T.C. Summary Opinion 2002-154
UNITED STATES TAX COURT
MARCEL TOTO NGOSSO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13291-01S. Filed December 11, 2002.
Richard P. Rosenblatt, for petitioner.
Nancy C. Carver, for respondent.
PANUTHOS, Chief 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
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Revenue Code in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioner’s Federal
income tax of $12,161 and an accuracy-related penalty under
section 6662(a) of $784 for 1996.1 After concessions by
petitioner,2 the issues for decision are: (1) Whether petitioner
failed to report income of $39,444; (2) whether petitioner is
entitled to the claimed dependency exemption deduction; and (3)
whether petitioner is liable for an accuracy-related penalty
under section 6662.
Petitioner resided in Hyattsville, Maryland, at the time he
filed the petition. Some of the facts have been stipulated and
are so found. For convenience we combine our findings of fact
and conclusions.
1
Petitioner timely filed his 1996 tax return on or about
Apr. 15, 1997. The notice of deficiency at issue was mailed on
Aug. 15, 2001. We note that the general 3-year period of
limitations for the 1996 tax year expired on Apr. 15, 2000, but
petitioner has not pleaded that the period of limitations has
expired. Sec. 6501(a). As we conclude below, petitioner has
omitted from gross income an amount properly includable therein
which is in excess of 25 percent of the amount stated in the
return. Thus, if the statute of limitations were in issue, we
would conclude that the 6-year period of limitations under sec.
6501(e)(1)(A) is applicable.
2
Petitioner concedes that he is not entitled to the
claimed head-of-household filing status but is entitled to single
filing status, and that he is not entitled to the claimed earned
income credit.
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During 1996, petitioner was employed part-time by a light
fixture store. He reported $1,774 in wages received from his
employer.
Petitioner also assisted a tax return preparer, Bakary
Diomande (Mr. Diomande), with the preparation of Federal income
tax returns; however, the exact nature and extent of petitioner’s
role in the preparation of tax returns is unclear. Although he
testified that he was not a tax return preparer, petitioner also
explained at trial that for tax returns that are filed
electronically, “the tax preparer and the taxpayer have to sign
that * * *. And if it’s me who has prepared his taxes, my
signature would appear there.”
Petitioner testified that he received and cashed checks from
Mr. Diomande’s clients, which he then paid over to Mr. Diamonde,
because Mr. Diomande did not accept checks as payment from his
clients. The record contains a money order and numerous checks
made payable to petitioner or a third party that petitioner
either cashed or deposited into his Chevy Chase Bank account.
For example, petitioner’s Chevy Chase Bank account statements
reflect that petitioner cashed in part and deposited in part a
U.S. Treasury refund check issued in 1996 to Somia Essomba Toto
Ngosso, and deposited a U.S. Treasury refund check issued in 1996
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to Constance Njombua Toto Ngosso.3 Petitioner’s bank account
records, however, do not clearly indicate that petitioner
withdrew funds or wrote checks for the exact or similar amounts
to support his theory that he acted as a conduit for Mr.
Diomande.
Petitioner reported $7,700 in gross income on Schedule C,
Profit or Loss From Business, attached to his Federal income tax
return for the 1996 tax year. Petitioner reported “Income Tax
Prep” as the principal business.
Petitioner, a native of the Republic of Cameroon, and Epee
Ndolo Emmanuel (Mr. Emmanuel), his uncle who lives in Yaoundé,
Cameroon, engaged in a series of transactions in which they
effectively exchanged U.S. dollars for Cameroonian francs (CFA
francs) for the benefit of friends, business associates, and
strangers. Petitioner engaged in a “currency exchange
transaction” and explained it as follows: Petitioner received a
sum of U.S. dollars in cash from an individual who desired to
send money to a third party in Cameroon; petitioner calculated
the equivalent amount of CFA francs using the exchange rate for
that day; petitioner either deposited the U.S. dollars he
received into one of two bank accounts or held the cash in his
house on behalf of Mr. Emmanuel; petitioner faxed the information
3
There is nothing in the record indicating that these
individuals are related to petitioner.
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concerning the U.S. dollar-CFA franc exchange rate to both Mr.
Emmanuel and the designated recipient of the CFA francs in
Cameroon; Mr. Emmanuel then paid the designated recipient of the
CFA francs in Cameroon the equivalent amount of CFA francs in
cash; and petitioner later purchased various items in the U.S.,
such as cars and computers, and shipped them to Mr. Emmanuel.
Petitioner asserts that he did not charge a fee for his
services. Three witnesses testified on petitioner’s behalf that
they engaged petitioner’s services, free of charge, in the
exchange of U.S. dollars for CFA francs. None of the witnesses
provided any documentary evidence to support the testimony.
