*132 Decision will be entered for the petitioner.
Fraud -- Proof -- Unexplained Bank Deposits -- Statute of Limitations -- Penalties. -- Unexplained bank deposits involved herein are not clear and convincing proof of fraud.
*742 The Commissioner determined a deficiency of $ 1,488.02 in income tax and additions thereto of 50 per cent under section 293 (b) for fraud and $ 206.17 under section 294 (d) (1) (A) and (d) (2) for failure to file a Declaration of Estimated Tax and for substantial understatement of estimated tax, all for 1946. It is conceded that the statute of limitations bars the Commissioner unless the Commissioner proves that the return filed was false and fraudulent with intent to evade tax. The fraud issue alone is considered and decided herein.
FINDINGS OF FACT.
The petitioner filed his separate individual income tax return for 1946 with the collector of internal revenue for the second district of Texas on February 17, 1947. His wife, Edith, filed her separate individual return on that same day. They resided in Texas.
The petitioner reported wages of $ 2,950 and *133 taxes withheld thereon of $ 528.60 resulting in an overpayment of $ 118.60 which he asked to have refunded. Edith reported wages of $ 2,111.57 and taxes withheld thereon of $ 267.92 resulting in an overpayment of $ 1.92 which she asked to have refunded.
The Commissioner, in determining the deficiency, increased the petitioner's income by $ 6,176.99 and allowed a standard deduction of $ 500. He explained, "It has been determined from various bank *743 transactions that income disclosed on your return is understated by $ 6,176.99; and that amount is here added to income."
The petitioner and his wife made total deposits in their bank accounts of $ 22,826.26 during 1946, of which $ 6,000 represented transfers from one account to another or the deposit of borrowed money. The petitioner had no bank account until April 1946. The petitioner invested $ 5,200 in a liquor business in January 1946 and sold his interest therein for $ 5,800 in June 1946. Checks on the separate business bank account were issued to the petitioner during 1946 in the total amount of $ 7,326.23 (including one for the $ 5,800) of which $ 6,575 was deposited in the petitioner's bank account. Taxes of $ 796.52*134 were withheld from the wages of the petitioner and his wife for 1946 and refunds were made thereon of $ 120.03.
The Commissioner added the total bank deposits of the petitioner and his wife, the withdrawals from the business and the taxes withheld (a total of $ 30,949.01); subtracted the transfers and borrowings, the business withdrawals deposited by the petitioner, and the tax refunds (a total of $ 12,695.03); determined the community income to be the remainder, $ 18,253.98; and subtracted the income reported by the petitioner ($ 2,950) from one-half of the community income to arrive at the additional income of $ 6,176.99 which gave rise to the deficiency.
OPINION.
The Commissioner recognizes that he has the burden to prove by clear and convincing evidence that the petitioner's return for 1946 was false and fraudulent with intent to evade tax, and if he fails, his whole determination falls because of the statute of limitations. "It is respondent's contention that the difference between the reported income of $ 2,950 and the amount of all deposits, less the adjustments explained in Exhibit M, constitutes unreported income to the petitioner in the amount of $ 6,176.99 and that the*135 failure to report such income was due to fraud with intent to evade tax." He has attempted to prove that the petitioner and his wife had community income of $ 18,253.98 by showing "unexplained bank deposits" of $ 16,826.26, undeposited withdrawals from a business of $ 751.23, and net taxes paid by withholding of $ 676.49. The petitioner kept no books, and his only records were bank deposit slips, checks, and statements. The Commissioner was justified in resorting to other methods of determining the correct income and tax liability of the petitioner. However, the "unexplained bank deposits" involved herein, the principal and essential part of the Commissioner's case, are not in themselves clear and convincing evidence that the return was false and fraudulent with intent to evade tax. . The "unexplained deposits" here merely represent deposits *744 which are unexplained to the satisfaction or in the opinion of the revenue agents who examined them and the Commissioner, who adopted their conclusions. The unexplained deposits may, as the petitioner testified and the Commissioner has not disproven, have included*136 some funds which were held but not in the bank at the beginning of the year. The petitioner must have had some such funds in January to invest in the liquor business before he had a bank account. The unexplained deposits may have included money which did not represent income. See, however, The method does not take into account withdrawals which went into losses and the petitioner, a gambler, stated that he had losses in excess of his winnings. The petitioner did not satisfactorily explain the deposits, indeed he made little or no effort to explain them, but this failure of the petitioner does not make up the deficiency in the Commissioner's evidence to sustain the burden of proof of fraud placed upon him by statute. The Commissioner's case is wholly inadequate unless the unexplained bank deposits are proof of fraud. He has failed to prove fraud, the statute of limitations has run, there can be no deficiency and, consequently, no percentage additions.
Decision will be entered for the petitioner.