T.C. Memo. 2015-238
UNITED STATES TAX COURT
SALEH OMAR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14799-13. Filed December 14, 2015.
Bonnie F. Emadi, Marshall West Taylor, and Marc Jeffrey Winter, for
petitioner.
Randall L. Eager, Jr., and Sebastian Voth, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: In a notice of deficiency respondent determined a
deficiency in petitioner’s 2008 Federal income tax of $74,122 and an accuracy-
related penalty under section 6662(a) of $14,824.40. The issues for decision are:
(1) whether respondent properly determined using a bank deposits method of
-2-
[*2] reconstructing income that petitioner underreported his gross receipts on
Schedule C, Profit or Loss From Business, and (2) whether petitioner is liable for
an accuracy-related penalty pursuant to section 6662(a).1
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulated
facts and facts drawn from stipulated exhibits are incorporated herein by this
reference. Petitioner resided in California when he petitioned this Court.
I. Petitioner’s Background and Fast Mart Gas & Grocery, LLC
Petitioner was born in Yemen and moved to the United States in 1978.
After graduating from high school in California petitioner attended college for two
years and took business administration classes but did not obtain a degree. During
and after college he owned and operated several convenience and grocery stores,
which he sold sometime before 2008.
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the year at issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. Some monetary amounts are
rounded to the nearest dollar. Other adjustments to petitioner’s 2008 Federal
income tax as reflected in the notice of deficiency are solely computational and
will not be addressed further. The notice of deficiency was also addressed to
petitioner’s spouse. She did not file a petition with respect to the notice of
deficiency either jointly with petitioner or separately, and she is not a party to this
case. See Rule 34(a)(1).
-3-
[*3] Petitioner’s uncle, Ghaleb Omar, owned Fast Mart Gas & Grocery, LLC
(Fast Mart, LLC), which operated a convenience store and gas station in New
York doing business as Fast Mart (Fast Mart). Fast Mart had an ATM on the
premises and sold lottery tickets. Ghaleb Omar maintained four bank accounts at
HSBC Bank associated with Fast Mart: an operating account, a food stamp
account, an account for ATM transactions, and an account for lottery ticket sales
(collectively, Ghaleb Omar business bank accounts). The bank accounts were
designated “Ghaleb Omar dba Fast Mart”, with the exception of the lottery ticket
sales bank account, which was designated “Ghaleb Omar dba AA Express Mart”.2
Before 2008 petitioner worked at Fast Mart as a manager. While working
for his uncle, petitioner performed all the banking activities for the business and
had full access to the Ghaleb Omar business bank accounts.3
2
The record does not indicate whether the business name had changed from
AA Express Mart to Fast Mart.
3
Petitioner testified that he had access to the Ghaleb Omar business bank
accounts under a power of attorney because of his uncle’s old age. This testimony
is not corroborated by any credible evidence. Ghaleb Omar did not testify.
-4-
[*4] A. Petitioner’s Purchase and Operation of Fast Mart
In December 2007 petitioner purchased the Fast Mart convenience store and
gas station from Ghaleb Omar.4 Petitioner subsequently applied for various
operating licenses and permits and a tax identification number for the business,
which he received promptly. He also applied for a liquor license for the business
but did not obtain it until approximately March 2008. Petitioner, however,
continued to operate all aspects of the Fast Mart business from December 2007
using the existing liquor license.5
4
Although the record is not clear, we infer from the evidence that petitioner
purchased the convenience store and related assets, and not Ghaleb Omar’s
equitable interest in Fast Mart, LLC. The record is also unclear as to when
petitioner purchased Fast Mart. Petitioner testified that he had purchased Fast
Mart both in 2007 and in 2008. When asked to clarify, he testified that he had
purchased the business and had paid Ghaleb Omar for the business in December
2007. He further testified that he had paid Ghaleb Omar approximately $120,000
by cashier’s check for the business inventory in December 2007 but that he
“probably” had paid more money to his uncle later for the buildings, the inventory,
and the business. Respondent’s revenue agent also testified that during his audit
of Fast Mart petitioner had told him that the purchase had occurred in December
2007. The preponderance of the evidence suggests a finding that petitioner
purchased Fast Mart in December 2007.