As an example of the final step in the currency exchange
transaction petitioner presented some documents and testimony of
items purchased and sent to Cameroon. Petitioner purchased a
Jeep Cherokee in Virginia for approximately $20,000 in March or
April 1996. He paid for the Jeep Cherokee with cash that he
either kept in his house or withdrew from one of his bank
accounts in increments of $2,000 or $3,000. At trial petitioner
was unable to indicate which withdrawals or cash received from a
deposit reflected on his bank account statements were used to pay
for the Jeep Cherokee. Petitioner produced a bill of lading
reflecting the shipping of the Jeep Cherokee from the U.S. to
Cameroon in November 1996. Mr. Emmanuel’s name does not appear
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on the bill of lading because the Jeep Cherokee was received by a
shipping agent.
Petitioner did not produce receipts or shipping documents
for other items that he purchased for, and shipped to, Mr.
Emmanuel. Petitioner did not produce other records from the
currency exchange transactions, such as the letters faxed to Mr.
Emmanuel or the designated recipient, because “there was no need
to keep it” once the transaction was over. Petitioner explained
that he accounted for the U.S. dollars that he held on behalf of
Mr. Emmanuel by using his bank account statements.
The record contains account statements from a Citibank
account that petitioner co-owned with two other individuals,
Ebenezer Soh Kengne and Daniel P. Fleret. Petitioner did not
explain, and it is not clear from the record, who owned the funds
in the Citibank account.
Respondent, utilizing a bank deposits methodology,
determined that petitioner underreported $39,444 of income.4
Respondent’s agent explained at trial that respondent first
examined petitioner’s income tax return for the 1996 tax year in
connection with a tax return preparer penalty. Respondent
determined that petitioner had unexplained bank deposits of
4
Petitioner testified at trial that he received income
from his family in Cameroon and rental income from two houses
that he owns in Cameroon. Respondent did not make a
determination or a claim with respect to these two sources of
income. Therefore, such matter is not at issue.
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$104,239 in 1996. From the unexplained bank deposits respondent
deducted the following amounts that were not includable in
petitioner’s income:
Unexplained bank deposits $104,239
Income tax refund checks $21,726
1997 receipts 2,000
Examiner error 1,624
Currency transactions 39,445
Total 64,795
Underreported income 39,444
Petitioner’s position is that the currency exchanges are
“net transactions” and that the money he received is not income
to him because he acted as a conduit for Mr. Emmanuel.
Gross income means all income from whatever source derived.
Sec. 61. When a taxpayer fails to provide adequate records
substantiating income, the Commissioner is authorized to
reconstruct the taxpayer’s income by using any reasonable method
that clearly reflects income, including an indirect method. Sec.
446(b); Holland v. United States, 348 U.S. 121 (1954). The
reconstruction need only be reasonable in light of all facts and
circumstances. Clayton v. Commissioner, 102 T.C. 632, 643
(1994); Giddio v. Commissioner, 54 T.C. 1530, 1532 (1970).
The Commissioner is authorized to use bank deposit records
to reconstruct a taxpayer’s income. Clayton v. Commissioner,
supra at 645 (citing DiLeo v. Commissioner, 96 T.C. 858, 867
(1991), affd. 959 F.2d 16 (2d Cir. 1992)). When a taxpayer keeps
no books or records and has large bank deposits, the
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Commissioner’s use of the bank deposits method is not arbitrary
or capricious. Id. Bank deposits are prima facie evidence of
income. Id. In calculating a taxpayer’s taxable income, the
Commissioner must take into account any nontaxable source or
deductible expense of which he has knowledge. Id. at 645-646.
Generally the taxpayer bears the burden of proof. Rule
142(a)(1). The burden of proving facts relevant to the
deficiency may shift to the Commissioner under section 7491 if
the taxpayer establishes compliance with the requirements of
section 7491(a)(2)(A) and (B) by substantiating items,
maintaining required records, and fully cooperating with the
Secretary’s reasonable requests. Section 7491 also places the
burden of production upon the Secretary with respect to additions
to tax. Sec. 7491(c). Section 7491 is effective with respect to
court proceedings arising in connection with examinations by the
Commissioner commencing after July 22, 1998, the date of its
enactment by section 3001(a) of the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, 112 Stat.
685.
It is not clear from the record when respondent commenced
the examination of petitioner’s return; however, petitioner has
not alleged that section 7491 is applicable to this case. Even
if section 7491 were to apply, petitioner has not established
that he complied with the requirements of section 7491(a)(2)(A)
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and (B) to substantiate items, maintain required records, and
fully cooperate with respondent’s reasonable requests.
Therefore, the burden of proof remains with petitioner. Further,
based on our findings and conclusion, the burden of proof does
not play a role with respect to the accuracy-related penalty
under section 6662.
Respondent utilized the bank deposits method to reconstruct
petitioner’s income because petitioner did not present any books
and records reflecting the income reported on his return. We
accept petitioner’s and the witnesses’ generalized testimony that
petitioner engaged in some currency exchange transactions, and
that a certain amount of the bank deposits is not income to
petitioner. However, the documents and testimony are not
necessarily consistent with the amounts reported on the return,
and petitioner did not explain the flow of cash into and out of
his bank accounts. Petitioner acknowledged at trial that he
failed to retain records of the currency exchange transactions.
