T.C. Memo. 2018-23
UNITED STATES TAX COURT
KEVIN E. RUSHING, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25029-15. Filed February 28, 2018.
P did not file income tax returns for the 2010, 2011, and 2012
taxable years. R prepared substitutes for returns, determining that P
had unreported income during those years, and issued a notice of
deficiency making certain determinations as to P’s income.
Held: R’s determinations are sustained because P has failed to
prove by a preponderance of the evidence that the determinations in
the notice of deficiency are incorrect.
James G. McGee, Jr., for petitioner.
Edwin B. Cleverdon and Horace Crump, for respondent.
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[*2] MEMORANDUM OPINION
LARO, Judge: This case arises out of respondent’s determinations as to
petitioner’s income for the 2010, 2011, and 2012 tax years. The case was
submitted fully stipulated for decision without trial. See Rule 122.1
Respondent determined deficiencies in petitioner’s Federal income tax, as
well as additions to tax under sections 6651(a)(1) and (2) and 6654 for the taxable
years and in the amounts as follows:
Additions to tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
2010 $7,012 $1,407.38 $1,563.75 $132.34
2011 28,578 6,280.20 Undetermined1 551.13
2012 54,084 12,168.90 Undetermined 969.66
1
For the sec. 6651(a)(2) additions to tax for the 2011 and 2012 taxable
years, the notice of deficiency states: “*computed at later date”. Per the Form
4549-A, Income Tax Examination Changes (Unagreed and Excepted Agreed),
accompanying the deficiency notice, as of June 23, 2015, the sec. 6651(a)(2)
additions to tax for 2011 and 2012 were $5,442.84 and $7,301.34, respectively.
We decide whether to sustain respondent’s determinations of unreported
income in the notice of deficiency upon which this case is based. As set forth in
this opinion, we uphold those determinations.
1
Unless otherwise indicated, section references are to the Internal Revenue
Code (Code) in effect at all relevant times. Rule references are to the Tax Court
Rules of Practice and Procedure.
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[*3] Background
I. Overview
The parties submitted this case fully stipulated under Rule 122. The
stipulation of facts is incorporated herein. Petitioner is a resident of Mississippi.
This case is appealable to the Court of Appeals for the Fifth Circuit absent
stipulation of the parties to the contrary.
II. Petitioner
Petitioner was married during each of the years at issue. During the same
period he was the sole member of Rushing Enterprises, LLC (LLC), which was in
the construction and insurance business under the business name “R.E. Mortgage
Services”.2 He was a signatory on multiple bank accounts in the LLC’s name with
Forum Credit Union (FCU) and Wells Fargo (WF).
III. Petitioner’s Undisputed Income
Petitioner during 2010 sold a desk and a chair for $2,300. He received
wages from the U.S. Army in 2010 and 2011 of $6,719 and $5,486, respectively.
He also received interest income in 2010 and 2011 of $1,094 and $428,
2
The parties have treated the LLC as petitioner’s sole proprietorship and
thus a disregarded entity. See sec. 301.7701-3(a) and (b)(1)(ii), Proced. & Admin.
Regs. We follow that lead.
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[*4] respectively.3 He received taxable IRA distributions, subject to the 10%
additional tax under section 72(t), in 2011 and 2012 of $3,550 and $59,333,
respectively. And during 2012 he received Social Security benefits of $6,903, the
taxable amount of which is agreed by the parties to be computational.
Petitioner had tax withholding for 2010 and 2011 of $757 and $666,
respectively.
IV. Disputed Income
During 2010, 2011, and 2012 there were unexplained deposits with respect
to the LLC’s FCU and WF bank accounts totaling $20,744.19, $80,525.69, and
$95,214.48, respectively. In the notice of deficiency respondent determined these
amounts to be reportable as income from self-employment on petitioner’s
Schedule C, Profit or Loss From Business, and subject to income tax; petitioner
disputes the inclusion of these amounts in his income.