5
Petitioner testified that he could not operate the business without the liquor
license and that Ghaleb Omar had remained the named owner and operator of Fast
Mart until petitioner had obtained the liquor license. This testimony is not
supported by any credible evidence in the record, and we are not convinced that it
is true.
-5-
[*5] The Ghaleb Omar business bank accounts were the only bank accounts
associated with Fast Mart until March 2008. Once petitioner had obtained the
liquor license in March 2008 he opened his own business bank accounts at HSBC
Bank. He opened an operating bank account, a food stamp bank account, a bank
account for ATM transactions, and a bank account for lottery ticket sales
(collectively, Fast Mart business bank accounts). These bank accounts were all
designated “Fast Mart Gas and Grocery” or “Fast Mart Gas and Grocery LLC”.
In 2008 Fast Mart accepted only cash and food stamps as forms of payment.
Fast Mart also operated the ATM and sold lottery tickets during 2008 and
generated income from these activities.6 Additionally, when tobacco companies
6
Petitioner testified that he received a commission of 75 cents for each ATM
transaction and estimated a commission of 3% of lottery ticket sales. Petitioner
further testified that he received a monthly commission check and a monthly
statement from the ATM collection agency showing the amounts of his
commission and that he either deposited the commission checks into a bank
account or endorsed them over to a vendor without depositing them. Petitioner
also testified that he deposited lottery ticket sale proceeds into the lottery bank
account; that New York State drafted the proceeds from the lottery bank account
every week; and that he received a commission check from New York State every
week. He estimated that he had received between $10,000 and $15,000 in lottery
ticket sales commissions in 2008. However, the revenue agent identified only
$2,432 of deposits from the New York lottery into the business bank accounts in
2008, comprising (1) $1,600 into the Fast Mart operating bank account on May 8,
2008; (2) $378 into the Ghaleb Omar lottery bank account on June 4, 2008; and
(3) $130 and $324 into the Fast Mart lottery bank account on December 3 and 31,
2008, respectively. Petitioner did not introduce the commission checks or
(continued...)
-6-
[*6] wanted to promote their cigarettes, Fast Mart sold the cigarettes at a
discounted price and received a check from the tobacco companies for the
difference between the discounted price and the original price. Petitioner
deposited at least some of these checks into the Ghaleb Omar and Fast Mart
business bank accounts.
Petitioner worked at Fast Mart in 2008 and received a weekly salary of
$400. He also paid one employee to work at the store. Petitioner paid both his
and his employee’s salary from cash that he took from the cash register. He also,
at least occasionally, paid vendors in cash. He deposited the remaining cash
weekly.
B. Continued Use of the Ghaleb Omar Business Bank Accounts
Even after petitioner had opened his new Fast Mart business bank accounts,
he continued to make substantial deposits into and withdrawals from the Ghaleb
Omar business bank accounts. The account activity before and after March 2008
was similar. For example, petitioner deposited several payments from tobacco
companies into the Ghaleb Omar ATM bank account on May 27, 2008. Petitioner
made payments to Norco Energy Corp. (Norco Energy), Fast Mart’s fuel supplier,
6
(...continued)
statements into evidence.
-7-
[*7] from the Ghaleb Omar operating bank account in similar amounts several
times a month from January until May 2008. Petitioner paid New York State
employment taxes from the Ghaleb Omar food stamp bank account on June 11,
2008. Further, New York State drafted funds from the Ghaleb Omar lottery bank
account until July 16, 2008.7
Petitioner’s testimony about the use of the Ghaleb Omar business bank
accounts, which is not corroborated by any credible evidence, was contradictory
and vague. We do not find it credible.8
7
The Ghaleb Omar ATM bank account and the Ghaleb Omar lottery bank
account were active until at least August 15, 2008. The Ghaleb Omar operating
bank account was active until at least May 8, 2008. The Ghaleb Omar food stamp
bank account was active until at least October 24, 2008.
