T.C. Memo. 1996-528

UNITED STATES TAX COURT

KHOSROW GHADIRI AND TURAN MIRHADY GHADIRI, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14817-95. Filed November 27, 1996.

Ps operated the Maple Press and Acacia Press print

shops during 1986 and 1987. Ps operated the Maple

Press, Acacia Press, and Print Technology print shops

during 1988. During all 3 years, Ps deposited the

proceeds from the print shops into bank accounts. 

1. Held: Ps must include in income the portion

of Maple Press, Acacia Press, and Print Technology bank

deposits which did not represent gross receipts

reported, insufficient funds checks, bank debits, or

interaccount transfers.

2. Held, further, R is not barred by the period of

limitation from assessing tax for Ps' 1988 taxable year.

3. Held, further, Ps are liable for additions to

tax under sec. 6651(a)(1), I.R.C., for all years in

issue.

4. Held, further, Ps are liable for additions to

tax under sec. 6653(a)(1)(A) and (B), I.R.C., for 1986

and 1987, and under sec. 6653(a)(1), I.R.C., for 1988.
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Jerold A. Reiton and Alan James Pinner, for petitioners.

Andrew P. Crousore, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Khosrow Ghadiri (Mr. Ghadiri) and Turan

Mirhady Ghadiri (Mrs. Ghadiri) petitioned the Court to 

redetermine respondent's determination of the following Federal

income tax deficiencies and additions thereto:

 Additions to Tax 

 Sec. Sec. Sec. Sec.

Year Deficiency 6651(a)(1) 6653(a)(1)(A) 6653(a)(1) 6653(a)(1)(B)

1986 $227,086 $56,771 $11,354 --- 50% of the 

 interest due 

 on $227,086

1987 143,674 35,919 7,184 --- 50% of the 

 interest due 

 on $143,674

1988 33,251 8,313 --- $1,663 ---

Respondent later adjusted these deficiencies to the amounts

stated below. Respondent conceded that the additions to tax

should be adjusted to reflect the revised deficiencies. 

 Additions to Tax 

 Sec. Sec. Sec. Sec.

Year Deficiency 6651(a)(1) 6653(a)(1)(A) 6653(a)(1) 6653(a)(1)(B)

1986 $129,159 $56,771 $11,354 --- 50% of the 

 interest due 

 on $268,589

1987 75,428 35,919 7,184 --- 50% of the 

 interest due 

 on $260,736

1988 41,969 8,313 --- $1,663 --- 

Following concessions, we must decide:
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1 During the trial, petitioners' counsel presented testimony

of petitioners and their acquaintances. We found much of their

testimony to be vague, elusive, and uncorroborated. Under the

circumstances, we are not required to, and we do not, rely on

that testimony to support petitioners' positions. See Ruark v.

Commissioner, 449 F.2d 311, 312 (9th Cir. 1971), affg. per curiam

T.C. Memo. 1969-48; Clark v. Commissioner, 266 F.2d 698, 708-709

(9th Cir. 1959), affg. in part and remanding T.C. Memo. 1957-129.

1. Whether, and to what extent, amounts that petitioners

deposited into their print shop bank accounts are includable in

their 1986, 1987 and 1988 gross income. We hold petitioners must

include $449,306, $401,226, and $332,147 in gross income for

their 1986, 1987, and 1988 taxable years, respectively.

2. Whether respondent is barred from assessing tax for

petitioners' 1988 taxable year. We hold she is not.

3. Whether petitioners are liable for additions to tax

under section 6651(a)(1) for their 1986, 1987, and 1988 taxable

years. We hold they are.

4. Whether petitioners are liable for additions to tax

under section 6653(a)(1)(A) and (B) for their 1986 and 1987

taxable years, and under section 6653(a)(1) for their 1988

taxable year. We hold they are.

Unless otherwise indicated, section references are to the

Internal Revenue Code applicable to the years in issue. Rule

references are to the Tax Court Rules of Practice and Procedure. 

