T.C. Memo. 2003-208
UNITED STATES TAX COURT
THOMAS RICE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17356-94. Filed July 15, 2003.
Thomas Rice, pro se.
Richard A. Stone, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determined the following income
tax deficiencies and additions to tax with respect to
petitioner’s Federal income tax:
- 2 -
Additions to tax
Sec. Sec. Sec. Sec.
6653 6653 6653 6653 Sec.
Year Deficiency (b)(1) (b)(2) (b)(1)(A) (b)(1)(B) 6654
1 2
1982 $14,041 $7,021 –- –- $1,359
3 4
1983 15,785 7,893 –- –- 964
5
1984 12,953 6,477 –- –- 814
6
1985 27,178 13,589 –- –- 1,558
7
1986 19,911 –- –- $14,933 963
8
1987 5,430 –- –- 4,073 294
1
This deficiency is subject to a prepayment credit
adjustment of $73.
2
50 percent of the interest due on $13,968.
3
This deficiency is subject to a prepayment credit
adjustment of $19.
4
50 percent of the interest due on $15,766.
5
50 percent of the interest due on $12,953.
6
50 percent of the interest due on $27,178.
7
50 percent of the interest due on $19,911.
8
50 percent of the interest due on $5,430.
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,1 the issues for decision are:
1
In the notice of deficiency dated June 27, 1994, respondent
determined that petitioner: (1) Received unreported interest
income during 1982, 1983, 1984, 1985, 1986, and 1987 of $84,
$290, $22, $114, $110, and $19, respectively; (2) received
unreported income from forgiveness of indebtedness during 1986 of
$3,471; and (3) is liable for self-employment taxes for all years
at issue. Petitioner did not raise these issues in his petition
or at trial. We deem these issues conceded. See Rule 34(b)(4).
Additionally, in his petition petitioner alleged that
respondent erred in determining that petitioner: (1) Is not
entitled to various deductions claimed on Schedule A, Itemized
Deductions, in addition to those allowed by respondent for all
years at issue; (2) is not entitled to head-of-household filing
status under sec. 2(b) for all years at issue; (3) is not
entitled to the child care credit under sec. 21 for all years at
(continued...)
- 3 -
(1) Whether petitioner received unreported income from the
sale of tax shelters and insurance during 1982, 1983, 1984, 1985,
1986, and 1987 of $56,701, $46,744, $16,939, $27,783, $49,346,
and $23,406, respectively;
(2) whether petitioner is entitled to various deductions
claimed on Schedule C, Profit or Loss from Business, in addition
to those allowed by respondent for all years at issue;
(3) whether petitioner is entitled to claim dependency
exemptions under section 151 for his two children2 for 1982 and
1986;3 and
(4) whether petitioner is liable for additions to tax for
fraud pursuant to section 6653(b)(1) and (2) for 1982 through
1
(...continued)
issue; and (4) is liable for additions to tax pursuant to sec.
6654 for failure to make estimated tax payments for all years at
issue. Because petitioner failed to address these issues at
trial or on brief, we deem these issues conceded. See Rule
151(e)(4) and (5); Petzoldt v. Commissioner, 92 T.C. 661, 683
(1989); Money v. Commissioner, 89 T.C. 46, 48 (1987).
Petitioner conceded in the stipulation of facts that he
received taxable income from: (1) Wages during 1982 and 1983 of
$4,549 and $165, respectively; (2) partnership distributions
during 1983 and 1984 of $4,834 and $3,416, respectively; and (3)
dividends during 1984 and 1985 of $25,773 and $46,884,
respectively.
2
In his petition, petitioner asserted that he was entitled
to dependency exemptions for three children for the years at
issue. The record indicates that petitioner has only two
children.
3
In the notice of deficiency, respondent allowed dependency
exemptions for two of petitioner’s children during 1983, 1984,
1985, and 1987.
- 4 -
1985 and pursuant to section 6653(b)(1)(A) and (B) for 1986 and
1987.
FINDINGS OF FACT
Some of the facts have been deemed established for purposes
of this case in accordance with Rule 91(f).4 We incorporate
these facts into our findings by this reference. Petitioner
resided in Washington, D.C., on the date his petition was filed.
During the years at issue, petitioner conducted business as
a financial planner and consultant through four companies: Rice
& Associates; Ridgeway, Rice & Dill, Inc.; Integrated Financial
Concepts, Inc. (IFC); and Life Investors Group, Inc. Petitioner
sold insurance, promoted and sold various tax shelters, and
referred clients to his associate, Jim Dill (Mr. Dill), for tax
return preparation services.
