T.C. Memo. 2003-269
UNITED STATES TAX COURT
WILLIAM B. MCDERMOTT AND DONNA MCDERMOTT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18050-99. Filed September 16, 2003.
William B. McDermott and Donna McDermott, pro sese.
Stephen S. Ash, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioners petitioned the Court to
redetermine a $215,493 deficiency in their 1995 Federal income
tax and a $43,099 accuracy-related penalty under section 6662(a).
Following respondent’s concession as to 17 of the 23 bank
deposits determined by him in the notice of deficiency to be
income, and our granting of petitioners’ motion to dismiss much
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of this case for lack of jurisdiction,1 we decide whether
petitioners underreported their gross income by $15,496; i.e.,
the total amount of the remaining 6 deposits. We hold they did
not.2 Section references are to the applicable versions of the
Internal Revenue Code, Rule references are to the Tax Court Rules
of Practice and Procedure, and dollar amounts are rounded.
FINDINGS OF FACT
Some facts were stipulated. The parties’ stipulation of
facts and the exhibits submitted therewith are incorporated
herein by this reference. Petitioners are husband and wife, and
they resided in Phoenix, Arizona, when their petition was filed.
They have at least two children (Melissa and Joshua).
Petitioners filed a joint 1995 Federal income tax return on
or about September 9, 1996. They reported on that return that
their gross income consisted of $30,000 of business income and
$54 of dividend income, and they reported and paid $5,915 in
Federal income tax with respect thereto. They reported on their
1
Specifically, petitioners had moved to dismiss the portion
of this case that concerned partnership items which respondent
conceded were included erroneously in the notice of deficiency.
See Maxwell v. Commissioner, 87 T.C. 783 (1986) (partnership
items must be readjusted in a unified partnership level
proceeding brought under the Tax Equity and Fiscal Responsibility
Act of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat. 648, and
cannot be considered in a proceeding brought under sec. 6213(a)
to redetermine a deficiency).
2
On the basis of this holding, we also hold that
petitioners are not liable for the accuracy-related penalty
determined by respondent as it relates to the bank deposits.
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1995 return that the business income consisted of $12,000
received by William McDermott (Mr. McDermott) and $18,000
received by Donna McDermott (Ms. McDermott). During 1995, Mr.
McDermott was an independent contractor who bought and sold
educational textbooks as the manager of Omega Resources LLC
(Omega). He generally works for Omega throughout the United
States, and it reimburses him for his out-of-pocket traveling
expenses. Ms. McDermott also worked for Omega during that year
as an independent contractor. She has an undergraduate degree in
teaching and a master’s degree in the healing arts (the study of
alternative medicine), and she worked for Omega counseling
individuals on their personal problems.
During 1995, petitioners had a regular checking account at
First Interstate Bank (FIB), two valuechecking accounts at Bank
One, and a securities account at Prudential Securities. When
respondent audited petitioners’ 1995 return, respondent performed
a bank account analysis on these four accounts and determined in
the notice of deficiency that the following 23 deposits into the
FIB and Bank One accounts were includable in petitioners’ 1995
gross income:
Date of Deposit Amount
Jan. 18 $1,375
Apr. 7 150
May 10 93
May 10 475
May 10 151
May 10 156
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July 3 3,165
July 3 1,000
July 25 831
Aug. 2 2,500
Aug. 18 1,000
Aug. 28 1,248
Oct. 5 102
Nov. 6 114
Nov. 16 457
Nov. 17 289
Nov. 22 210
Nov. 29 251
Dec. 1 3,000
Dec. 14 3,000
Dec. 18 3,000
Dec. 18 454
Dec. 29 763
23,784
Petitioners had not included any of these deposits in their 1995
gross income.
