T.C. Memo. 2002-318
UNITED STATES TAX COURT
THOMAS LEE WOODALL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2644-01. Filed December 30, 2002.
Thomas Lee Woodall, pro se.
Frank J. Jackson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined the following
deficiencies in, additions to, and penalties on petitioner’s
Federal income taxes:1
1
All figures are rounded to the nearest dollar.
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Additions to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6654 Sec. 6662
1992 $117,034 $29,258 $23,407
1993 361,493 90,373 $5,447
1994 48,973 12,243 2,541
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
After concessions,2 the issues for decision are: (1)
Whether petitioner had additional unreported income for 1992,
1993, and 1994, (2) whether petitioner is liable for an addition
to tax pursuant to section 6651(a)(1) for 1992, 1993, and 1994,
(3) whether petitioner is liable for an addition to tax pursuant
to section 6654 for 1993 and 1994, and (4) whether petitioner is
liable for a penalty pursuant to section 6662 for 1992.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time he filed the
petition, petitioner resided in New York, New York.
2
Petitioner concedes that deposits totaling $168,948,
$133,022, and $41,124 in 1992, 1993, and 1994, respectively, are
taxable income to petitioner for 1992, 1993, and 1994,
respectively. Respondent concedes that deposits totaling $3,897,
$3,665, and $3,951 in 1992, 1993, and 1994, respectively, are not
taxable income to petitioner. Additionally, respondent concedes
that petitioner received gifts totaling $10,000 in 1992 and
$19,949 in 1993.
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Petitioner’s Law Practice
Petitioner is an attorney. In 1973, petitioner received his
law degree and was admitted to the Texas bar. As of the time of
trial, petitioner was licensed to practice law in Texas, was in
good standing in Texas, and was engaged in the practice of law.
During 1992, 1993, and 1994, petitioner was engaged in the
practice of law in Texas. During that time, petitioner worked as
an independent attorney out of the law office of Patrick V.
Strong, Esq. Petitioner had several overseas clients.
Petitioner also worked on Mr. Strong’s cases. In 1992, Mr.
Strong paid petitioner $38,692.
Petitioner has no records from his law practice. Petitioner
has no documents that establish his relationship with Norman D.
Haynes (Mr. Haynes) or any project in the Philippines.
Petitioner’s Bank Accounts and Additional Bank Deposits3
A. Cullen Bank
In 1992, 1993, 1994, deposits totaling $124,055, $1,000, and
$38,194, respectively, were made into Cullen Bank4 account number
XX-XXXXXXX (Cullen #453). Cullen #453 was styled “Manila
Recovery Company”.
In 1992, 1993, 1994, deposits totaling $105,000, $584,236,
3
These deposits are in addition to those conceded by
petitioner and respondent. See supra note 2.
4
As of the time of trial, Cullen Bank had changed its name
to Frost National Bank.
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and $5,658, respectively, were made into Cullen Bank account
number XX-XXXXXXX (Cullen #921). Cullen #921 was styled “Manila
Exploration Company-Eldridge”.
In 1993 and 1994, deposits totaling $120,800 and $55,663,
respectively, were made into Cullen Bank account number 50-
1211226 (Cullen #226). Cullen #226 was styled “Manila
Exploration Company Rizal”.
For convenience, Cullen #453, Cullen #921, and Cullen #226
are hereinafter collectively referred to as the Manila Accounts.
The Manila Accounts were not client trust accounts. Petitioner’s
Social Security number was the only Social Security number on the
Manila Accounts. Petitioner was one of two signatories on the
Manila Accounts, and each of the Manila Accounts required only
one signature.
The Manila Accounts bank statements were sent to petitioner
at his law office address. Petitioner received the bank
statements for the Manila Accounts for 1992, 1993, and 1994.
Petitioner made intrabank transfers between the Manila
Accounts. Petitioner also made intrabank transfers from the
Manila Accounts to a “trust account” he had at Cullen Bank,
account number XX-XXXXXXX (Cullen trust account). During the
years in issue, petitioner deposited money that was income to him
into his Cullen trust account. During the years in issue,
petitioner wired at least $214,000 from the Manila Accounts to an
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offshore account in the Philippines. In 1993, petitioner also
wired $5,000 from Cullen #921 to a bank in Washington State.
B. Nations Bank
Petitioner had a bank account, number 266-216660-1, at
Nations Bank styled “Thomas Lee Woodall, Attorney at Law Trust
Account” (Nations trust account). Petitioner’s Social Security
number was on the Nations trust account.