When petitioner received clients’ payments for tax shelter
investments, he deposited them into his personal checking
accounts.5 Petitioner also deposited into his accounts the
proceeds from financial investment counseling fees, sales
4
On Oct. 18, 2002, respondent filed a motion to show cause
why proposed facts in evidence should not be accepted as
established under Rule 91(f) and attached a proposed stipulation
of facts based on admissions. Petitioner failed to respond to
the Court’s order to show cause under Rule 91(f) issued on Oct.
18, 2002. As a result, on Nov. 15, 2002, the Court made the
order to show cause under Rule 91(f) absolute and deemed
established the facts and evidence set forth in respondent’s
proposed stipulation of facts.
5
Over the course of the years at issue, petitioner used 12
personal checking accounts.
- 5 -
commissions, tax preparation fees, loans, and real estate sales.
Throughout the years at issue, petitioner had two children,
Jamal and Joshua, who lived with petitioner and his wife. For
the taxable years 1982 and 1986, petitioner’s wife filed as
married filing separately and claimed Jamal and Joshua as
dependents.
In March 1993, petitioner pled guilty to (1) conspiring to
defraud the Government by impeding, impairing, obstructing, and
defeating the lawful functions of the Internal Revenue Service in
the ascertainment, computation, assessment, and collection of
revenue, in violation of 18 U.S.C. sec. 371, and (2) two counts
of bank fraud, in violation of 18 U.S.C. sec. 1014.6
Petitioner’s criminal conviction stemmed from his practice of
opening interest-bearing bank accounts under false names,
addresses, and Social Security numbers in an attempt to conceal
his financial activities.
Despite petitioner’s awareness of the requirements to file
Federal income tax returns and maintain books of account and
records of his business activities, petitioner consistently
failed to comply with either requirement. Consequently,
respondent subpoenaed petitioner’s bank records in order to
reconstruct petitioner’s income for all years at issue.
Respondent’s examination of petitioner’s bank records led
6
Petitioner received a Federal prison sentence of 2 years
followed by 3 years of probation.
- 6 -
respondent to issue the notice of deficiency dated June 27, 1994.
On September 23, 1994, petitioner filed a timely petition
with the Court. A trial was held on December 5 and 23, 2002.
This Court established a posttrial briefing schedule that
required respondent to file an opening brief on or before March
10, 2003, and required petitioner to file an answering brief on
or before May 22, 2003. Only respondent filed the required
posttrial brief.
OPINION
Respondent contends that from 1982 through 1987 petitioner
failed to report income he received from the sale of tax shelters
and insurance. In addition, respondent alleges that the entire
underpayment for all 6 years is attributable to fraud.
Petitioner contends that respondent’s determinations for all
years at issue are incorrect and denies that he committed fraud.
I. Income Tax Deficiencies
A. Unreported Income
Gross income is defined as “all income from whatever source
derived” and includes gross income derived from business
(Schedule C taxable income). Sec. 61(a)(2). Section 6001
requires a taxpayer to maintain books of account or records
sufficient to establish his gross income, deductions, and
credits. Sec. 1.6001-1(a), Income Tax Regs.; see also Estate of
Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d 2
(6th Cir. 1977). When a taxpayer fails to keep adequate records,
- 7 -
the Commissioner may use an indirect method of proving income,
such as the bank deposits method, in order to determine the
taxpayer’s taxable income. Estate of Mason v. Commissioner,
supra at 656. Under the bank deposits method, bank deposits are
prima facie evidence of income. Tokarski v. Commissioner, 87
T.C. 74, 77 (1986); Estate of Mason v. Commissioner, supra.
Because petitioner failed to file tax returns and maintain
adequate books and records, respondent used the bank deposits
method to compute petitioner’s taxable income. Specifically,
respondent examined petitioner’s deposit tickets, bank
statements, transcripts from related bank accounts, and canceled
checks. After excluding transfers of funds between accounts and
deposits related to petitioner’s wife’s income and other non-
Schedule-C items, respondent determined that petitioner received
unreported Schedule C taxable income during all years at issue.
Respondent’s determinations are presumed correct, and petitioner
bears the burden of proof.7 Rule 142(a)(1); Welch v. Helvering,
290 U.S. 111, 115 (1933). Petitioner generally contests
respondent’s determinations and asserts that he shared the bank
accounts with his business associates.
