VALDES v. COMMISSIONER

T.C. Summary Opinion 2004-19

UNITED STATES TAX COURT

RENE D. AND ROSEMARY S. VALDES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2357-00S. Filed February 25, 2004.

Rene D. Valdes, pro se.

Lorianne D. Masano, for respondent.

POWELL, Special Trial Judge: This case was heard pursuant

to the provisions of section 74631 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.

1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the years in
issue, and Rule references are to the Tax Court Rules of Practice
and Procedure.
 - 2 -

Respondent determined deficiencies in petitioners’ Federal

income taxes and accuracy-related penalties as follows:

Penalty
Year Deficiency Sec. 6662(a)

1996 $10,950 $2,190.00
1997 10,007 2,001.40
1998 11,643 2,328.60

After a concession by respondent,2 the issues are (1)

whether petitioners3 are liable for taxes on unreported income in

the amounts of $32,810, $33,071, and $36,392 for the taxable

years 1996, 1997, and 1998, respectively, and (2) whether

petitioners are liable for accuracy-related penalties under

section 6662(a) for the years in issue. Petitioners resided in

Tampa, Florida, at the time the petition was filed.

Background

During the examination of petitioners’ 1996, 1997, and 1998

Federal income tax returns, petitioner provided to respondent

unorganized boxes of receipts for his business and personal

expenses. Respondent calculated petitioner’s business expenses

using petitioners’ 1996, 1997, and 1998 returns. Respondent

2
Respondent conceded that petitioners are entitled to a
dependency exemption for their daughter, Robyn M. Valdes, in the
1997 taxable year.
3
Petitioner Rosemary S. Valdes did not appear at the
trial and did not sign the stipulation of facts. With respect to
her, we dismiss this case for failure to prosecute. Rule 123(b).
The decision, when entered, will be in the same amount as
ultimately determined against petitioner Rene D. Valdes. In the
opinion, references to petitioner are to Rene D. Valdes.
 - 3 -

calculated petitioner’s personal expenses for his 1996 and 1997

expenditures using petitioner’s receipts. Petitioner did not

provide receipts for his 1998 personal expenses, and respondent

calculated the 1998 expenditures by averaging the 1996 and 1997

expenditures. Using the cash expenditures method, respondent

reconstructed petitioner’s business income as follows:

Year Reported Income Reported Expenses Unreported Income

1996 $83,353 $116,163 $32,810
1997 37,804 70,875 33,071
1998 39,064 75,456 36,392

Petitioner contends that the unreported income represents

nontaxable loans or gifts he received from his mother and his

aunt.

This case, upon petitioner’s requests, was continued twice.

The second continuance was granted on petitioner’s

representations that he could obtain from Merrill Lynch and Dean

Witter “cashier’s checks that were handed to me from my mother to

pay * * * [my] bills.” He alleged that he had the account

numbers of his mother’s accounts at both firms, and that he could

track the funds from those accounts into his hands. According to

petitioner, the withdrawals were “in cashier’s checks at the time

of withdrawal made out to * * * [petitioner’s mortgage company]”.

At trial 16 months later, petitioner testified that he

“didn’t have her [his mother’s] account numbers * * * until after

she’s [sic] passed away”. His mother died approximately 5 months

prior to the trial, and well after his earlier representations
 - 4 -

that he had her account numbers. He further testified that his

mother would sell her stocks and bonds and that “she would always

go to the bank and draw it out in cash.” There was no mention of

the alleged amounts paid to petitioner’s mortgage company by

cashier’s checks drawn on his mother’s accounts.

Discussion

Unreported Income

A taxpayer is required to maintain records sufficient to

establish the amount of his or her income and deductions. Sec.

6001; sec. 1.6001-1(a), (e), Income Tax Regs. If the taxpayer

does not, the Commissioner is authorized by section 446 to

reconstruct the taxpayer’s income. Petzoldt v. Commissioner, 92

T.C. 661, 693 (1989). The source and application of funds method

(also referred to as the cash expenditures method) is an accepted

method to reconstruct income. United States v. Johnson, 319 U.S.

503, 517-518 (1943).

The cash expenditures method is based on the assumption that

the amount by which a taxpayer’s expenditures during a taxable

period exceed his reported income has taxable origins, absent

some explanation by the taxpayer. Burgo v. Commissioner, 69 T.C.

729, 742 (1978). To prevail, petitioner must establish that

either someone else made the expenditures or that the funds used

for the expenditures were obtained from nontaxable sources, such

as loans, gifts, inheritances, or assets available at the
 - 5 -

beginning of the tax year. Petzoldt v. Commissioner, supra at

695; Burgo v. Commissioner, supra at 743.

At one time, petitioner asserted that the unreported income

represents nontaxable loans or gifts from his mother in the

approximate amounts of $7,000 and $49,000 for the 1996 and 1997

taxable years, respectively, and $4,000 from his aunt.4 At

trial, however, he did not testify as to any specific amounts

that he received. As discussed, according to petitioner, his

mother and aunt sold capital assets and gave the proceeds to him

in the form of either cash or cashier’s checks, and he used these

funds to pay his personal expenses. Petitioner, however, did not

provide any documentation to substantiate these purported loans

or gifts. The record is devoid of any loan agreements; Form

1099-B, Proceeds from Broker and Barter Exchange Transactions,

relating to his mother’s or aunt’s sale of capital assets; or the

alleged cashier’s checks. See Wynn v. Commissioner, T.C. Memo.

1996-415. Additionally, upon examination of respondent’s

financial information concerning petitioner’s mother and aunt for

1995, 1996, and 1997, it does not appear that either had the

financial capability to make such large loans or gifts to

petitioner.5 See Holland v. United States, 348 U.S. 121, 135-137

4
We note that except for 1997, even if these amounts are
correct, there still are substantial understatements of income.
5
From respondent’s summary of records, it appears that
(continued...)
 - 6 -

(1954). Finally, we are struck by petitioner’s inability to tell

the same story twice. All of these considerations lead us to

conclude that petitioner’s allegations have more mendacity than

truthfulness.6 We sustain respondent’s determinations as to the

unreported income.

Accuracy-Related Penalties

Section 6662 imposes an accuracy-related penalty “equal to

20 percent of the portion of the underpayment” of tax

attributable to “Any substantial understatement of income tax”.

Sec. 6662(a) and (b)(2). A substantial understatement of income

tax exists if the amount of the understatement for the taxable

year exceeds the greater of 10 percent of the tax required to be

shown on the return for the taxable year or $5,000. Sec.

6662(d)(1)(A).

However, “No penalty shall be imposed * * * if it is shown

that there was a reasonable cause * * * and that the taxpayer

acted in good faith”. Sec. 6664(c). Petitioner failed to

address the accuracy-related penalties at trial and offered no

5
(...continued)
petitioner’s mother received $4,881 from two sales of stock in
1997. There is no evidence to indicate that petitioner received
these proceeds. His aunt did not file tax returns for 1995 and
1996, and respondent’s summary of records indicates that she
received total income of $13,075 in 1995 and $10,635 for 1996.
6
Given the lack of records and the lack of credibility in
petitioner’s testimony, sec. 7491(a), pertaining to shifting the
burden of proof, has no application here.
 - 7 -

evidence that he had reasonable cause for the understatements or

that he acted in good faith. Accordingly, we sustain

respondent’s determinations.7

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect respondent’s concession,

Decision will be entered

under Rule 155.

7
Considering the amount of unreported income, respondent
has satisfied the burden of production with regard to the
penalties. See sec. 7491(c).