8
Petitioner testified that before March 2008 he had performed all the
banking activities for the Ghaleb Omar business bank accounts, including making
deposits, using the power of attorney for his uncle unless his uncle needed to go to
the bank to approve a change or sign a document. Petitioner also testified that
Ghaleb Omar had closed the Ghaleb Omar business bank accounts in March 2008
but also testified: “I really don’t remember if he closed the account after I open
[sic] mine.” He further testified that there were no business-related deposits into
the Ghaleb Omar business bank accounts after March 2008; that he did not have
access to those bank accounts after March 2008; that he did not know whether his
uncle had deposited money into those bank accounts after March 2008; and that
Ghaleb Omar had received the benefit of any deposits into those bank accounts
after March 2008. When asked how his uncle would have accessed the money in
those bank accounts, petitioner stated: “I have no idea. Maybe I took the money
and transferred to him, or I withdraw [sic] and take the money and give it to him.
I’m not sure. My uncle was an old man, and I used to do the banking and
(continued...)
-8-
[*8] II. Petitioner’s Federal Income Tax Liability and Respondent’s
Examination
Petitioner hired an accountant to prepare his Federal income tax return for
the 2008 taxable year. Petitioner’s timely filed return included a Schedule C for
Fast Mart, which he operated as a sole proprietorship, reflecting gross receipts of
$5,181,251. Although petitioner testified that he had kept monthly ledgers and
had provided the accountant with income and expense summaries and invoices for
the business, he did not provide the accountant with any bank records showing
deposits into the business bank accounts, and the monthly ledgers and income and
expense summaries, if they exist, are not a part of the record.
Revenue Agent David Krysztof (Revenue Agent Krysztof) conducted an
examination of petitioner’s 2008 Federal income tax return. In January 2010 he
conducted an initial interview with petitioner during which he requested financial
books and records. After petitioner failed to provide the financial books and
records, Revenue Agent Krysztof summoned the 2008 bank records from HSBC
Bank. He subsequently conducted a bank deposits analysis with respect to the
eight business bank accounts.
8
(...continued)
everything for him.”
-9-
[*9] Revenue Agent Krysztof began his analysis of each bank account by listing
every deposit made into the bank account. He then identified the deposits that
appeared to be taxable, separately identifying cash deposits and deposits
attributable to certain vendors such as Frito Lay, Lorillard Tobacco Co., Phillip
Morris, and RJ Reynolds. In calculating the deposits, Revenue Agent Krysztof
listed and analyzed the withdrawals from each account and determined that certain
withdrawals or adjustments, e.g., cash used to replenish the ATM, lottery
payments transferred to the lottery authority, returned checks, and bank
adjustments, should be treated as nontaxable deposits.
Revenue Agent Krysztof summarized his bank deposits analysis as follows:
Total deposits Total deposits from
(excluding deposits tobacco companies
Account in column 3) and Frito Lay Withdrawals
Ghaleb Omar ATM $106,922 $1,089 $121,968
Fast Mart ATM 66,420 -0- 68,930
Ghaleb Omar operating 2,092,848 104 108,765
Fast Mart operating 4,141,080 1,495 172
Ghaleb Omar food stamp 64,210 531 23,706
Fast Mart food stamp 29,377 -0- 20,566
Ghaleb Omar lottery 58,751 1,774 67,376
Fast Mart lottery 48,555 1,119 37,262
Total 6,608,163 6,112 448,745
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[*10] Revenue Agent Krysztof then calculated the gross income/receipts from the
eight business bank accounts by adding up the withdrawals that he concluded
represented nontaxable deposits and subtracting that amount, along with New
York State sales tax payments of $100,705, from the total deposits. He therefore
calculated petitioner’s gross income/receipts to be $6,064,823.
Revenue Agent Krysztof determined that total deposits in 2008, less the
withdrawals that he treated as nontaxable deposits, into the eight bank accounts
constituted taxable income to petitioner. On May 21, 2013, respondent issued
petitioner a notice of deficiency in which respondent determined, inter alia, that
petitioner (1) had unreported gross income/receipts of $883,572, (2) was entitled
to an additional deduction of $697,472 for business expenses,9 and (3) was liable
for a $74,122 income tax deficiency and a $14,824.40 section 6662(a) accuracy-
related penalty for 2008.
9
These additional business expenses primarily represented amounts that
petitioner paid to Norco Energy as reflected in the bank records but did not claim
on his 2008 Federal income tax return. While cross-examining the revenue agent
at trial, petitioner claimed he had received a “report” from Norco Energy showing
expenses of $10,900,059, which is greater than the amount that respondent
allowed. However, this report was not introduced into evidence.
