TAX COURT OPINION

Case: Mufutau Sanni
Docket Number: 13190-13
Judge: Gustafson
Opinion Type: bench
Filed: 04/29/2014
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 MUFUTAU SANNI, Petitioner, v. CMS ) ) ) ) Docket No. 13190-13. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORD ER Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at Washington, D.C., on April 18, 2014, containing his oral findings of fact and opinion, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Gustafson at Washington, D.C., containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. April 29, 2014 SERVED Apr 30 2014 Capital Reporting Company 3 1 Bench Opinion by Judge David Gustafson 2 April 1 , 2014 3 Mufutau Sanni v. Commissioner 4 5 6 Docket No. 13190-13 THE COURT:| The Court has decided to render the following as its oral Findings of Fact and 7 Opinion in this case. This Bench Opinion is made 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Tax Court Rule 152; and it shall not be relied on as precedent in any other case. By a notic of .deficiency dated March 15, 2013 (Ex. 3-J), respondent determined deficiencies in the Federal income tax of petitioner Mufutau Sanni for the five years 2006 through 2010, plus additions to tax and penalties. The parties have settled many of the adjustments r flected in the notice of deficiency, leaving, as the only issues for us to decide, whether certain bank deposits are taxable I income (as responden contends) or are instead non- taxable loan proceed(cid:0)541(as petitioner contends) and whether a portion ofiincome that petitioner realized by reason of third parties' payments to petitioner's lender is deductible as interest. For the reasons explained below, we hold that the bank deposits are 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 largely taxable income, and that a portion of the third-party payments is deductible interest. Trial of this case was conducted on April 16 and 17, 2014, in Washington, D.C. Petitioner was represented by Thomas F. DeCaro, Jr., and respondent was represented by Archana Ravindranath and Scott A. Hovey. FINDINGS OF FACT 1 2 3 4 5 6 7 8 9 Mr. Sanni's real estate activity 10 11 12 13 14 15 16 During the years at issue Mr. Sanni worked in the real estate industry. He owned a number of properties and engaged in several businesses. (Stip. 9-13.) He entered ihto various transactions with Lateefat Coker. Mr. Sanni did not keep books and records for any of his business activities in these years. (Stip. 50.) 17 Mr. Sanni's loans and bank deposits 18 19 20 21 22 23 24 25 Mr. Sanni commingled funds from all of his businesses into several bank accounts. (Stip. 13.) To conduct his businesses, Mr. Sanni borrowed money from banks and several private lenders, including Douglas Goldsten and others. Some of the deposits into his accounts were the non-taxable proceeds of loans, and the parties have settled the character of some such deposits. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Of the deposits whose taxable or non- taxable character was still in dispute at the time of trial, there were only two non-taxable amounts: first, a $4,000 deposit made on February 27, 2007 (which was a loan made by NE Hunt Place, Inc.; see Ex. 35-J, p. 201; Ex. 58-P, check #1010); and second, a $10,000 deposit made on October ) 2010 (which was a draw on a loan made by James Schneider; see Ex. 35- J, p. 220; Ex. 41-J, p. 670). None of the deposits that are derived from (or that are alleged to have been derived from) Lateefat Coker were proved to be loan proceeds, and we therefore find that they were taxable income. Except for the amounts stipulated by respondent to be non-taxable, none of the deposits that are derived from (or that are alleged to have been derived from) Douglas Goldsten or his entity 17 General Funding Corporation were proved to be loan 18 19 20 21 proceeds, and we therefore find that they were taxable income. Payoff of Goldsten loan On October |31, 2008, Douglas Goldsten lent 22 Mr. Sanni $510,830. (Stip. 31.) By October 27, 23 24 25 2009, the balance of that debt with interest had grown to $629,461. OEx. 49-J.) Mr. Sanni paid off that loan with the proceeds from two real estate 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 sales. (Ex. 47-J.) Mr. Sanni arranged that, in the closings of those sales, proceeds totaling the amount that he owed to Mr. Goldsten would be paid directly to Mr. Goldsten in order to pay off the loan. Those proceeds were taxable income to Mr. Sanni, but this arrangement made it seem that the payment was not apparently attributable to him. Of the total paid off (i.e., $629,461), the interest component was $118,631, Tax returns and audit Mr. Sanni filed Federal income tax returns for the years 2007 and 2009, but did not report all his income on those returns, and he filed no Federal income tax returns for the years 2006, 2008, and 2010. (Stip. 2-7). The IRS commenced an examination of Mr. Sanni. It identified at least some of the banks in 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 