3
We note that while respondent determined in the notice of deficiency that
petitioner had $1,096 of unreported interest income for 2010, the parties agreed in
their stipulation of facts that “[p]etitioner received interest income in 2010 … of
$1,094.00”. Because the parties state in their stipulation that the statements
contained therein “may be accepted as facts” in this case, we take the $1,094
amount as the correct statement of petitioner’s interest income for the 2010 taxable
year. See, e.g., Ford Motor Co. v. Commissioner, 102 T.C. 87, 89 n.3 (1994),
aff’d,
71 F.3d 209 (6th Cir. 1995); see also Humberson v. Commissioner,
T.C.
Memo. 1995-470,
70 T.C.M. (CCH) 886, 888 nn. 8 & 9 (1995).
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[*5] During 2010, 2011, and 2012 there were also rental checks deposited into
petitioner’s FCU bank accounts totaling $14,445, $11,950, and $1,522.16,
respectively. In the notice of deficiency, respondent determined that these
amounts reflect income to petitioner reportable on Schedule E, Supplemental
Income and Loss; petitioner disputes the inclusion of these amounts in his income.
V. Substitutes for Returns, Notice of Deficiency, and Petition
Petitioner failed to file Federal income tax returns for any of the years at
issue. Respondent on June 23, 2015, prepared under section 6020(b) substitutes
for returns for these years. In the absence of other records, respondent relied on
third-party reporting and petitioner’s bank deposits and cash payments to
determine his taxable income. On July 1, 2015, respondent issued the notice of
deficiency to petitioner with respect to his income tax liabilities for the 2010,
2011, and 2012 taxable years.
Petitioner’s last day to file a petition with this Court was September 29,
2015.4 The Court received his petition on October 2, 2015, but because it was
4
The notice of deficiency erroneously states that the last day for petitioner to
file a petition with this Court was September 28, 2015. The deficiency notice was
issued on July 1, 2015, after which petitioner had 90 days to file his petition. See
sec. 6213(a). This period expired on September 29, 2015, which was not a
Saturday, Sunday, or legal holiday in the District of Columbia. Respondent
concedes this error and agrees that petitioner’s petition is timely.
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[*6] mailed on September 29, 2015, and bore a corresponding U.S. Postal Service
postmark, it is treated as timely filed. See sec. 7502(a).
VI. Petitioner’s Concessions
Beyond the undisputed items of income set forth above, the parties agree
that petitioner’s entitlement to the now-defunct section 36A “making work pay”
credit for 2010 is computational. They also agree that petitioner is entitled to
claim the standard deduction using a filing status of married filing separately, with
a personal exemption deduction, for each of the years at issue. Finally, the parties
agree that the additions to tax under sections 6651(a)(1) and (2) and 6654 are
applicable for each of the years at issue.
Given the parties’ stipulated agreement as to various tax items (including
the parties’ stipulations that certain of those items are computational), the only
noncomputational determinations still outstanding are those as to: (1) all Schedule
E rents received for the three taxable years at issue; (2) all Schedule C gross
receipts for the taxable years at issue; and (3) so much of the $2,300 received by
petitioner during the 2010 taxable year for the sale of the desk and chair as
exceeds his basis in that property. Although not addressed expressly by any of the
parties’ stipulations, but as we deduce from respondent’s computations
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[*7] accompanying the notice of deficiency, the self-employment tax and corollary
self-employment tax deduction are computational.
Discussion
I. Overview
Generally, the Commissioner’s determination of a taxpayer’s liability for an
income tax deficiency is presumed to be correct, and the taxpayer bears the burden
of proving the determination improper by a preponderance of the evidence. See
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In certain instances,
where a taxpayer has introduced credible evidence with respect to any factual
issue relevant to ascertaining his tax liability, the burden of proof shifts to the
Commissioner, but only if the taxpayer has complied with substantiation
requirements, maintained all records required by the Code, and cooperated with
the Government’s reasonable requests for witnesses, information, documents,
meetings, and interviews. Sec. 7491(a). A case’s submission under Rule 122 does
not alter the burden of proof, or the requirements otherwise applicable with respect
to adducing proof, or the effect of a failure of proof. Rule 122(b).