During this proceeding, respondent conceded error as to 17
of the deposits determined to be includable in petitioners’ 1995
gross income. Respondent now asserts that only the following six
deposits are so includable: The July 3 deposit of $3,165, the
July 25 deposit of $831, the August 2 deposit of $2,500, the
December 1 deposit of $3,000, the December 14 deposit of $3,000,
and the December 18 deposit of $3,000. The $3,165 was a deposit
made in cash or by check. The $831 was a deposit made in cash.
The $2,500 and the first $3,000 were deposits made by wire
transfer from the Lorain, Ohio, bank account of Ms. McDermott’s
mother. The second $3,000 was a deposit made by check. The
third $3,000 was a deposit made by check, the drawer of which was
a bank located in the Bahamas.
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Mr. McDermott has a brother who lives in Canada. Every
year, the brother visits petitioners for the Christmas holidays.
The brother generally gives petitioners money around that time to
buy Christmas presents for their family.
Mr. McDermott’s father was a native of Canada, and he lived
there in 1995.3 During that year, he suffered from diabetes and
had heart problems which required significant care. His wife
died in October 1995, and he stayed with petitioners for a long
time over Christmas. He gave $6,000 to petitioners before his
stay to buy Christmas presents for the extended family and to buy
household and medical items (e.g., medical supplies, a chair, and
a bed, covering, and linens) related to his stay. At least part
of that money came from an offshore bank account that Mr.
McDermott’s father maintained in the Bahamas.
Before marrying Mr. McDermott, Ms. McDermott was a widow
with two children. Beginning with the birth of the first child,
Ms. McDermott’s mother has given money to Ms. McDermott to help
her raise her children. Her mother also gives money to her
around Christmastime to buy presents for the family. During
1995, Ms. McDermott’s mother wired $2,500 and $3,000 from her
bank account in Lorain, Ohio, to petitioners’ bank account. Of
those amounts, $3,000 was a Christmas gift, and $2,500 was to be
3
Mr. McDermott’s father died on June 24, 1998.
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applied towards petitioners’ daughter’s college tuition for the
fall semester.
OPINION
Respondent argues that his use of the bank deposits method
is a “prima facie case” that requires that petitioners prove that
the six deposits are not unreported income. Respondent asserts
that the revenue agent who conducted the audit “determined based
on his experience that petitioners’ income in 1995 was diverted
to an offshore bank account and that the funds were moved to the
McDermott’s [sic] parents’ account in Canada and then came back
as alleged gifts.” Respondent asserts that the funds given to
petitioners by Ms. McDermott’s mother also were determined to be
unreported income because of the involvement of Mr. McDermott’s
father with offshore accounts.
Petitioners argue that each of the six deposits has a
nontaxable source. Petitioners assert that the $3,165 deposit
was a payment to Mr. McDermott from Omega (consisting of $165 for
a petty cash expense, $1,000 as partial reimbursement for
out-of-pocket expenses, and $2,000 as an advance contract payment
that Mr. McDermott included in the $12,000 that he recognized as
income for 1995). They assert that the first $3,000 deposit was
wired to them from Ms. McDermott’s mother as a Christmas gift.
They assert that the other two $3,000 deposits were given to them
by Mr. McDermott’s father to pay for his extended stay at their
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home over the Christmas holiday and to buy Christmas presents for
them and members of the extended family. They assert that the
$2,500 was wired to them from Ms. McDermott’s mother to apply
towards their daughter’s college tuition for the fall semester.
They assert that the $831 deposit came from a nontaxable source.
We need not decide which party bears the burden of proof in
this case in that we can and do decide this case on the basis of
the record.4 Petitioners generally support their assertions as
to the tax status of the deposits by their respective testimony
and the introduction of certain documentary evidence. On the
basis of the record at hand, we are persuaded that none of the
six deposits are includable in petitioners’ 1995 gross income.
We have considered all of the parties’ arguments and reject those
arguments not discussed herein as meritless.
Decision will be entered
under Rule 155.
4
Sec. 7491 does not apply to this case because the
examination of petitioners’ tax return commenced before July 22,
1998, the effective date of that section. Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
sec. 3001(a), 112 Stat. 726.