T.C. Memo. 2016-58
UNITED STATES TAX COURT
LUIS ALEJANDRO REY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10409-14. March 29, 2016.
Luis Alejandro Rey, pro se.
William J. Gregg and Maria F. Di Miceli, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LAUBER, Judge: With respect to petitioner’s Federal income tax for 2010,
the Internal Revenue Service (IRS or respondent) determined a tax deficiency of
$56,063, a late-filing addition to tax of $2,783 under section 6651(a)(1), and an
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[*2] accuracy-related penalty of $11,213 under section 6662(a).1 After
concessions, the sole issue for decision is whether the IRS properly determined
omissions from petitioner’s gross income by use of a bank deposits analysis. With
certain exceptions noted below, we will sustain respondent’s determinations.
FINDINGS OF FACT
The parties submitted a stipulation of facts at trial. We incorporate that
stipulation and the attached exhibits by this reference. Petitioner resided in Vir-
ginia when he filed his petition.
During 2010 petitioner worked as a consultant for the Inter-American De-
velopment Bank (IADB) performing computer-related services. His work entailed
some foreign travel, for example, to IADB meetings overseas. He maintained with
the IADB credit union several accounts, which formed the basis for respondent’s
bank deposits analysis. During 2010 petitioner also had a Virginia real estate
license and received in connection with his real estate activity income of $9,343,
which was reported by the payors on three Forms 1099-MISC, Miscellaneous
Income.
1
Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, as amended and in effect for the taxable year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure. We round all
monetary amounts to the nearest dollar.
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[*3] Petitioner filed his Form 1040, U.S. Individual Income Tax Return, as “mar-
ried filing separately.” He received an extension of time until October 15, 2011,
to file that return. Because that day was a Saturday, petitioner’s return was due for
filing on Monday, October 17. He filed the return on October 24, 2011, one week
late.
Petitioner attached to his Form 1040 a Schedule C, Profit or Loss From
Business, reporting income and expenses from his consulting business. He report-
ed gross receipts of $162,365 and total expenses of $150,181, thus showing a net
profit of $12,184. Upon examination of that return, the IRS allowed deductions in
the aggregate amount of $43,263 for legal and professional fees, taxes and licen-
ses, travel, meals, and home office expense. The IRS disallowed for lack of sub-
stantiation deductions in the aggregate amount of $106,918 for returns and allow-
ances, office expense, repairs and maintenance, and supplies. Petitioner produced
no substantiation for any of the latter expenses and conceded at trial that the IRS
had correctly disallowed Schedule C expenses in the amount of $106,918.
The IRS determined that petitioner had engaged in a separate Schedule C-2
business as a real estate professional in which he had earned a net profit of $9,343,
the aggregate amount reported on the Forms 1099-MISC. Petitioner conceded at
trial that he had earned taxable income in that amount from his real estate activity
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[*4] during 2010. The IRS determined that petitioner was liable for a late-filing
addition to tax under section 6651(a)(1) and an accuracy-related penalty under
section 6662(a). Petitioner conceded at trial that he was liable for both.
The only subject of dispute at trial concerned unreported income from peti-
tioner’s consulting business. The notice of deficiency determined, on the basis of
the revenue agent’s bank deposits analysis, that petitioner had omitted $70,671 of
income from this business.2 Petitioner contended that certain of the deposits the
agent treated as taxable should have been excluded as nontaxable.
At the close of trial the Court ordered one round of seriatim briefs. Respon-
dent timely filed his brief on January 19, 2016. Petitioner did not file a post-trial
brief.3
2
The revenue agent determined omitted income of $80,014 overall. But
because the agent allocated $9,343 of this sum to petitioner’s Schedule C-2 real
estate business, the omitted income allocable to petitioner’s Schedule C-1 con-
sulting business was reduced to $70,671.
3
When a party fails to file a brief on issues that have been tried, we may
consider those issues waived or conceded. See, e.g., Nicklaus v. Commissioner,
117 T.C. 117, 120 n.4 (2001); Stringer v. Commissioner, 84 T.C. 693, 704-708
(1985), aff’d without published opinion, 789 F.2d 917 (4th Cir. 1986). We will
exercise our discretion not to do so here.
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[*5] OPINION
I. Burden of Proof
The IRS’ determinations in a notice of deficiency are generally presumed
correct. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The U.S.
Court of Appeals for the Fourth Circuit, the appellate venue here absent stipula-
tion to the contrary, has held that the usual presumption of correctness applies in
omitted-income cases where the IRS employs a “reasonable method of determin-
ing income,” such as the bank deposits method. Williams v. Commissioner, 999
F.2d 760, 763-764 (4th Cir. 1993), aff’g T.C. Memo. 1992-153. Other courts have
required the Commissioner in unreported income cases to establish a “minimal
evidentiary showing” connecting the taxpayer with the income-producing activity.
Blohm v. Commissioner, 994 F.2d 1542, 1548-1549 (11th Cir. 1993), aff’g T.C.
Memo. 1991-636. If that threshold showing were required here, respondent met it
by introducing bank records establishing that petitioner received (as he concedes)
unreported income from his consulting business. Petitioner thus bears the burden
of proving by a preponderance of the evidence that respondent’s determinations
are arbitrary or erroneous. See Williams, 999 F.2d at 763 (citing Helvering v.
