T.C. Summary Opinion 2002-122
UNITED STATES TAX COURT
JON D. DEZAGOTTIS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3497-00S. Filed September 23, 2002.
Jon D. Dezagottis, pro se.
Bradley C. Plovan, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
- 2 -
Respondent determined a deficiency in petitioner’s Federal
income tax for the taxable year 1994 in the amount of $2,011 and
an addition to tax of $503 pursuant to section 6651(a)(1).
Some of the facts in this case have been stipulated and are
so found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioner lived in Mechanicsburg, Pennsylvania.
In the notice of deficiency, respondent determined that
petitioner: (1) Failed to report $12,255 of income which was
subject to self-employment tax; (2) failed to report a 1993 State
of Virginia income tax refund of $410; (3) failed to report
dividend income of $75; (4) failed to report interest income of
$185; and (5) was subject to an addition to tax of $503 pursuant
to section 6651(a)(1) for failure to file the return by the
prescribed due date.
In the Stipulation of Facts, petitioner conceded that the
income tax refund, dividend income, and interest income, which
collectively totaled $670, are includable in income for the year
at issue. In addition, respondent conceded that credit card
advances totaling $1,862 that were initially included in the
unexplained bank deposits of $12,255 are not includable in
income. Therefore at trial, only $10,393 of unexplained bank
deposits treated as unreported business income is at issue.
After the above-mentioned concessions, the remaining issues
- 3 -
for decision are: (1) Whether petitioner had unreported income of
$10,393; (2) whether petitioner is liable for self-employment tax
on unreported income; and (3) whether petitioner is liable for an
addition to tax under section 6651(a)(1) for the taxable year
1994. Adjustments to the self-employment income tax and the
deduction therefor are computational and will be resolved by the
Court’s holding in this case.
During 1994, petitioner maintained a checking account with
Crestar Bank. Petitioner made various deposits into the checking
account throughout the year totaling $25,860. The various
deposits are categorized as follows: (1) A 1993 State of
Virginia income tax refund for $410; (2) dividend income of $75;
(3) interest income of $185; (4) overdraft protection deposits of
$1,271; (5) credit card advances totaling $1,862; and (6)
proceeds from stock sale transactions of $11,664. As previously
stated, respondent is now contending that the difference, or
$10,393, is income from unexplained bank deposits.
On his tax return, petitioner reported total income of
$3,274, consisting of $3,229 of wages and $45 of taxable interest
income. In the notice of deficiency, respondent deducted these
reported amounts in computing petitioner’s corrected income.
For some period during 1994, petitioner worked for Merkle &
Company (Merkle) as a real estate appraiser. However, petitioner
cannot recollect the exact dates in 1994 that he worked for
- 4 -
Merkle. Furthermore, petitioner is not sure whether he was an
employee of Merkle or an independent contractor.
Petitioner did not file his 1994 Federal income tax return
by the April 17, 1995, due date.1 Additionally, petitioner did
not file for an extension of time to file the 1994 tax return.
Petitioner dated his return April 28, 1997.2 Thus, at a minimum,
the return was filed more than 2 years after the original due
date.
The determinations of the Commissioner in a notice of
deficiency are presumed correct, and the burden is on the
taxpayer to show that the determinations are incorrect. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).3
1. Unreported Income
A taxpayer’s gross income generally includes “all income
from whatever source derived”. Sec. 61(a). A taxpayer is
required to maintain records sufficient to establish the amount
1
Individual income tax returns are generally due on Apr.
15 of each year, but since Apr. 15, 1995, was a Saturday, the due
date was extended until Monday, Apr. 17, 1995.
2
The actual date the return was filed is not in the
record. Respondent testified that the return was filed in May
1997.
3
Sec. 7491 does not apply in this case to place the
burden of proof on respondent because petitioner neither alleged
that sec. 7491 was applicable nor established that he fully
complied with the substantiation requirements of sec.
7491(a)(2)(A).
- 5 -
of his or her income. Sec. 6001; sec. 1.6001-1(a), (e), Income
Tax Regs. In the absence of adequate books and records, the
Commissioner may reconstruct a taxpayer’s income by any
reasonable method. See sec. 446(b); Holland v. United States,
348 U.S. 121 (1954). The bank deposits method has long been
recognized as a reasonable method to reconstruct income where the
taxpayer’s records are inaccurate or incomplete. See Estate of
Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d 2
(6th Cir. 1977). “Though not conclusive, bank deposits are prima
facie evidence of income.” Id. The Commissioner is not required
to show that all deposits constitute income and need not show a
likely source of that income. See id. at 657; Gemma v.