Dollar amounts are rounded to the nearest dollar.

FINDINGS OF FACT1
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Some of the facts have been stipulated and are so found. 

The stipulations and the exhibits attached thereto are

incorporated herein by this reference. Petitioners resided in

San Jose, California, when they filed their petition.

During petitioners' 1986, 1987, and 1988 taxable years, they

owned and operated print shops known as "Maple Press" and "Acacia

Press". During petitioners' 1988 taxable year, they also owned

and operated a print shop known as "Print Technology". 

Petitioners did not keep books or records for any of these print

shops. During 1986 and 1987, petitioners' only sources of income

were Maple Press, Acacia Press, and Mr. Ghadiri's teaching

position, which paid him less than $5,000 per year. During 1988,

petitioners' only sources of income were Maple Press, Acacia

Press, Print Technology, and Mr. Ghadiri's teaching position,

which paid him less than $5,000.

Petitioners reported Mr. Ghadiri's teaching income on their

tax returns for the respective years. Petitioners hired Peter A.

Balbiani, a certified public accountant, to file their Federal

income tax returns for 1986, 1987, and 1988. For 1986, 1987, and

1988, the record contains no copies of deposit slips for the bank

accounts into which the gross receipts of petitioners' print

shops were deposited.

During 1986, petitioners made the following deposits and

reported on their tax return the following gross receipts from 

Maple Press and Acacia Press:
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 Gross

 Total Receipts 

 Entity Account Name Deposits Reported

Maple Press Bank of America $512,037 $125,199

Acacia Press Bank of America 94,124 - 0 -

Total 606,161 125,199

In 1986, Maple Press received checks totaling $7,765 which were

not honored on presentment due to insufficient funds (ISF checks)

and had miscellaneous bank debits totaling $15,299. Acacia Press

received ISF checks totaling $1,282. The following transfers

occurred during 1986:

Entity Receiving Transfer

 Transfer Maple Acacia

 From Press Press Total

 Mrs. Ghadiri $1,730 - 0 - $1,730

 Maple Press - 0 - $2,410 2,410

 Acacia Press 3,170 - 0 - 3,170

 4,900 2,410 7,310

During 1987, petitioners made the following deposits and

reported on their tax return the following gross receipts from

Maple Press and Acacia Press:

 Gross

 Total Receipts

 Entity Account Name Deposits Reported

Maple Press Bank of America $277,574 $126,267

Bank of the West 169,241 - 0 -

Acacia Press Bank of America 360,236 - 0 -

Bank of the West 16,622 - 0 -

 Total 823,673 126,267
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In 1987, Maple Press received ISF checks totaling $2,619 and had

miscellaneous bank debits totaling $18,090. Acacia Press

received ISF checks totaling $35,897. The following transfers

occurred during 1987:

 Entity Receiving Transfer

 Transfer Maple Acacia

 From Press Press Total

Mrs. Ghadiri $156,784 $65,455 $222,239

Maple Press - 0 - 6,066 6,066

Acacia Press 11,290 - 0 - 11,290

 Total 168,074 71,521 239,595

For their 1987 taxable year, petitioners received but did not

report interest income of $21.

During 1988, petitioners made the following deposits and

reported on their tax return the following gross receipts from 

Maple Press, Acacia Press, and Print Technology:

 Gross

 Total Receipts

 Entity Account Name Deposits Reported

Maple Press Bank of the West $304,087 $150,044

Acacia Press Bank of the West 176,803 - 0 -

Print Technology Wells Fargo Bank 48,368 - 0 -

 Total 529,258 150,044

In 1988, Maple Press received ISF checks totaling $6,533. Acacia

Press received ISF checks totaling $7,886. The following

transfers occurred during 1988:

 Entity Receiving Transfer 

 Transfer Maple Acacia Print

 From Press Press Technology Total
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Mrs. Ghadiri $360 - 0 - $1,600 $1,960

Maple Press - 0 - $10,922 - 0 - 10,922

Print 

Technology 13,725 6,050 - 0 - 19,775

 Total 14,085 16,972 1,600 32,657

For their 1988 taxable year, petitioners received but did not

report interest income of $9.