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[*11] OPINION
I. The Presumption of Correctness and the Burden of Proof
Generally, the Commissioner’s determination of a deficiency is presumed
correct, and the taxpayer bears the burden of proving that the determination is
improper. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
However, if a taxpayer produces credible evidence10 with respect to any factual
issue relevant to ascertaining the taxpayer’s liability for any tax imposed by
subtitle A or B of the Code and satisfies the requirements of section 7491(a)(2),
the burden of proof on any such issue shifts to the Commissioner. Sec.
7491(a)(1). Section 7491(a)(2) requires a taxpayer to demonstrate that he or she
(1) complied with the requirements under the Code to substantiate any item, (2)
maintained all records required under the Code, and (3) cooperated with
reasonable requests by the Secretary11 for witnesses, information, documents,
10
“Credible evidence is the quality of evidence which, after critical analysis,
the court would find sufficient upon which to base a decision on the issue if no
contrary evidence were submitted (without regard to the judicial presumption of
IRS correctness).” Higbee v. Commissioner, 116 T.C. 438, 442 (2001) (quoting
H.R. Conf. Rept. No. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995).
11
The term “Secretary” means the Secretary of the Treasury or his delegate.
Sec. 7701(a)(11)(B).
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[*12] meetings, and interviews. See also Higbee v. Commissioner, 116 T.C. 438,
440-441 (2001).
The U.S. Court of Appeals for the Ninth Circuit, to which an appeal in this
case would lie absent a stipulation to the contrary, see sec. 7482(b)(1)(A), (2), has
held that for the presumption of correctness to attach to the notice of deficiency in
unreported income cases, the Commissioner must establish some evidentiary
foundation connecting the taxpayer with the income-producing activity, see
Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979), rev’g 67
T.C. 672 (1977), or demonstrating that the taxpayer actually received unreported
income, Edwards v. Commissioner, 680 F.2d 1268, 1270-1271 (9th Cir. 1982). If
the Commissioner introduces some evidence that the taxpayer received unreported
income, the burden shifts to the taxpayer, who must establish by a preponderance
of the evidence that the unreported income adjustment was arbitrary or erroneous.
See Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), aff’g T.C.
Memo. 1997-97.
Petitioner purchased Fast Mart from his uncle in December 2007. Although
petitioner asserts various explanations for why some of the unreported income for
2008 is not attributable to him, see infra pp. 16-17, respondent has established the
necessary evidentiary foundation linking petitioner to the income-producing
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[*13] activity and to the business bank accounts for 2008. See Edwards v.
Commissioner, 680 F.2d at 1271 (“It is undisputed that * * * [the taxpayer] owned
an income-generating * * * business during the years in question. Therefore, the
Commissioner was entitled to rely on the presumption.”). The presumption of
correctness stands, and petitioner bears the burden of proving that respondent’s
determination is incorrect unless he demonstrates that the burden of proof should
shift to respondent under section 7491(a)(1) and (2). Petitioner does not contend
that he met the requirements of section 7491(a), and the record confirms that he
did not do so. Accordingly, the burden of proof remains on petitioner.
II. Bank Deposits Analysis
Gross income includes “all income from whatever source derived”,
including income derived from business. Sec. 61(a)(2). A taxpayer must maintain
books and records establishing the amount of his or her gross income. See sec.
6001; Petzoldt v. Commissioner, 92 T.C. 661, 686 (1989); sec. 1.446-1(a)(4),
Income Tax Regs. When a taxpayer fails to keep adequate books and records, the
Commissioner is authorized to determine the existence and amount of the
taxpayer’s income by any method that clearly reflects income. Sec. 446(b);
Petzoldt v. Commissioner, 92 T.C. at 693. The Commissioner may use indirect
methods, and he has latitude in determining which method of reconstruction to
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[*14] apply when a taxpayer fails to maintain adequate books and records.
Petzoldt v. Commissioner, 92 T.C. at 693. The Commissioner’s reconstruction of
a taxpayer’s income need only be reasonable in the light of all surrounding facts
and circumstances. Schroeder v. Commissioner, 40 T.C. 30, 33 (1963); see also
Giddio v. Commissioner, 54 T.C. 1530, 1533 (1970). The method of
reconstruction that the Commissioner uses is not invalidated solely because the
Commissioner’s income determination may not be completely correct. Halle v.