Taylor, 293 U.S. 507, 515 (1935)); Tokarski v. Commissioner, 87 T.C. 74 (1986).
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[*6] II. Analysis
Section 61(a) defines gross income as “all income from whatever source de-
rived,” including income derived from business. A taxpayer must maintain books
and records establishing the amount of his or her gross income. See sec. 6001.
When a taxpayer does not keep accurate books of account, the IRS may determine
his income “under such method as, in the opinion of the Secretary, does clearly
reflect income.” Sec. 446(b); see Petzoldt v. Commissioner, 92 T.C. 661, 693
(1989). And where the taxpayer has unexplained bank deposits, the IRS may em-
ploy the bank deposits method to estimate his income. Estate of Hague v. Com-
missioner, 132 F.2d 775 (2d Cir. 1943), aff’g 45 B.T.A. 104 (1941); Estate of
Mason v. Commissioner, 64 T.C. 651, 657 (1975), aff’d, 566 F.2d 2 (6th Cir.
1977). The IRS has great latitude in reconstructing a taxpayer’s income, and the
reconstruction “need only be reasonable in light of all surrounding facts and cir-
cumstances.” Petzoldt, 92 T.C. at 687.
Bank deposits are prima facie evidence of income. The bank deposits meth-
od starts with the presumption that all money deposited in a taxpayer’s bank ac-
count during a given period constitutes taxable income. Price v. United States,
335 F.2d 671, 677 (5th Cir. 1964). This presumption is rebutted to the extent the
deposits are shown to include nontaxable amounts, and “the Government must
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[*7] take into account any non-taxable source * * * of which it has knowledge.”
Ibid.; DiLeo v. Commissioner, 96 T.C. 858, 868 (1991), aff’d, 959 F.2d 16 (2d
Cir. 1992).
After the IRS reconstructs a taxpayer’s income and determines a deficiency,
the taxpayer bears the burden of proving that the IRS’ implementation of the bank
deposits analysis was unfair or inaccurate. See Clayton v. Commissioner, 102
T.C. 632, 645 (1994); DiLeo, 96 T.C. at 871-872. The taxpayer may do so by
showing (among other things) that certain deposits came from nontaxable sources.
See Clayton, 102 T.C. at 645. Nontaxable sources include funds attributable to
inter-account bank transfers and returned checks, as well as “loans, gifts, inheri-
tances, or assets on hand at the beginning of the taxable period.” Burgo v. Com-
missioner, 69 T.C. 729, 743 n.14 (1978) (quoting Troncelliti v. Commissioner,
T.C. Memo. 1971-72).
The revenue agent employed the bank deposits method to reconstruct peti-
tioner’s income. He used petitioner’s account statements (which are part of the
record) to prepare schedules listing all deposits. After eliminating nontaxable
receipts of which he had knowledge, the revenue agent prepared, and provided to
petitioner, schedules that initially determined unreported income in excess of
$150,000.
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[*8] In response petitioner provided the revenue agent with a spreadsheet listing
$114,170 of alleged nontaxable deposits. This list, which was included in the
revenue agent’s report, comprised inter-account transfers of $81,120, a returned
check of $2,050, an alleged loan of $1,000 from a coworker, and an alleged loan
of $30,000 from New York Life. The revenue agent agreed that all of these de-
posits, with the exception of the $30,000 item, should be treated as nontaxable and
revised his bank deposits analysis accordingly. This reduced the unreported in-
come from petitioner’s Schedule C-1 consulting business to $70,671.
Petitioner subsequently supplied the revenue agent with a revised spread-
sheet listing $118,081 of alleged nontaxable deposits. This list, which was intro-
duced into evidence at trial, was substantially identical to the previous list, except
that it included two additional items: a deposit of $689, which petitioner alleged
was a “transfer from coworker account,” and a deposit of $3,222, which petitioner
alleged was “per diem paid by IADB for overseas expenses.” The revenue agent
declined, for lack of substantiation, to treat either of these additional items as a
nontaxable deposit.
At trial petitioner did not identify, or provide any evidence concerning, any
other deposits that he alleged to be nontaxable. Respondent conceded during trial
that petitioner had supplied enough documentation concerning the loan from New
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[*9] York Life to treat this $30,000 deposit as nontaxable. And respondent con-
ceded in his opening brief that petitioner’s unreported income should be reduced
by $689 because the deposit to which petitioner refers had been counted twice.
This leaves the proper treatment of the $3,222 deposit as the only issue for
this Court to decide. Petitioner contends that this sum constituted reimbursement
from IADB for expenses he incurred during overseas travel. We agree with re-
spondent that petitioner did not carry his burden of proof. He produced no evi-
dence concerning IADB’s reimbursement policy, no evidence that the $3,222
constituted reimbursement, and no evidence substantiating that he incurred $3,222
of expenses to which the alleged reimbursement corresponded.
We accordingly find that petitioner received during 2010 unreported income
from his Schedule C-1 consulting business of $39,982, that is, $70,671 as deter-
mined in the notice of deficiency minus ($30,000 + $689). On the basis of peti-
tioner’s concessions, we sustain respondent’s other adjustments to his 2010 in-
come and expenses and conclude that he is liable for a late-filing addition to tax
and an accuracy-related penalty in amounts to be determined. To reflect the
foregoing,
Decision will be entered under
Rule 155.