In June 1993, a $100,000 deposit was made into the Nations
trust account. The $100,000 was wired from offshore into the
Nations trust account. Between June 30 and July 2, 1993,
petitioner wrote 21 checks on the Nations trust account totaling
$99,950--19 checks for $5,000, 1 check for $3,500, and 1 check
for $1,450.
Tax Returns and Notice of Deficiency
Petitioner filed his 1992 Federal income tax return on April
28, 1994. On his 1992 return, the only income petitioner
reported was $38,692 of business income. Attached to the 1992
return was a Form 1099-MISC, Miscellaneous Income, that reported
$38,692 paid to petitioner by Mr. Strong. The 1992 return listed
$0 of tax withheld and $0 of estimated tax payments.
Petitioner did not file Federal income tax returns for 1993
and 1994.
Respondent timely issued a statutory notice of deficiency to
petitioner for 1992, 1993, and 1994. Respondent computed
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petitioner’s taxable income for 1992, 1993, and 1994 using the
bank deposits method. Respondent eliminated transfers and
nontaxable sources of income from his bank deposits computation.
OPINION
I. Unreported Income
Every individual liable for tax is required to maintain
books and records sufficient to establish the amount of his or
her gross income. Sec. 6001; DiLeo v. Commissioner, 96 T.C. 858,
867 (1991), affd. 959 F.2d 16 (2d Cir. 1992). For the years in
question, we find that petitioner maintained inadequate books and
records for his law practice.
Where a taxpayer fails to maintain or produce adequate books
and records, the Commissioner is authorized to compute the
taxpayer’s taxable income by any method that clearly reflects
income. Sec. 446(b); Holland v. United States, 348 U.S. 121
(1954); Webb v. Commissioner, 394 F.2d 366, 371-372 (5th Cir.
1968), affg. T.C. Memo. 1966-81. The reconstruction of income
need only be reasonable in light of all surrounding facts and
circumstances. Giddio v. Commissioner, 54 T.C. 1530, 1533
(1970). The Commissioner is given latitude in determining which
method of reconstruction to apply when a taxpayer fails to
maintain records. Petzoldt v. Commissioner, 92 T.C. 661, 693
(1989).
Respondent employed the bank deposits method of proof to
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reconstruct petitioner’s gross receipts from his law practice.
This method of proof is well established. DiLeo v. Commissioner,
supra at 867; 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. Tokarski v. Commissioner, 87
T.C. 74, 77 (1986); Estate of Mason v. Commissioner, supra at
656-657. When using the bank deposits method, the Commissioner
is not required to show that each deposit or part thereof
constitutes income, Gemma v. Commissioner, 46 T.C. 821, 833
(1966), or prove a likely source, Clayton v. Commissioner, 102
T.C. 632, 645 (1994); Estate of Mason v. Commissioner, supra at
657. Unless the nontaxable nature of deposits is established,
gross income includes deposits to bank accounts where the
taxpayer has dominion and control of the funds. Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 431 (1955); Davis v. United
States, 226 F.2d 331, 334-335 (6th Cir. 1955); Manzoli v.
Commissioner, T.C. Memo. 1988-299, affd. 904 F.2d 101 (1st Cir.
1990). Respondent’s determination is presumed to be correct, and
petitioner bears the burden of proving otherwise.5 Rule 142(a).
A. Manila Accounts
Petitioner claims that Mr. Haynes was his client and that he
(petitioner) set up the Manila Accounts as an accommodation to
5
Sec. 7491 is inapplicable, as the audit in this case
started in 1994. Higbee v. Commissioner, 116 T.C. 438, 440
(2001).
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Mr. Haynes as part of an alleged treasure hunting operation--
searching for gold allegedly hidden by the Japanese in the
Philippines during World War II--being conducted by Mr. Haynes in
the Philippines (Manila projects). Petitioner claimed that he
entered into some type of agreement with Mr. Haynes (agreement)
in order to open the Manila Accounts. Petitioner argues that all
the money that was deposited into the Manila Accounts was capital
contributions from various investors for the alleged treasure
hunting operation.
Petitioner did not provide a copy of the agreement to the
Court and claims he does not have a copy of the agreement.
Additionally, petitioner has no records that show Mr. Haynes or
the Manila projects as clients of his law practice. Contrary to
petitioner’s assertions, the signature cards for the Manila
Accounts clearly show that the Manila Accounts were not trust
accounts.