Respondent used a bank deposits analysis to reconstruct

petitioners' income for 1986, 1987, and 1988. Respondent

determined that petitioners' print shops' checking accounts had

total deposits of $485,974, $394,648, and $295,085 for 1986,

1987, and 1988, respectively. The notice did not specifically

mention "Maple Press" even though the deficiencies determined in

the notice of deficiency for 1986, 1987, and 1988 took into

account only gross receipts from Maple Press. Following

discussions with petitioners, respondent adjusted petitioners'

deficiencies to include in their gross income gross receipts from

Acacia Press and Print Technology. Although respondent included

the gross receipts from additional stores in making her

revisions, the deficiencies for 1986 and 1987 are lower, as a

result of respondent's adjustments, than originally determined

because respondent gave petitioners credit for additional

inter-account transfers and ordinary and necessary business

expenses.

Mr. Ghadiri received a bachelor's degree in electrical

engineering at the University of California at Berkeley, a
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master's degree in electrical engineering at San Jose State

University, and a doctoral degree in electrical engineering from

the University of California at Berkeley and San Jose State

University. Mrs. Ghadiri received a bachelor's degree in German

at San Jose State University and a master's degree in math and

German at San Jose State University. Mr. Ghadiri testified that

he received approximately $680,000 in loans from acquaintances

during the years in question. During the trial, Mr. Ghadiri's

acquaintances stated that they had lent him money. Each

acquaintance that testified claimed to have canceled checks

regarding the loan but failed to bring the checks to trial.

Petitioners filed their joint 1986, 1987, and 1988 Federal

income tax returns on November 15, 1990. On August 2, 1993,

petitioners and respondent executed a Form 872-A, Special Consent

to Extend the Time to Assess Tax, extending the period of

limitation on assessment for petitioners' 1988 taxable year only.

On February 8, 1995, petitioners forwarded to respondent a Form

872-T, Notice of Termination of Special Consent to Extend the

Time to Assess Tax, with respect to petitioners' 1988 taxable

year. Respondent received the Form 872-T on February 10, 1995. 

The subject notice of deficiency was mailed to petitioners on

May 12, 1995, more than 90 days after respondent received Form

872-T. 

OPINION

A. Bank Deposits Analysis
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2 Respondent asserted in her opening brief that petitioners

failed to report gross receipts totaling $333,714 for 1988, but

respondent made a mathematical error in that computation. This

$1,567 discrepancy does not affect our holding.

3 Petitioners argue that respondent has the burden of proof

with respect to any income earned by Acacia Press for 1986 and

1987 because Acacia Press was not specifically mentioned in the

notice of deficiency and is a new matter. We are persuaded that

the gross receipts in question must be included in petitioners'

income for 1986 and 1987 regardless of which party has the burden

of proof.

Respondent asserts that the deposits into the Maple Press,

Acacia Press, and Print Technology bank accounts constituted

unreported income to petitioners in the amounts of $449,306,

$401,205, and $332,138 for their 1986, 1987, and 1988 taxable

years, respectively.2 Petitioners argue that a majority of the

deposits were interaccount transfers or loans, rather than

income. We find that the evidence supports respondent.3

Section 61(a) defines gross income as "all income from

whatever source derived." Sec. 61(a)(1). This definition

includes all "accessions to wealth, clearly realized, and over

which the taxpayers have complete dominion." Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 431 (1955); Hawkins v. United

States, 30 F.3d 1077, 1079 (9th Cir. 1994). When a taxpayer

keeps no books or records for his or her business, the

Commissioner generally may recompute his or her income under any

method that the Commissioner determines clearly reflects income. 