Although petitioner and his wife were listed as the sole
account holders, petitioner contends that the bank accounts did
7
Respondent’s examination in this case commenced before July
22, 1998, the effective date of sec. 7491. See Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
sec. 3001(c), 112 Stat. 727.
- 8 -
not belong to him exclusively. Petitioner insists that he and
his partners, Mr. Ridge8 and Mr. Dill, shared the bank accounts
and the funds deposited into them. We find no support in the
record for this assertion.
Petitioner has presented little evidence concerning the
individual bank deposits at issue. Addressing the 1982
deficiency at trial, petitioner characterized the 1982 deposits
as clients’ payments toward tax shelter investments. Petitioner
did not produce any corroborating evidence, but rather asked “to
be given the benefit of the doubt.” Petitioner did not
specifically address the individual bank deposits for 1983
through 1987.
Besides his testimony described above, the only evidence
petitioner submitted was the testimony of his pro bono attorney,
William Davidson (Mr. Davidson).9 Mr. Davidson testified that
when he visited respondent’s office to examine petitioner’s bank
records, he found the records in a state of “disarray”. After he
examined the bank records, Mr. Davidson doubted whether
respondent had properly considered “interbank transfers”, noting
the large number of bank accounts petitioner used. However, Mr.
Davidson did not allege any specific errors or otherwise
8
The record does not contain Mr. Ridge’s full name.
9
William Davidson assisted petitioner with his case pro bono
during the time leading up to trial, but he did not enter an
appearance before the Court on petitioner’s behalf.
- 9 -
elaborate on his observations.
On the record as developed, petitioner has not offered
sufficient evidence to show that respondent’s determinations of
petitioner’s unreported Schedule C taxable income were in error.
We therefore sustain respondent’s determinations concerning
petitioner’s Schedule C taxable income for the years 1982 through
1987.
B. Schedule C Deductions
Section 162(a) provides a deduction for ordinary and
necessary expenses that a taxpayer pays or incurs during the
taxable year in carrying on a trade or business (Schedule C
expenses).10 When using the bank deposits method to determine
taxable income, the Commissioner must take into account any
deductible expenses, including Schedule C expenses, of which the
Commissioner has knowledge. DiLeo v. Commissioner, 96 T.C. 858,
872 (1991), affd. 959 F.2d 16 (2d Cir. 1992). If a taxpayer
claims any deductible expenses that the Commissioner did not
allow, the taxpayer must prove their existence. Id.
On the basis of the examination of petitioner’s personal
bank accounts, respondent concluded that petitioner had Schedule
C expenses of $25,065 in 1982, $4,001 in 1983, zero in 1984 and
10
Respondent does not question whether petitioner engaged in
a trade or business during the years at issue.
- 10 -
1985, $3,955 in 1986,11 and zero in 1987. In his petition,
petitioner contended that he--
incurred for all years relevant to the Notice, various
and certain deductible business expenses, ordinary and
necessary for the conduct of his businesses, including
businesses involving the ownership of certain real
property, all of which businesses during certain years
incurred both capital and net operating losses which
the Commissioner erroneously disallowed.
Petitioner failed to produce any evidence of his alleged
business expenses. At trial petitioner blamed the lack of
evidence on respondent, contending that respondent had all of
petitioner’s business records and was unwilling to share them
with petitioner.12
Petitioner’s contention lacks merit. The only records of
petitioner that respondent had in his possession and used in
making his determination were petitioner’s bank records that
respondent had obtained from various financial institutions by
summons. The record shows that petitioner had numerous
opportunities to inspect the bank records in respondent’s
possession during the time before and between the two dates of
11
On Mar. 1, 1986, IFC lost its corporate charter. The
Schedule C expenses respondent allowed for 1986 are those IFC
incurred from March through December of 1986.
12
Specifically, petitioner asserted that the business
records had been in the possession of his former partner, Mr.
Dill, and were at some point “confiscated” by “the IRS.”
According to respondent, any business records held by the
Government relating to Mr. Dill had nothing to do with
petitioner. In fact, petitioner’s lack of business records
necessitated respondent’s use of the bank deposits method.
- 11 -
his trial. Petitioner did not avail himself of these
opportunities.
Because petitioner has failed to carry his burden of proof,
we sustain respondent’s determinations concerning petitioner’s
Schedule C expenses for the years 1982 through 1987.