Commissioner, 175 F.2d 500, 502-503 (2d Cir. 1949), aff’g 7 T.C. 245 (1946);
DiLeo v. Commissioner, 96 T.C. 858, 868 (1991), aff’d, 959 F.2d 16 (2d Cir.
1992).
Respondent used the bank deposits method because petitioner failed to
maintain or produce for examination adequate books and records for the year at
issue. A bank deposit is prima facie evidence of income. DiLeo v. Commissioner,
96 T.C. at 868; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). The bank
deposits method of reconstruction assumes that all of the money deposited into a
taxpayer’s account is taxable income unless the taxpayer can show that the
deposits are nontaxable. See DiLeo v. Commissioner, 96 T.C. at 868; see also
Price v. United States, 335 F.2d 671, 677 (5th Cir. 1964). The Commissioner need
not show a likely source of the income when using the bank deposits method, but
- 15 -
[*15] the Commissioner must take into account any nontaxable items or deductible
expenses of which the Commissioner has knowledge. See Price, 335 F.2d at 677;
Tokarski v. Commissioner, 87 T.C. at 77. After the Commissioner reconstructs a
taxpayer’s income using the bank deposits method and determines a deficiency,
the taxpayer bears the burden of proving respondent’s analysis and deficiency
amount are erroneous. See Clayton v. Commissioner, 102 T.C. 632, 645 (1994);
DiLeo v. Commissioner, 96 T.C. at 883. The taxpayer may prove that the
Commissioner’s reconstruction of his income is in error, in whole or in part, by
proving that a deposit is nontaxable. See Clayton v. Commissioner, 102 T.C. at
645.
During the investigation Revenue Agent Krysztof asked petitioner for Fast
Mart’s business books and records, but petitioner never produced them. Revenue
Agent Krysztof subsequently summoned bank records directly from HSBC bank
and prepared a bank deposits analysis on which respondent’s determination of an
income tax deficiency is based. Respondent reasonably relied on the bank
deposits method to determine petitioner’s taxable income and the resulting income
tax deficiency. Because petitioner bears the burden of proving that respondent’s
bank deposits analysis is erroneous, petitioner must prove that respondent erred in
- 16 -
[*16] preparing it. See sec. 446(b); Petzoldt v. Commissioner, 92 T.C. at 693; sec.
1.446-1(b)(1), Income Tax Regs.
A. Whether the Bank Deposits Constituted Gross Income to Petitioner
Respondent determined that an analysis of the deposits into the Ghaleb
Omar business bank accounts and into the Fast Mart business bank accounts for
2008 shows that petitioner underreported his Schedule C gross income. Petitioner
disagrees.
Gross income includes all accessions to wealth over which a taxpayer has
complete dominion. See James v. United States, 366 U.S. 213, 219 (1961);
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955). We generally
have held that when the Commissioner uses the bank deposits method to
reconstruct a taxpayer’s income, the taxpayer’s gross income includes deposits
into all accounts over which the taxpayer has dominion and control, not just
deposits into accounts titled in the taxpayer’s name. See, e.g., Price v.
Commissioner, T.C. Memo. 2004-103; Cohen v. Commissioner, T.C. Memo.
2003-42; Woodall v. Commissioner, T.C. Memo. 2002-318; Woods v.
Commissioner, T.C. Memo. 1989-611, aff’d without published opinion, 929 F.2d
702 (6th Cir. 1991). A taxpayer has dominion and control over an account when
- 17 -
[*17] the taxpayer has the freedom to use its funds at will. See Rutkin v. United
States, 343 U.S. 130, 136-137 (1952).
Petitioner clearly had dominion and control over the Fast Mart business
bank accounts, which he opened in March 2008. The issue is whether petitioner
also had dominion and control over the Ghaleb Omar business bank accounts in
2008 such that the deposits into those accounts are properly attributable to him.
Petitioner advances two explanations as to why the deposits into the Ghaleb
Omar business bank accounts are not his income. Petitioner contends that the
deposits from January to March 2008 are not attributable to him because, although
he purchased the business from his uncle in 2007, he did not begin operating the
business until March 2008 because that is when he obtained a liquor license in his
name and opened the Fast Mart business bank accounts in his name. Although
petitioner handled all of the banking for the business during that time, he asserts
that before March 2008 he was acting solely under a power of attorney for his
uncle, who could not perform banking activities because of his advanced age.