Commissioner, 46 T.C. 821, 833 (1966).
At trial, petitioner testified that the remaining
unidentified deposits totaling $10,393 were derived from
additional credit card cash advances and from earnings from
Merkle. However, petitioner presented absolutely no evidence to
corroborate his testimony. No credit card receipts or earning
statements were presented at trial. Petitioner testified that he
entered into many credit card cash advance transactions during
1994, but he could not estimate the amount. Further, petitioner
testified that he “couldn’t exactly say, nor * * * even guess
roughly” what his earnings may have been from Merkle for the year
at issue.
- 6 -
We find the testimony given by petitioner to be too vague
and based too much upon conjecture to establish that the $10,393
of bank deposits at issue were derived from credit card cash
advances, earnings from Merkle, or a combination of both.
Furthermore, we find no other evidence in the record which
establishes that the $10,393 of funds deposited into petitioner’s
checking bank account were nontaxable. In the absence of such
evidence, we must find for respondent on this issue.
2. Self-Employment Tax
Respondent determined that petitioner is liable for self-
employment tax on the unreported income. Section 1401 imposes a
tax on the self-employment income of individuals.
Self-employment income means the net earnings from self-
employment derived by an individual. Sec. 1402(b). In general,
net earnings from self-employment means the gross income derived
by an individual from any trade or business that he or she
carries on, reduced by allowable deductions attributable thereto.
Sec. 1402(a). Petitioner bears the burden of showing that
respondent's determination is erroneous. Rule 142(a); cf. Jones
v. Commissioner, T.C. Memo. 1994-230, affd. without published
opinion 68 F.3d 460 (4th Cir. 1995); O’Rourke v. Commissioner,
T.C. Memo. 1993-603, affd. without published opinion 60 F.3d 834
(9th Cir. 1995).
When asked at trial about his employment status, petitioner
- 7 -
testified that he would venture to guess that he was an
independent contractor. However, petitioner presented no
evidence at trial establishing his employment status with Merkle
or the amount of compensation he received from the company.
By presenting absolutely no evidence establishing that the
$10,393 of unreported income is not subject to self-employment
tax, petitioner has not met his burden with respect to this
issue. Accordingly, we hold that petitioner is liable for self-
employment tax on the $10,393 of unreported income.
3. Section 6651(a)(1) Addition to Tax
Respondent determined an addition to tax as a result of
petitioner’s failure to timely file his Federal income tax return
for the year at issue. Section 6651(a)(1) imposes an addition to
tax for failure to file a timely tax return. The addition to tax
is equal to 5 percent of the amount of the tax required to be
shown on the return if the failure to file is not for more than 1
month. Sec. 6651(a)(1). An additional 5 percent is imposed for
each month or fraction thereof in which the failure to file
continues, to a maximum of 25 percent of the tax. Id. The
addition to tax is imposed on the net amount due. Sec. 6651(b).
The addition to tax is applicable unless a taxpayer
establishes that the failure to file was due to reasonable cause
and not willful neglect. Sec. 6651(a). If a taxpayer exercised
ordinary business care and prudence and was nonetheless unable to
- 8 -
file the return within the date prescribed by law, then
reasonable cause exists. Sec. 301.6651-1(c)(1), Proced. & Admin.
Regs. "Willful neglect" means a "conscious, intentional failure
or reckless indifference." United States v. Boyle, 469 U.S. 241,
245 (1985).
Petitioner testified that he did not file his 1994 Federal
income tax return “in a timely fashion” because he had
“difficulty”. At trial, petitioner offered two reasons for his
difficulty in filing a timely return for the year at issue.
First, petitioner claimed that he moved from Maryland to
Pennsylvania. Petitioner did not explain how his move had any
bearing on filing his tax return 2 years late. The act of moving
from one State to another is certainly not reasonable cause to
file a late return.
Second, petitioner claimed that he lost his earnings form
provided by Merkle. Petitioner failed to offer any basis why
losing the form caused a 2-year delay in filing his return.
“Unavailability of records, without more, is not reasonable cause
for failing to file a timely return.” Regan v. Commissioner,
T.C. Memo. 1987-512.
Petitioner’s 1994 Federal income tax return was due on April
17, 1995. Petitioner did not file his return until 2 years later
and offered no rational explanation for his failure to file his
return timely. Petitioner failed to show that he exercised
- 9 -
ordinary care and prudence in this case. Accordingly, petitioner
is liable for the addition to tax under section 6651(a)(1).
Respondent is sustained on this issue.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.