C. Dependency Exemptions
A taxpayer may claim exemptions for individuals who qualify
as the taxpayer’s dependents. Sec. 151(a), (e)(1).13 Section
152(a)(1) permits a taxpayer to claim his children as dependents
if the taxpayer provided over half of their support during the
calendar year.
When petitioner’s wife filed as married filing separately in
1982 and 1986, she claimed their two children as dependents.
Petitioner asserts that he was entitled to the dependency
exemptions. Under such circumstances, the right to claim the
dependency exemptions belongs to the parent who provided over
half of the children’s support. Llorente v. Commissioner, 74
T.C. 260, 269 (1980), affd. in part and revd. in part on other
grounds 649 F.2d 152 (2d Cir. 1981).
Petitioner failed to provide any evidence with respect to
this issue other than his own testimony. We are not required to
accept petitioner’s self-serving testimony in the absence of
13
For taxable years beginning after Dec. 31, 1986, sec.
151(e)(1) was redesignated sec. 151(c)(1) by the Tax Reform Act
of 1986 (TRA), Pub. L. 99-514, sec. 103(b), 100 Stat. 2103.
- 12 -
corroborating evidence. See Tokarski v. Commissioner, 87 T.C. at
77. Consequently, we sustain respondent’s determination
disallowing petitioner any dependency exemptions for 1982 and
1986.
D. Conclusion
We sustain respondent’s determinations of income tax
deficiencies for the taxable years at issue.
II. Additions to Tax for Fraud
Section 6653(b)14 authorizes the imposition of an addition
to tax for underpayments of tax due to fraud. Before amendments
by the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 1085
(the 1986 amendments), the addition to tax for fraud consisted of
50 percent of the underpayment amount, plus 50 percent of the
interest due on the portion of the underpayment attributable to
fraud. Sec. 6653(b)(1) and (2). After the 1986 amendments,
section 6653(b)(1) and (2) became section 6653(b)(1)(A) and (B),
respectively, and imposed an addition to tax for fraud of 75
percent of the portion of the underpayment attributable to fraud,
plus 50 percent of the interest due on that portion of the
underpayment. Section 6653(b)(1) and (2) governs petitioner’s
income tax liabilities for 1982 through 1985; section
14
Sec. 6653(b) was amended by the Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec.
1015(b)(2)(B), 102 Stat. 3569, and the Omnibus Budget
Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(c)(1), 103
Stat. 2399. Sec. 6663(a) contains the current version of the
fraud penalty.
- 13 -
6653(b)(1)(A) and (B) applies to the 1986 and 1987 liabilities.15
“Fraud is established by proving that the taxpayer intended
to evade tax believed to be owing by conduct intended to conceal,
mislead, or otherwise prevent the collection of such tax.”
Recklitis v. Commissioner, 91 T.C. 874, 909 (1988). The presence
of fraud is not presumed, and the Commissioner bears the burden
of proving fraud by clear and convincing evidence. Sec. 7454(a);
Rule 142(b); Beaver v. Commissioner, 55 T.C. 85, 92 (1970). The
existence of fraud is a factual question resolved by an
examination of the entire record. DiLeo v. Commissioner, 96 T.C.
at 874. In order for the Commissioner to prove fraud by clear
and convincing evidence, the Commissioner must establish for each
year at issue that (1) the taxpayer underpaid his taxes, and (2)
some part of the underpayment is attributable to fraud.16 Id. at
886. The Commissioner may establish fraud by circumstantial
15
The 1986 amendments apply to returns due after Dec. 31,
1986. TRA sec. 1503(e), 100 Stat. 2743.
16
For purposes of the sec. 6653(b)(1) additions to tax for
1982 through 1985, the Commissioner must prove that a portion of
the underpayment in each year is due to fraud, but for purposes
of the sec. 6653(b)(2) additions to tax for 1982 through 1985,
the Commissioner must prove the specific portion of each year’s
underpayment that is due to fraud. DiLeo v. Commissioner, 96
T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992). For
purposes of the sec. 6653(b)(1)(A) and (B) additions to tax for
1986 and 1987, if the Commissioner proves that any portion of the
underpayment for a year is attributable to fraud, the entire
underpayment for that year is treated as attributable to fraud,
except with respect to any portions of the underpayment that the
taxpayer establishes are not attributable to fraud. Sec.
6653(b)(2).