which he maintained accounts, obtained from those 19 20 21 22 23 24 25 banks monthly statements for those accounts, performed an analysis of the deposits that were made into those accounts for the years at issue, and determined that many of the deposits were taxable income that Mr. Sanni had not reported. (Stip. 55; Ex. 35-J). On March 15, 2013, the IRS issued its 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company notice of deficiency for those five years; and Mr. Sanni timely filed his petition on June 11, 2013. Our record does not show where Mr. Sanni resided when 7 he filed his petition. OPINION The IRS's determination is presumed correct, and the taxpayer bears the burden to prove any adjustment to the income the IRS determined and to prove his entitlement to any deductions he claims. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). I. Bank deposit income The taxpayer bears the responsibility to 1 2 3 4 5 6 7 8 9 10 11 12 13 14 maintain books and records that are sufficient to 15 16 17 18 19 20 21 22 23 24 25 establish his income. See sec. 6001; 26 C.F.R. sec. 1.446-1(a)(4). Mr. Sanni did not do so. When a taxpayer fails to keep adequate books and records, the Commissioner is authorized by section 446 to determine the existence and amount of the taxpayer's income by any method that clearly reflects income. See; Holland v. United States, 348 U.S. 121, 130-132 (1954). A bank deposit is prima facie evidence of income, and a bank deposits analysis is a method of income reconstruction that this Court has long accepted. Tokarski v. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 Commissioner, 87 T.C. 74, 77 (1986). When a taxpayer keeps inadequate or incomplete books or records and has large bank deposits, the IRS is not acting 4 arbitrarily or capriciously by resorting to the bank 8 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 deposits method. See DiLeo v. Commissioner, 96 T.C. 858, 867-868 (1991), aff'd, 959 F.2d 16 (2d Cir. 1992). 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 th t the deposits are not taxable. The IRS need not show a likely source of the income when using the bank deposits method, but the IRS must take into account any nontaxable items or deductible expenses of which the IRS has knowledge. See Price v. United States, 335 F.2d 671, 677 (5th Cir. 1964). At trial Mr. Sanni claimed that certain deposits were non-taxable amounts. However, this claim was largely undocumented. For example, he contended that very s,ubstantial amounts were loans from Ms. Coker, but there were no loan agreements whatsoever between the two of them. Though both testified, neither stated what interest rates the supposed loans bore nor the period over which they would be paid. A so-called "journal" in which Ms. I 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Coker supposedly kept track of loans to Mr. Sanni was an indecipherable jumble, not even in chronological order. Although Mr. Sanni evoked testimony from Ms. Coker to ostensibly show that a March 2006 deposit of $249,000 was the proceeds of a loan by Ms. Coker to Ms. Sanni, she insisted that she made the loan by signing over to Mr. Sanni a check payable to her, which he deposited into his account. However, the check by which she allegedly made the loan was not for $249,000 but was for a different amount -- $267,933. . (Ex. 4 -P, p. 829.) Her testimony was not at all credible. Supposed loan proceeds from Mr. Goldsten (other than thòse the IRS stipulated as non-taxable) depend on the uncorroborated testimony of Mr. Sanni. 16 Only his testimony identifies some of I the deposits as 17 18 19 20 21 22 23 24 25 being from Mr. Goldsten; and where canceled checks do show that others came from Mr. Goldsten, only Mr. Sanni's testimony supports the idea that they were loan proceeds (as opposed to taxable payments for services, of which the evidence includes several examples). Except for the $4,000 loan from NE Hunt Plant, Inc., and the $10,000 draw from James Schneider, Mr. Sanni did not credibly explain and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 substantiate that any of the disputed deposits were loan proceeds or from any other non-taxable source. We therefore hold that they were taxable income. II. Interest on loan payoff At trial Mr. Sanni conceded that he paid off his loan from Mr. Goldsten (then totaling $629,461) by having the proceeds from two real estate sales paid directly to Mr. Goldsten. Mr. Sanni 1 seemed to concede, through counsel, that this payoff constituted taxable income to him -- as it certainly does -- but he contended that he was entitled to a deduction of the interest component (i.e., $118,631). Respondent then conceded that this amount did constitute interest and was deductible from Mr. Sanni's income. The computation of Mr. Sanni's liability should incorporate these concessions. So that the liability can be recalculated, decision will be entered pursuant to Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 2:27 p.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com