Petitioner further asserts that any deposits into the Ghaleb Omar business bank
accounts after March 2008 are not attributable to him because he had opened his
own business bank accounts, he believed his uncle had closed the Ghaleb Omar
business bank accounts, he was not involved with any of the banking activities
- 18 -
[*18] with respect to those bank accounts after March 2008, and any deposits into
those bank accounts after March 2008 were not business related.
Petitioner did not introduce any documents such as withdrawal slips, copies
of endorsed checks, proof of signatory authority over the Ghaleb Omar business
bank accounts, or other credible evidence that would prove either that he did not
make the deposits or that he made them on behalf on his uncle pursuant to a
credible agreement to acquire the business. Petitioner purchased the business in
2007. He did not introduce a sales contract or other credible evidence to prove
that the gross receipts generated by the business after the purchase should be
attributed to his uncle. The record does not contain a copy of the alleged power of
attorney, and Ghaleb Omar did not testify.
Moreover, contrary to petitioner’s testimony,12 Ghaleb Omar’s business
bank accounts were not closed in March 2008. The Ghaleb Omar operating bank
account was active until at least May 8, 2008. The Ghaleb Omar ATM bank
account and the Ghaleb Omar lottery bank account were active until at least
August 15, 2008. The Ghaleb Omar food stamp bank account was active until at
least October 24, 2008. Each had frequent, substantial deposits and withdrawals
12
Petitioner testified both that his uncle’s bank accounts were closed in
March 2008 and that he did not know whether they were closed because he did not
have any involvement with the bank accounts after that time.
- 19 -
[*19] after March 2008 consistent with the operation of an ongoing business and
consistent with the deposits into and withdrawals from those bank accounts
between January and March 2008. Moreover, we decline to credit petitioner’s
testimony that his uncle’s advanced age prevented him from doing any banking
before March 2008 but that his uncle was responsible for all of the account
activity after that time. The frequency and nature of the deposits into and
withdrawals from the Ghaleb Omar business bank accounts clearly indicate that
petitioner continued to use those bank accounts for Fast Mart well after March
2008. We find that petitioner exercised dominion and control over the Ghaleb
Omar bank accounts during the entire 2008 year in his personal capacity, rather
than under a power of attorney for his uncle, and that the deposits into those
accounts are properly attributable to him.
B. Whether the Bank Deposits Analysis Is Erroneous
We next determine whether the revenue agent’s bank deposits analysis is in
error. The parties stipulated the amounts of the total deposits into each Ghaleb
Omar business bank account and each Fast Mart business bank account. However,
the stipulated totals did not include deposits into the bank accounts from Frito Lay
and the tobacco companies, which Revenue Agent Krysztof tracked in a separate
chart within his bank deposits analysis summary. See table supra p. 9. Because
- 20 -
[*20] the bank deposits analysis summary clearly indicates that the stipulated
totals did not include these deposits, we disregard the stipulations and find that,
consistent with the bank deposits analysis summary and the notice of deficiency,
the deposits into the business bank accounts totaled $6,614,275. See Cal-Maine
Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989); Jasionowski v.
Commissioner, 66 T.C. 312, 317-318 (1976).
Petitioner contends that the bank deposits analysis is inaccurate because (1)
the business had a greater cost of goods sold than respondent allowed, (2) the
business paid New York State sales tax in an amount greater than respondent
allowed, and (3) respondent improperly determined that the deposits into the ATM
and lottery bank accounts were taxable.
First, petitioner contends that he is entitled to a greater cost of goods sold
with respect to amounts allegedly incurred or paid to Norco Energy for fuel. In
performing the bank deposits analysis, the revenue agent allowed petitioner a cost
of goods sold with respect to Norco Energy expenses in an amount equal to the
total payments to Norco Energy in 2008 as reflected in the bank records. While
cross-examining the revenue agent at trial, petitioner claimed he had received a
“report” from Norco Energy showing expenses of $10,900,059, which is greater
than the amount that respondent allowed. However, this “report” was never
- 21 -
[*21] introduced into evidence, and nothing in the record proves the amount that
petitioner, as a cash basis taxpayer, actually paid to Norco Energy in 2008. To the
extent that petitioner claims he should receive a reduction of gross receipts for
amounts allegedly paid to Norco Energy with cash taken directly from the cash
register, petitioner failed to properly substantiate those expenses with any credible
evidence, see sec. 6001; sec. 1.6001-1(a), Income Tax Regs., and petitioner would
not be entitled to cost of goods sold in any event because any cash taken directly
from the register would not have been included in the revenue agent’s calculation
of gross income. Therefore, petitioner is not entitled to a cost of goods sold in an
amount greater than respondent allowed.