- 14 -
evidence, id. at 875, which includes the various indicia or
badges of fraud relied upon by the courts, see Bradford v.
Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo.
1984-601; DiLeo v. Commissioner, supra at 875. A combination of
several badges of fraud constitutes persuasive circumstantial
evidence of fraud. Niedringhaus v. Commissioner, 99 T.C. 202,
211 (1992); Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989).
Respondent has established that petitioner underpaid his
income tax for each of the years at issue. The bank deposits
analysis reflects substantial deposits into petitioner’s bank
accounts for each year. The record contains substantial credible
evidence that the deposits were income to petitioner. When this
fact is coupled with the uncontested fact that petitioner was
required to file but failed to file tax returns for the years at
issue, we find that the record contains clear and convincing
proof that petitioner underpaid his income tax for each of the
years at issue.
Respondent’s proof that petitioner’s underpayments are
attributable to fraud consists primarily of petitioner’s deemed
admissions. We have held that deemed admissions are sufficient
to satisfy the Commissioner’s burden of proof with respect to the
issue of fraud. See Doncaster v. Commissioner, 77 T.C. 334, 336-
338 (1981).
According to respondent, petitioner’s deemed admissions
establish the following indicia or badges of fraud for all years
- 15 -
at issue: (1) Understatement of income; (2) failure to keep
adequate books and records; (3) failure to file tax returns; (4)
acts designed to conceal income and/or assets; (5) false,
misleading, inconsistent, or implausible explanations of
behavior; (6) failure to cooperate with respondent’s agents; (7)
engaging in illegal activities; (8) awareness of tax laws; (9)
attempts to conceal illegal activities; (10) high education level
and sophistication; and (11) a pattern of inaction and delay
during the pretrial and trial proceedings.
We agree that petitioner’s deemed admissions contain several
badges of fraud. Petitioner knew of the requirement to file tax
returns. Nevertheless, petitioner consistently failed to report
substantial amounts of income over several years, behavior which
strongly evidences fraudulent intent. See Farber v.
Commissioner, 43 T.C. 407, 419-420 (1965). Petitioner also knew
of the requirement to maintain adequate books or records of
account but failed to do so. This record-keeping omission,
combined with petitioner’s failure to file tax returns,
constitutes persuasive evidence of petitioner’s intent to conceal
income and evade taxes. Petzoldt v. Commissioner, supra at 701.
Other badges of fraud contained in petitioner’s deemed
admissions include petitioner’s involvement in illegal
activities, as evidenced by petitioner’s criminal convictions and
practice of opening bank accounts under false names, addresses,
- 16 -
and Social Security numbers;17 petitioner’s failure to make
estimated tax payments; and petitioner’s failure to cooperate
with respondent’s agents’ attempts to reconstruct his income.
Bradford v. Commissioner, supra at 308; DiLeo v. Commissioner,
supra at 875; Petzoldt v. Commissioner, supra at 701-702.
Petitioner has not presented any persuasive evidence to
rebut respondent’s proof of fraud. Mr. Davidson testified that
his review of petitioner’s bank records did not reveal any
evidence “that would give rise to a claim of fraud, insofar as
intentional withholding of information or anything of that sort.”
Other than Mr. Davidson’s comments, the only evidence petitioner
offered was his own testimony denying that he committed fraud.
The badges of fraud contained in petitioner’s deemed
admissions strongly indicate that petitioner intended to conceal
his income and avoid paying taxes. We conclude that respondent
has met his burden of proof, establishing by clear and convincing
evidence that all of petitioner’s underpayments for 1982 through
1987 were attributable to fraud. Petitioner is liable for
17
At trial, respondent stated that the deemed admissions
relevant to the fraud issue contained information directly taken
from the criminal indictment. The record lacks additional
details about petitioner’s criminal conviction, making it unclear
whether the conspiracy and bank fraud charges related to work
that petitioner performed for a client or pertained solely to
petitioner’s personal financial activities and whether the
charges covered all of the years at issue. Regardless, however,
of the period or the activities covered by petitioner’s criminal
case, sufficient indicia of fraud still exist to support a
finding of fraud for each of the years at issue.
- 17 -
section 6653(b)(1) and (2) additions to tax for 1982 through 1985
and section 6653(b)(1)(A) and (B) additions to tax for 1986 and
1987.
We have considered the remaining arguments of both parties
for results contrary to those expressed herein and, to the extent
not discussed above, find those arguments to be irrelevant, moot,
or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.