Petitioner testified that he was not held out as an investor
in any of the purported Manila projects, he was not a partner in
the purported Manila Exploration Company-Eldridge project, and he
never had an equity interest in any Manila partnerships.
The only document in evidence about the Manila projects,
entitled Project Update for Manila Exploration Company Eldridge
Recovery, Ltd., lists petitioner as a major investor in the
Manila projects, as one of the Manila projects’ strongest
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supporters over a number of years, as having a small interest in
“Phase I”, as having invested a substantial sum of cash, and as
Co-Managing General Partner of Manila Exploration Co. - Eldridge,
Ltd. (USA). Thus, the money wired from the Manila Accounts to
the Philippines appears to represent the substantial sums of cash
that the Project Update states petitioner invested in the Manila
projects.
We note that neither Mr. Haynes nor any of the alleged
investors in the Manila projects were called as witnesses.6 We
infer that their testimony would not have been favorable to
petitioner. Wichita Terminal Elevator Co. v. Commissioner, 6
T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).
6
At trial and on brief, petitioner repeatedly argued that
petitioner and respondent had an agreement to stipulate three
affidavits--including an affidavit of Mr. Haynes--that the Court
did not receive into evidence after sustaining respondent’s
hearsay objections. Petitioner claims respondent “duped”
petitioner into not having his witnesses at trial.
At trial, the Court asked respondent: “Did you all have an
agreement that you all would stipulate to those affidavits?”
Petitioner claims that respondent gave a carefully crafted answer
to avoid directly answering this question. Respondent, however,
replied, “At no time was there ever an agreement.”
In addition to offering hearsay, at trial petitioner stated
that he had a witness waiting for a call from the Court so that
the witness could “testify” via speaker phone.
Petitioner was a trial attorney. Petitioner has been an
attorney for almost 30 years. Petitioner stated, that as an
attorney, he knew that the affidavits were not admissible in
evidence and he should have known better. At trial, petitioner
stated that he had a “lame excuse” for failing to get his
witnesses to the trial. We agree.
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Petitioner claims that none of the deposits into the Manila
Accounts during 1992, 1993, and 1994 were his income “except for
$36,000 to $38,000" from which he made intrabank transfers to his
personal account at Cullen Bank. Petitioner relies on his own
self-serving testimony to support this conclusion. Petitioner’s
testimony was questionable, vague, conclusory, and unsupported by
the evidence in the record. Under these circumstances, we are
not required to, and do not, rely on petitioner’s testimony to
sustain his burden of establishing error in respondent’s
determinations. Lerch v. Commissioner, 877 F.2d 624, 631-632
(7th Cir. 1989), affg. T.C. Memo. 1987-295; Tokarski v.
Commissioner, supra at 77.
Petitioner had dominion and control over the Manila
Accounts. Petitioner had the power to make withdrawals out of
the Manila Accounts. His Social Security number was the only one
on the Manila accounts, his name was on the Manila Accounts, he
was one of two signatories on the Manila accounts, and his
business address was on the Manila Accounts. Petitioner made
intrabank transfers into and out of the Manila Accounts and wired
money domestically and overseas from the Manila Accounts.
There is, however, documentary evidence suggesting that five
deposits into the Manila Accounts are not income to petitioner.
The revenue agent’s work papers were submitted as evidence. For
1993, the revenue agent listed as deposits into Cullen #226 a
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check from Mark E. Weaver in the amount of $25,000 and a check
from Michael C. Dawson in the amount of $10,000. The “memo” line
of Mr. Weaver’s check contained the phrase “Philippine
Investment” and the “memo” line of Mr. Dawson’s check contained
the phrase “Rizal Ptnership”. Cullen #226 was styled “Manila
Exploration Company Rizal”.
For 1994, the revenue agent listed as deposits into Cullen
#226 a check from George A. Balian in the amount of $1,500 and a
check from “Nationwide Ins.” in the amount of $3. The “memo”
line of Mr. Balian’s check contained the phrase “Rizal Ptnership
Phase II” and the revenue agent noted that the “Nationwide Ins.”
check was paid to Norman D. Haynes and endorsed over to Manila
CK58351228.
The account statements for Cullen #453 include a copy of one
of the checks deposited into the account during the years in
issue and the associated deposit ticket. The deposit ticket is
dated July 15, 1993, and lists a single deposit of $1,000. The
check deposited into Cullen #453 is dated July 4, 1993. The
printed name on the top of the check is “Deepsea Recovery Corp.”,
the check is made payable to the order of Norman Haynes, the
check is endorsed by Norman Haynes, the check contains the
notation “Post Dated-Loan Repayment”, the amount of the check is
$1,000, and the check is signed by someone whose first name is
Dennis (the last name is illegible).