Sec. 446(b); Commissioner v. Hansen, 360 U.S. 446, 467 (1959);

Cole v. Commissioner, 586 F.2d 747, 749 (9th Cir. 1978), affg.
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64 T.C. 1091 (1975); Meneguzzo v. Commissioner, 43 T.C. 824, 831

(1965). The Commissioner may use any method that is reasonable

in light of the facts and circumstances of the particular case. 

Giddio v. Commissioner, 54 T.C. 1530, 1532-1533 (1970). 

When the taxpayer's records are incomplete, the Commissioner

may look to the bank deposits method as evidence of income. 

Nicholas v. Commissioner, 70 T.C. 1057, 1064 (1978); Estate of

Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d

2 (6th Cir. 1977). The propriety of this method is well 

established. Parks v. Commissioner, 94 T.C. 654, 658 (1990);

Nicholas v. Commissioner, supra at 1064; see also Estate of Mason

v. Commissioner, supra at 656-657; Harper v. Commissioner,

54 T.C. 1121, 1129 (1970). 

In this case, respondent used the bank deposits method to

reconstruct petitioners' income. Respondent determined that

petitioners received and failed to report gross income totaling

$449,306 during their 1986 taxable year. She determined this

amount by deducting $125,199 in gross receipts reported, $9,047

in ISF checks, $15,299 miscellaneous bank debits, and $7,310 in

interaccount transfers from the $606,161 in total bank deposits

during 1986. Respondent further determined that petitioners

received and failed to report gross income totaling $401,226

during their 1987 taxable year. She determined this amount by

deducting $126,267 in gross receipts reported, $38,516 in ISF

checks, $18,090 in miscellaneous bank debits, and $239,595 in
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interaccount transfers from the sum of the $823,673 in total bank

deposits and $21 in unreported interest during 1987. Respondent

further determined that petitioners received and failed to report

gross income totaling $332,147 during their 1988 taxable year. 

She determined this amount by deducting $150,044 in gross

receipts reported, $14,419 in ISF checks, and $32,657 in

interaccount transfers from the sum of the $529,258 in total bank

deposits and $9 in unreported interest during their 1988 taxable

year.

 Mr. Ghadiri claimed that he received approximately $680,000

in loans during the years in question. However, his allegation

was unsupported by documentary evidence, and we found this

uncorroborated testimony unpersuasive. Mr. Ghadiri testified

that acquaintances made loans to him during the years in

question. Although Mr. Ghadiri's acquaintances testified at

trial as to their loans to him, they produced no evidence of any

indebtedness. We found this testimony unpersuasive. We note,

for example, that each acquaintance claimed to have canceled

checks regarding the loan but failed to bring the checks to

trial.

 Mr. Ghadiri testified that he made no interest payments on

any of the alleged "loans". Mr. Ghadiri kept no record of any

money that was lent to him. Moreover, Mr. Ghadiri testified that

all payments that Maple Press and Acacia Press received were

deposited in their respective bank accounts. Mr. Ghadiri
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admitted that he is unsure of the exact dates when "loans" were

made and how much of the "loan" proceeds he deposited in his

personal and business bank accounts. 

We find no probative evidence that any of the deposits were

loans. We are persuaded that the record supports respondent's

computation of petitioners' income for each of the 3 years

involved, based on the bank deposits. 

B. Period of Limitation

Respondent admits that the 3-year period of section 6501(a) 

has expired with respect to assessing tax for petitioners' 1988

taxable year. Respondent argues, however, that the 6-year period

of limitation of section 6501(e)(1) applies because petitioners'

1988 tax return omitted more than 25 percent of their gross

income for that year. Petitioners argue that respondent has

failed to show that they underreported their income by more than

25 percent because respondent's bank deposits analysis does not

meet her burden of proof. We agree with respondent.

Generally, the period of limitation for assessment of tax is

3 years from the date a taxpayer's return is filed. Sec.

6501(a). If, however, a taxpayer omits from gross income an

amount in excess of 25 percent of the gross income reported on

his or her tax return, the statutory period for assessment is

extended to 6 years. Sec. 6501(e)(1)(A). 