Under section 61(a), gross income includes “all income from whatever
source derived”. All gains are covered except those specifically exempted.
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955). Furthermore,
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[*8] taxpayers are obligated to maintain records sufficient to establish their correct
tax liabilities. Sec. 6001. Where a taxpayer fails to do so, or if his records do not
clearly reflect income, then the Commissioner is authorized to reconstruct income
in accordance with a method clearly reflecting the full amount of income received.
The reconstruction need only be reasonable in the light of all surrounding facts
and circumstances. Petzoldt v. Commissioner, 92 T.C. 661, 686-687 (1989); see
also sec. 446(b). Self-serving declarations generally are not a sufficient substitute
for records. Weiss v. Commissioner,
T.C. Memo. 1999-17,
1999 WL 34813,
at *9.
II. The Parties’ Arguments
A. Petitioner’s Argument
Petitioner observes that respondent analyzed several bank accounts
containing otherwise unexplained deposits attributed to the LLC or to petitioner
personally and concluded that those amounts represent earned but unreported
income. Petitioner admits that respondent’s methodology appears on its face to
provide a causal connection between the deposits and petitioner’s gross income
such that respondent has met his burden of proof in establishing the presumption
of correctness. See, e.g., El v. Commissioner, 144 T.C. 140, 142-143 (2015); see
also sec. 6201(d). Petitioner maintains, however, that because of events that
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[*9] alienated him from access to his bank accounts, he was never able to realize
or benefit from any of the deposits made into those accounts for the tax years at
issue. Thus, petitioner contends, respondent’s determination of unreported income
cannot be sustained on its face as correct.
Petitioner argues that before this Court can turn to the question of the
existence and amounts of deficiencies in this case, respondent must come forward
with evidence of his determination’s reasonableness because petitioner has come
forward with evidence supporting a finding that the determination was arbitrary
and excessive. See Cebollero v. Commissioner, 967 F.2d 986 (4th Cir. 1992),
aff’g
T.C. Memo. 1990-618. Petitioner argues that during the tax years at issue he
was listed as 80% disabled by the Department of Veterans Affairs as a result of his
active-duty military service from 2004 to 2008. Petitioner maintains that he was
unable to work and had applied for full disability benefits. At the same time, he
asserts, he had prepared and signed a durable power of attorney naming his then
wife as his guardian and representative and authorizing her to become the chief
operating officer of the LLC. At some later point, he submits, he learned that his
wife had been wrongfully spending income generated by the LLC during the
period of his disability, while he never had access to those funds and did not
realize any benefit from them. Thus, he argues, because his wife had had complete
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[*10] control of and access to the bank accounts upon which respondent relied in
making his determination, she was the only party in receipt of the gross income for
the tax years at issue. Petitioner does not believe that his being a signatory on
those bank accounts is sufficient to establish his possession of those funds.
Because petitioner had no access to the gross income in question, he argues,
respondent’s notice of deficiency is arbitrary and should not be sustained by this
Court. Petitioner maintains that no causal connection can be drawn between him
and the gross income attributed to him by respondent and that respondent has not
established by a preponderance of the evidence that his determination should be
entitled to a presumption of correctness.
B. Respondent’s Argument
Respondent denies that the underlying notice of deficiency was arbitrary
and capricious and should not be afforded a presumption of correctness.
Respondent points out that petitioner essentially is asking the Court to look behind
the deficiency notice to examine the evidence respondent used to make his
determination. However, respondent argues, the Court will look behind a notice
of deficiency only in exceptional circumstances. See McDonald v. Commissioner,
T.C. Memo. 1996-87,
1996 WL 83311, at *6 (citing Weimerskirch v.
Commissioner,
596 F.2d 358, 361 (9th Cir. 1979), rev’g
67 T.C. 672 (1977),
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[*11] Riland v. Commissioner, 79 T.C. 185, 201 (1982), Jackson v.