As indicated above, respondent took into account $21,726 of
income tax refund checks issued to third parties and cashed by
petitioner on their behalf, and $39,445 of currency exchange
transactions with Mr. Emmanuel as nontaxable sources of income.
Under these facts, we conclude that respondent’s
reconstruction of petitioner’s income was reasonable. We are
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satisfied that petitioner underreported income, and respondent is
sustained on this issue.
The next issue for our decision is whether petitioner is
entitled to the claimed dependency exemption deduction.
Petitioner claimed a dependency exemption deduction for Shanita
Edwards (Shanita) on his return for 1996. Shanita, who was born
in 1984, is the daughter of Barbara Nicholson (Ms. Nicholson),
who was petitioner’s girlfriend during the year at issue.
Petitioner testified generally that he provided for all of
the food and shelter for Shanita, and that Ms. Nicholson provided
for only Shanita’s clothing. Petitioner admitted that he did not
know whether Shanita’s father or any other relative provided any
of her support, and he did not know whether Ms. Nicholson
received any form of Government benefit. Petitioner produced
copies of Shanita’s birth certificate and Social Security card.
Petitioner alleges that Shanita, Ms. Nicholson, and Kimberly
Nicholson (Kimberly), also a minor and a daughter of Ms.
Nicholson, lived with him in his apartment in Silver Spring,
Maryland, during 1996. Petitioner also alleges that Guy Behl
(Mr. Behl) lived in his apartment during 1996.
A taxpayer may be allowed a deduction for a dependent over
half of whose support is provided by the taxpayer. Secs.
151(c)(1), 152(a). A dependent includes an individual who, for
the taxable year, has as her principal place of abode the home of
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the taxpayer and is a member of the taxpayer’s household. Sec.
152(a)(9). It is necessary that the taxpayer both maintain and
occupy the household. Sec. 1.152-1(b), Income Tax Regs. It is
not necessary that the dependent be related to the taxpayer. Id.
The term “support” includes food, shelter, clothing, medical
and dental care, education, and the like. Sec. 1.152-1(a)(2)(i),
Income Tax Regs. The amount of support that the claimed
dependent received from the taxpayer is compared to the total
amount of support the claimed dependent received from all
sources. Id. The total amount of support for each claimed
dependent furnished by all sources during the year in issue must
be established by competent evidence. Blanco v. Commissioner, 56
T.C. 512, 514 (1971).
Petitioner’s testimony that he provided Shanita’s food and
shelter lacks credibility, and we need not accept it. Tokarski
v. Commissioner, 87 T.C. 74, 77 (1986). Additionally, petitioner
did not provide any documentary evidence to support his
testimony. We are not convinced that petitioner provided more
than half of Shanita’s support. Moreover, it is not clear that
Shanita had petitioner’s apartment as her principal place of
abode during 1996. Accordingly, the claimed dependency exemption
deduction for Shanita is denied.
The next issue for our decision is whether petitioner is
liable for a penalty under section 6662. Section 6662 provides
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that if any portion of any underpayment required to be shown on a
return is due to negligence or disregard of the rules or
regulations, then a taxpayer will be liable for a penalty equal
to 20 percent of the underpayment of tax required to be shown on
the return that is attributable to the taxpayer’s negligence or
disregard of the rules or regulations. Sec. 6662(a) and (b)(1).
“Negligence” includes any failure to make a reasonable attempt to
comply with the provisions of the Code. Sec. 6662(c).
“Disregard” includes any careless, reckless, or intentional
disregard. Id.
The penalties provided for in section 6662 will not be
imposed with respect 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 with respect to such portion.
Sec. 6664(c)(1). Whether the taxpayer has acted with reasonable
cause and in good faith is determined by relevant facts and
circumstances, including the taxpayer’s own efforts to assess his
proper tax liability. Stubblefield v. Commissioner, T.C. Memo.
1996-537; sec. 1.6664-4(b), Income Tax Regs.
Respondent determined in the notice of deficiency that
petitioner is liable for an accuracy-related penalty of $784
under section 6662(a) for 1996 because of negligence or disregard
of rules or regulations.
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At trial petitioner was unable to provide detailed and
reliable testimony concerning the deposits in and withdrawals
from his bank accounts. Petitioner’s testimony concerning his
income from tax return preparation and the currency exchange
transactions was, at best, vague and inconsistent, and his
testimony concerning support for Shanita was not credible or
supported by any documentary evidence. He did not maintain
records or accurately report his gross income. We are further
satisfied that respondent’s reconstruction of petitioner’s income
was reasonable. We conclude that his underpayment is
attributable to negligence and disregard of the rules or
regulations, and petitioner has not shown reasonable cause or
that he acted in good faith with respect to the underpayments.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.