Petitioner similarly claims that he is entitled to a deduction for State sales
tax in an amount greater than respondent allowed. At trial petitioner provided for
the first time quarterly State and local sales and use tax returns for part of 2007
and for 2008, which he claims proved that he paid $132,000 in State sales tax for
2008. However, those documents were not admitted into evidence because they
were not exchanged in accordance with the Court’s standing pretrial order.
Petitioner has not properly substantiated this claimed expense, and he is not
entitled to a State sales tax deduction in a greater amount than respondent allowed.
See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
- 22 -
[*22] Petitioner also contends that respondent’s bank deposits analysis is
inaccurate with respect to the Ghaleb Omar and Fast Mart ATM and lottery bank
accounts.13 Revenue Agent Krysztof calculated the taxable income with respect to
these four bank accounts by tallying the total deposits into the bank accounts and
reducing the total deposits by the amounts of certain withdrawals from the bank
accounts. See supra pp. 9-10. Petitioner assigns error to this method. He
contends that (1) only the commissions that he earned on the ATM transactions
and the lottery ticket sales are taxable income and (2) his taxable income should
not be calculated with reference to the deposits into those bank accounts because
the deposited amounts belonged to the ATM company or the State of New York,
not to him.
Petitioner appears to be confused by the results of the bank deposits
analysis. The amounts of the withdrawals from the ATM bank accounts,
presumably paid over to the ATM company or used to replenish the ATM
machine, that Revenue Agent Krysztof treated as nontaxable deposits exceeded
the total deposits into the ATM bank accounts.14 Therefore, Revenue Agent
13
The deposits into the Ghaleb Omar business bank accounts are attributable
to petitioner. See supra p. 19.
14
Total deposits into and total withdrawals from the Ghaleb Omar ATM
(continued...)
- 23 -
[*23] Krysztof’s calculation of taxable income did not include any amounts
deposited into the ATM bank accounts; in fact, the excess withdrawals from the
ATM bank accounts offset deposits into other bank accounts, which benefited
petitioner. Moreover, petitioner has not identified any entry in the bank deposits
analysis that represented a commission from the ATM company and has not
provided any credible evidence of the amount of the commission.
With respect to the two lottery bank accounts, total deposits exceeded the
amounts of the withdrawals presumably paid to the State of New York by
$5,561.15 Of this amount, $2,893 represented payments from tobacco and cigarette
companies rather than proceeds from lottery ticket sales. Therefore, Revenue
Agent Krysztof calculated petitioner’s taxable lottery income deposited into the
14
(...continued)
bank account were $108,011 and $121,968, respectively. The deposits included
not just amounts from ATM transactions but payments from tobacco and cigarette
companies as well. Total deposits into and total withdrawals from the Fast Mart
ATM bank account were $66,420 and $68,930, respectively. See table supra p. 9.
15
The total deposits into and the total withdrawals from the Ghaleb Omar
lottery bank account were $60,525 and $67,376, respectively. The total deposits
into and the total withdrawals from the Fast Mart lottery bank account were
$49,674 and $37,262, respectively. The deposits included not just amounts from
the sale of lottery tickets but payments from tobacco and cigarette companies as
well. See table supra p. 9.
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[*24] lottery bank accounts to be $2,668.16 Even if we were to accept petitioner’s
contention that only his commissions from the lottery ticket sales should constitute
taxable income, petitioner estimated that his lottery ticket sales commissions
totaled between $10,000 and $15,000 for 2008. Petitioner is therefore arguing
against himself and has not shown that the bank deposits analysis was in error.
In conclusion, petitioner has not substantiated any additional cost of goods
sold or State sales tax deduction, and any alleged inaccuracy in respondent’s bank
deposits analysis is favorable to petitioner. Accordingly, we uphold respondent’s
bank deposits analysis and his determination of taxable Schedule C income
derived from that analysis.