Commissioner,
73 T.C. 394, 400-401 (1979), and Greenberg’s Express, Inc. v.
Commissioner,
62 T.C. 324, 327 (1974)), aff’d in part and remanded in part on
another issue,
114 F.3d 1194 (9th Cir. 1997). As relevant here, such
circumstances generally are limited to those where the Commissioner relied upon
a “‘naked’ assessment without any foundation whatsoever”, United States v. Janis,
428 U.S. 433, 441 (1976), or introduced no predicate evidence of unreported
income, e.g., Dellacroce v. Commissioner,
83 T.C. 269, 280 (1984). This is not
one of those cases, respondent believes, because there is a link between petitioner
and the income in question.
Respondent argues that petitioner has stipulated facts suggesting a
connection between him and the income determined by respondent to have been
earned by him. Specifically, petitioner has stipulated that (1) he received wages,
interest, IRA distributions, Social Security benefits, and proceeds from the sale of
a desk and chair; (2) rental checks were deposited into his checking account; and
(3) his wholly owned company had unexplained bank deposits. Moreover,
respondent maintains, the record in this case is devoid of evidence supporting
petitioner’s contention that his former wife misappropriated the income at issue.
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[*12] Indeed, respondent asserts, his determination that petitioner had income was
based on third-party information reporting and an examination of bank deposits.
Respondent notes that the bank deposit method for computing income, by which it
is assumed that all money deposited into a taxpayer’s bank account during a given
period constitutes taxable income (adjusted for known exclusions or deductions),
has long been sanctioned by the courts. See Clayton v. Commissioner, 102 T.C.
632, 645-646 (1994) (citing DiLeo v. Commissioner,
96 T.C. 858, 867-868
(1991), aff’d,
959 F.2d 16 (2d Cir. 1992)). Respondent further notes that bank
deposits are prima facie evidence of income, and the taxpayer has the burden of
showing that the determination is incorrect.
Id. at 645 (citing Tokarski v.
Commissioner,
87 T.C. 74, 77 (1986), and Estate of Mason v. Commissioner,
64
T.C. 651, 657 (1975), aff’d,
566 F.2d 2 (6th Cir. 1977)). As to the rental checks
deposited into petitioner’s account, respondent points out that petitioner has
stipulated the fact of their deposit and has not introduced any countervailing
evidence that those amounts should not be includible in income. As to the $2,300
of proceeds from the sale of a desk and chair, respondent argues that there is
nothing in the record to indicate that petitioner had any basis therein, and so the
full amount should be taxed as capital gain. Cf. secs. 1001, 1011, 1012. And as to
the unexplained deposits into bank accounts in the LLC’s name, respondent claims
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[*13] that petitioner has not introduced evidence or otherwise carried his burden
of proving that the deposits are not includible in income.
Ultimately, respondent argues, petitioner cannot rely on mere allegations
unsupported by the record, see Wages v. Commissioner, T.C. Memo. 2017-103, at
*10-*11, and his failure to introduce favorable evidence within his control
supports an inference that such testimony or documentation would not support his
position, see Wichita Terminal Elevator Co. v. Commissioner,
6 T.C. 1158, 1165
(1946), aff’d,
162 F.2d 513 (10th Cir. 1947).
III. Petitioner’s Burden of Proof
A. Clarifying Which Issues Remain Before the Court
As a preliminary matter, we reiterate that the only noncomputational
determinations not resolved by the parties’ stipulations are those as to: (1) all
Schedule E rents received for the taxable years at issue; (2) all Schedule C gross
receipts for the taxable years at issue; and (3) so much of the $2,300 received by
petitioner during the 2010 taxable year for the sale of the desk and chair as
exceeds his basis in that property.
On brief petitioner has argued the first two determinations but not the third.
In other words petitioner has not disputed on brief respondent’s determination that
the $2,300 received as proceeds from the sale of a desk and chair in 2010 should
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[*14] be treated in its entirety as long-term capital gain, nor has petitioner argued
or presented evidence of his basis in those items.
Because petitioner has not disputed the third determination, he is deemed to
have conceded it. See Thiessen v. Commissioner, 146 T.C. 100, 106 (2016)
(“[I]ssues and arguments not advanced on brief are considered to be abandoned.”).
Thus the only issues remaining before the Court are the propriety of respondent’s
determinations as to petitioner’s Schedule E rents and Schedule C gross receipts.