For the 6-year period to apply, respondent must prove by a

preponderance of the evidence that: (1) Petitioners omitted from
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gross income an amount in excess of 25 percent of the amount of

gross income reported on their 1988 Federal income tax return,

and (2) the omitted income was properly includable in gross

income. See Burbage v. Commissioner, 82 T.C. 546, 553 (1984),

affd. 774 F.2d 644 (4th Cir. 1985); Bardwell v. Commissioner,

38 T.C. 84, 92-93 (1962), affd. 318 F.2d 786 (10th Cir. 1963);

Cruz v. Commissioner, T.C. Memo. 1990-594; Hittleman v.

Commissioner, T.C. Memo. 1990-325, affd. without published

opinion 945 F.2d 409 (9th Cir. 1991). Respondent must introduce

affirmative evidence to meet this burden of proof. The Court has

stated that "the existence of bank deposits, although not

explained or accounted for in a satisfactory manner, does not of

itself show that the sums deposited were or were not income." 

Jones v. Commissioner, 29 T.C. 601, 619 (1957). However, if bank

deposits are connected to a likely source of income, the Court

may find that they are income. Holland v. United States, 348

U.S. 121 (1954); Gong Yok Tsun Chin v. Commissioner, T.C. Memo.

1994-54. 

As stated above, respondent has determined petitioners'

unreported income for their 1988 taxable year by using the bank

deposits method. The size and frequency of the cash deposits

indicate a regular source of cash consistent with the operation

of a cash-intensive business, such as print shops. Mr. Ghadiri

testified that he deposited all of his proceeds from the print

shops into the bank accounts. However, he admitted that he
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failed to report any income from the operation of Acacia Press

and Print Technology for 1988. Petitioners reported no gross

receipts for 1988 other than $150,044 from Maple Press. During

the year, however, they made deposits of $304,087, $176,803, and

$48,368 into the bank accounts of Maple Press, Acacia Press, and

Print Technology, respectively and they failed to report interest

income of $9.

 Petitioners omitted items which constituted more than

25 percent of their gross income on their 1988 Federal income tax

return and which should have been included in income. After

deducting $150,044 in gross receipts reported, $14,419 in ISF

checks, and $32,657 in interaccount transfers, petitioners'

unreported gross receipts of $332,147 represented more than a

25-percent omission. As determined above, respondent's bank

deposits analysis proves that these unreported gross receipts are

properly includable in gross income. We find that respondent has

proved a likely source of income, namely the print shop business,

and that petitioners' claim of a nontaxable source, in the form

of loans, is not creditable. We hold that respondent is not

barred from assessing tax and additions to tax against

petitioners for their 1988 taxable year. In so holding, we note

that Kavoosi v. Commissioner, T.C. Memo. 1986-190, a case relied

upon heavily by petitioners to support a contrary holding, is

distinguishable on its facts.

C. Additions to Tax Under Section 6651(a)(1)
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Respondent determined additions to petitioners' 1986, 1987

and 1988 income tax under section 6651(a)(1), asserting that

petitioners failed to timely file Federal income tax returns for

those years. Petitioners filed all of these returns in 1990. 

Thus, in order to avoid this addition to tax, petitioners must

prove that their failure to file timely was: (1) Due to

reasonable cause and (2) not due to willful neglect. Sec.

6651(a); Rule 142(a); United States v. Boyle, 469 U.S. 241,

245 (1985); Buelow v. Commissioner, 970 F.2d 412, 415 (7th Cir.

1992), affg. T.C. Memo. 1990-219; Church of Scientology v.

Commissioner, 823 F.2d 1310, 1321 (9th Cir. 1987), affg. 83 T.C.

381 (1984); Catalano v. Commissioner, 81 T.C. 8 (1983), affd.

without published opinion sub nom. Knoll v. Commissioner, 735

F.2d 1370 (9th Cir. 1984). A failure to file a timely Federal

income tax return is due to reasonable cause if the taxpayer

exercised ordinary business care and prudence and, nevertheless,

was unable to file the return within the prescribed time. Sec.

