income tax return, it was because she

had health difficulties in 1991 and 1992 or because she had a

difficult pregnancy in 1994. We disagree. Petitioner’s ability

to work full time in 1993 and 1994 shows that she should have

been able to file her return for 1993.

We conclude that petitioner is liable for the addition to

tax under section 6651(a) for failure to file her 1993 return.

D. Whether Petitioner Is Liable for the Addition to Tax for
Failure To Pay Estimated Tax in 1993

Respondent determined that petitioner is liable for the

addition to tax under section 6654 for failure to pay estimated

tax for 1993. Petitioner did not file a return for 1993. We

have jurisdiction to review the Commissioner’s determination of

this addition to tax if the taxpayer did not file a return for

the taxable year. Sec. 6665(b)(2); Meyer v. Commissioner, 97

T.C. 555, 562 (1991).

A taxpayer is liable for the addition to tax under section

6654 for failure to pay estimated tax unless the taxpayer shows
 - 15 -

that he or she meets one of the exceptions provided in section

6654(e), none of which apply here. Petitioner offered no

evidence to show why she did not pay estimated tax. We conclude

that petitioner is liable for the addition to tax for failure to

pay estimated tax under section 6654 for 1993.

E. Whether Petitioner Is Liable for the Accuracy-Related
Penalty for 1994

Respondent contends that petitioner is liable for the

accuracy-related penalty for negligence under section 6662(a) for

1994. Taxpayers are liable for a penalty equal to 20 percent of

the part of the underpayment attributable to negligence or

disregard of rules or regulations. Sec. 6662(a) and (b)(1).

Negligence includes failure to make a reasonable attempt to

comply with internal revenue laws or to exercise ordinary and

reasonable care in preparing a tax return. Sec. 6662(c).

Petitioner bears the burden of proving that she is not liable for

the accuracy-related penalty. Rule 142(a); Tweeddale v.

Commissioner, 92 T.C. 501, 505 (1989).

Petitioner made no argument and offered no evidence that she

is not liable for the accuracy-related penalty. We conclude that

petitioner is liable for the accuracy-related penalty for 1994.

To reflect the foregoing,

Decision will be

entered for respondent.