B. Whether Petitioner Met His Burden of Proof
This case ultimately hinges upon whether petitioner has satisfied his burden
of proof. Petitioner contends that he has come forward with evidence supporting a
finding that respondent’s determination in the notice of deficiency was arbitrary
and excessive, thereby shifting the burden to respondent of coming forward with
evidence of his determination’s reasonableness. Respondent, on the other hand,
argues that petitioner has not proffered any such evidence and that at any rate the
Court should not look behind the notice of deficiency. We agree with respondent
that petitioner has not borne his burden of proof.
As we observed above, the burden is on the taxpayer to prove by a
preponderance of the evidence that the notice of deficiency is incorrect. See Rule
142(a); Welch v. Helvering, 290 U.S. at 115. As the short background section of
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[*15] this opinion attests, the record in this case is sparse. All that is before the
Court is a four-page stipulation of facts (without any corresponding exhibits)
establishing that petitioner had received certain income during the tax years at
issue, that there were rental checks deposited into petitioner’s bank accounts, and
that there were unexplained deposits into the LLC’s bank accounts over which
petitioner had signature authority. While petitioner had sought to introduce as
evidence certain exhibits attached to his seriatim reply brief, we held by order that
those exhibits were inappropriate for inclusion with the brief and were to be
stricken from the record. One of those exhibits, petitioner’s affidavit, could not
have constituted evidence. See Rule 143(c). Petitioner’s other exhibits, while
supporting some of his statements made on brief, were not timely or appropriate
and would not have been dispositive on the issues in contention even were they
admissible.
The core of petitioner’s argument--that his former wife wrongfully gained
access to the bank accounts in question and had exclusive dominion over them
during the taxable years at issue--is unsupported by any evidence, whether a
stipulation or exhibit thereto or other appropriate source. Petitioner has advanced
this argument several times: in his petition, in his pretrial memorandum, and on
brief. However, in the absence of evidence, petitioner’s statements in his
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[*16] pleadings and filings cannot be treated as anything more than unsworn
allegations. See, e.g., Wages v. Commissioner, at *10-*11, *13; see also Rule
143(c).
As respondent points out, petitioner’s case suffers from the same defect as
that of the taxpayers in Wages: assertions made on brief that are not supported by
the record. Had petitioner timely offered further stipulations of facts, witness
testimony, or any other evidence, we would have been able to consider the ways in
which such evidence supported his contentions. In its absence, we can look no
further than the facts stipulated by the parties and summarized in this opinion’s
background section. Those facts do not controvert respondent’s determination in
the notice of deficiency of petitioner’s tax liabilities.
Because petitioner has not adduced any evidence tending to show
respondent’s determination of his tax liabilities to be improper, the burden of
proof remains with him. Cf. sec. 7491(a). And because of his failure to present
contradictory evidence, petitioner necessarily cannot prove that determination
improper by a preponderance of the evidence. Accordingly, the presumption of
correctness attached to respondent’s determination as set forth in the notice of
deficiency holds, and we must sustain it.
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[*17] IV. Conclusion
Petitioner’s claims proffer an unfortunate picture: because of his disability
as a result of his active-duty military service, his former wife assumed control over
the LLC and the bank accounts in question and misappropriated income therefrom.
However, there is no evidence in the record before us to substantiate these claims.
Thus we can go no further than to find that petitioner has failed to satisfy his
burden of proving by a preponderance of the evidence that the notice of deficiency
is incorrect. We sustain respondent’s determinations in principal part and direct
the parties to submit computations under Rule 155 reflecting (1) their stipulation
that petitioner had $1,094 of interest income for the 2010 taxable year (instead of
$1,096 as determined in the notice of deficiency) and (2) the final computations, if
available, of the section 6651(a)(2) additions to tax for the 2011 and 2012 taxable
years.
We have considered all of the parties’ arguments and, to the extent not
discussed above, conclude that those arguments are irrelevant, moot, or without
merit.
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[*18] To reflect the foregoing,
Decision will be entered under
Rule 155.