III. Accuracy-Related Penalty Under Section 6662(a)
Section 6662(a) and (b)(1) and (2) authorizes the Commissioner to impose a
20% penalty on an underpayment of tax that is attributable to (1) negligence or
disregard of rules or regulations or (2) any substantial understatement of income
tax. Only one section 6662 accuracy-related penalty may be imposed with respect
to any given portion of an underpayment. New Phoenix Sunrise Corp. v.
16
This amount does not include the $1,600 payment from the New York
lottery deposited into the Fast Mart operating bank account on May 8, 2008. See
supra note 6.
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[*25] Commissioner, 132 T.C. 161, 187 (2009), aff’d, 408 F. App’x 908 (6th Cir.
2010); sec. 1.6662-2(c), Income Tax Regs.
The term “negligence” includes any failure to make a reasonable attempt to
comply with the provisions of the internal revenue laws, and the term “disregard”
includes any careless, reckless, or intentional disregard. Sec. 6662(c); sec. 1.6662-
3(b)(1) and (2), Income Tax Regs. “‘Negligence’ also includes any failure by the
taxpayer to keep adequate books and records or to substantiate items properly.”
Sec. 1.6662-3(b)(1), Income Tax Regs. Disregard of rules or regulations “is
‘careless’ if the taxpayer does not exercise reasonable diligence to determine the
correctness of a return position” and “is ‘reckless’ if the taxpayer makes little or
no effort to determine whether a rule or regulation exists, under circumstances
which demonstrate a substantial deviation from the standard of conduct that a
reasonable person would observe.” Id. subpara. (2); see also Neely v.
Commissioner, 85 T.C. 934, 947 (1985). An understatement means the excess of
the amount of the tax required to be shown on the return over the amount of the
tax imposed which is shown on the return, reduced by any rebate. Sec.
6662(d)(2)(A). An understatement is substantial in the case of an individual if the
amount of the understatement for the taxable year exceeds the greater of 10% of
the tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A).
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[*26] The accuracy-related penalty does not apply with respect to any portion of
the underpayment for which the taxpayer shows that there was reasonable cause
and that he or she acted in good faith. Sec. 6664(c)(1). The decision as to whether
a taxpayer acted with reasonable cause and in good faith is made on a case-by-case
basis, taking into account all of the pertinent facts and circumstances. See sec.
1.6664-4(b)(1), Income Tax Regs. “Circumstances that may indicate reasonable
cause and good faith include an honest misunderstanding of fact or law that is
reasonable in light of all of the facts and circumstances, including the experience,
knowledge, and education of the taxpayer.” Id.
The Commissioner bears the burden of production with respect to the
taxpayer’s liability for the section 6662(a) penalty and must produce sufficient
evidence indicating that it is appropriate to impose the penalty. See sec. 7491(c);
Higbee v. Commissioner, 116 T.C. at 446-447. Once the Commissioner meets his
burden of production, the taxpayer must come forward with persuasive evidence
that the Commissioner’s determination is incorrect or that the taxpayer had
reasonable cause or substantial authority for the position. See Higbee v.
Commissioner, 116 T.C. at 446-447.
Petitioner failed to report a large amount of his income on his 2008 Federal
income tax return and failed to maintain and/or provide to respondent adequate
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[*27] business books and records. See sec. 1.6662-3(b)(1), Income Tax Regs.
The resulting underpayment of petitioner’s Federal income tax is the product of
petitioner’s negligence and disregard of rules and regulations. Respondent has,
therefore, met his burden of producing evidence showing that a section 6662(a)
penalty for an underpayment of tax attributable to negligence or disregard of rules
or regulations is appropriate. Further, petitioner’s accountant who prepared the
2008 return did not testify, and petitioner’s testimony with respect to the records
and information that he provided to the accountant was confusing and vague. He
therefore has not produced any credible evidence that he acted with reasonable
cause and in good faith with respect to the underpayment. Accordingly, petitioner
is liable for a section 6662(a) penalty for an underpayment of tax attributable to
negligence or disregard of rules or regulations.
We have considered the parties’ remaining arguments, and to the extent not
discussed above, conclude those arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.