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We conclude that these five checks--totaling $36,000 for
1993 and $1,503 for 1994--are not income to petitioner; however,
we conclude that the remaining deposits into the Manila Accounts
in 1992, 1993, and 1994 are petitioner’s income.
B. Nations Trust Account
Petitioner claims that $98,550 of the $100,000 deposit into
the Nations trust account in 1993 is not unreported income.7
Petitioner relies on his own self-serving testimony to support
this conclusion. Petitioner’s testimony was questionable, vague,
conclusory, and unsupported by the evidence in the record. Under
these circumstances, we are not required to, and do not, rely on
petitioner’s testimony to sustain his burden of establishing
error in respondent’s determinations. Lerch v. Commissioner,
supra at 631-632; Tokarski v. Commissioner, 87 T.C. at 77.
Petitioner stipulated that the deposits into the Nations
trust account in 1994 were income to him. Petitioner also
testified that he used his attorney trust accounts as personal
accounts.
Petitioner originally claimed that the $100,000 deposit into
the Nations trust account was a certificate of deposit belonging
to a purported client of his named Charter Trading Corp., owned
by William C. Comey. After learning that the $100,000 deposit
7
Petitioner concedes that $1,450 of the $100,000 deposit
is his income.
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came from offshore, petitioner testified that he believed the
deposit was from a purported client of his named James
Scarborough for the promotion of a floating gambling boat on the
Mississippi River. Petitioner later testified that this money
came from an associate of Mr. Scarborough.
Petitioner presented no documentary evidence to support any
of these claims. Neither Mr. Comey or Mr. Scarborough was called
as a witness. We infer that their testimony would not have been
favorable to petitioner. Wichita Terminal Elevator Co. v.
Commissioner, 6 T.C. at 1165.
Petitioner had dominion and control over the Nations trust
account. Petitioner’s name was on the Nations trust account.
Petitioner had the power to make withdrawals out of the Nations
trust account. His Social Security number and name were on the
Nations trust account. Petitioner wrote 21 checks on the Nations
trust account drawing on virtually all of the $100,000 deposit.
We conclude that the $100,000 deposit into the Nations trust
account is petitioner’s income.
II. Section 6651(a)(1)
Section 6651(a)(1) imposes an addition to tax for failure to
file a return on the date prescribed (determined with regard to
any extension of time for filing), unless the taxpayer can
establish that such failure is due to reasonable cause and not
due to willful neglect. Rule 142(a); United States v. Boyle, 469
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U.S. 241, 245 (1985).
Petitioner stipulated that he filed his 1992 return late and
that he did not file returns for 1993 and 1994. Petitioner
stated that he had no good excuse or compelling reason for not
filing.
Petitioner offered no evidence showing that his failure to
file timely was due to reasonable cause and not due to willful
neglect. Accordingly, we hold that petitioner is liable for the
addition to tax pursuant to section 6651(a)(1) for 1992, 1993,
and 1994.
III. Section 6654
Section 6654 imposes an addition to tax for failure to pay
estimated income tax. Petitioner must come forward with evidence
sufficient to persuade the Court that respondent’s determination
is incorrect or that an exception applies. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
Petitioner did not offer any evidence at trial related to
this issue, and he failed to address it on brief. We conclude
that petitioner is liable for an addition to tax pursuant to
section 6654 for 1993 and 1994.
IV. Section 6662
Pursuant to section 6662(a), a taxpayer may be liable for a
penalty of 20 percent on the portion of an underpayment of tax
(1) attributable to a substantial understatement of tax or (2)
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due to negligence or disregard of rules or regulations. Sec.
6662(b). Whether applied because of a substantial understatement
of tax or negligence or disregard of the rules or regulations,
the accuracy-related penalty is not imposed with respect to any
portion of the understatement as to which the taxpayer acted with
reasonable cause and in good faith. Sec. 6664(c)(1). The
decision as to whether the taxpayer acted with reasonable cause
and in good faith depends upon all the pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioner conceded he did not report $168,948 of taxable
income in 1992. We have found that petitioner did not report an
additional $229,055 of income for 1992. Petitioner’s only
argument is that he should not be penalized because he “was naive
and stupid”.
We conclude that petitioner is liable for a penalty pursuant
to section 6662 for 1992.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and to the extent not
mentioned above, we find them to be irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.