301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect means a

conscious, intentional failure to file or reckless indifference. 

United States v. Boyle, supra at 245.

Petitioners claim that they are not liable for the addition

to tax under section 6651(a)(1) because their accountant advised

them that they had no obligation to file returns for 1986, 1987

or 1988. We find it implausible that petitioners' accountant

would advise petitioners that they did not have an obligation to
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file a tax return when their stores earned hundreds of thousands

of dollars a year. Even if their accountant did make such a

statement, it would not have been reasonable for petitioners to

rely in good faith upon such an erroneous suggestion. Although a

taxpayer may have "reasonable cause" when relying on an

accountant concerning questions of law, "The failure to make a

timely filing of a tax return is not excused by the taxpayer's

reliance on an agent, and such reliance is not 'reasonable cause'

for a late filing under §6651(a)(1)." Id. at 252 (Brennan, J.,

concurring); see also Church of Scientology v. Commissioner,

supra at 1310. Accordingly, we find that petitioners did not

have reasonable cause for their failure to file timely tax

returns, and that they are liable for these additions to tax

under section 6651(a)(1). 

D. Additions to Tax Under Section 6653(a)(1)(A) and (B)

Respondent further determined that petitioners' underpayment

of their 1986, 1987, and 1988 tax is attributable to negligence. 

For 1986 and 1987, section 6653(a)(1)(A) imposes an addition to

tax equal to 5 percent of the underpayment if any part of the

underpayment is attributable to negligence, and section

6653(a)(1)(B) imposes an addition to tax equal to 50 percent of

the interest payable on the portion of the underpayment

attributable to negligence. For 1988, section 6653(a) imposes an

addition to tax equal to 5 percent of the portion of the

underpayment that is attributable to negligence.
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Negligence includes a lack of due care or a failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances. Zmuda v. Commissioner, 731 F.2d 1417, 1422

(9th Cir. 1984), affg. 79 T.C. 714 (1982); Neely v. Commissioner,

85 T.C. 934, 947 (1985). Failure to file a timely Federal income

tax return is evidence of negligence. Emmons v. Commissioner,

92 T.C. 342, 349 (1989), affd. 898 F.2d 50 (5th Cir. 1990). 

Petitioner bears the burden of proving that respondent's

determination of negligence is erroneous. Rule 142(a); Bixby v.

Commissioner, 58 T.C. 757, 791-792 (1972). 

Petitioners allege that they were not negligent because

they: (1) Were born outside the United States, (2) have never

taken any business courses as part of their education, and

(3) relied on their tax preparer. We are not persuaded that any

of these allegations disproves respondent's determination with

respect to these additions to tax. The foreign birthplace of a

taxpayer is not sufficient to constitute "reasonable cause". See

Jamieson v. Commissioner, T.C. Memo. 1995-550. Although

petitioners did not take any business courses, their business

experience should have alerted them to the requirement of filing

a Federal income tax return. Mr. Ghadiri operated three print

shops during the years in question. In fact, he expanded his

business from two to three print shops during 1988. Mr. Ghadiri

received a doctoral degree in electrical engineering, and

Mrs. Ghadiri received a master's degree in both German and math. 
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Although an accountant signed petitioners' tax returns for the

years in issue as the preparer, the record does not show that

petitioners relied on their accountant's advice in failing to

file their returns timely and failing to report large amounts of

gross income. Petitioners' tax preparer never testified as to

his tax advice, and petitioners offered no evidence, other than

Mr. Ghadiri's testimony, concerning his tax advice. We find

Mr. Ghadiri's testimony to be unpersuasive on this issue. 

For the reasons stated above, we conclude that the entire

underpayment of tax for each year is due to negligence. 

Accordingly, we sustain respondent's determination on this issue.

We have considered all arguments made by petitioners for 

contrary holdings and, to the extent not discussed above, find

them to be without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.