TAX COURT OPINION

Case: Ronald W. McClelland
Docket Number: 13221-11
Judge: Gustafson
Opinion Type: bench
Filed: 11/07/2012
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 JMP RONALD W. MCCLELLAND, ET AL., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent 13221-11. ) ) ) ) ) Docket No. 15301-10, ) ) ) ) ) ) ) ) ) O R D E R Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at Columbia, South Carolina, on September 11, 2012, 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 Columbia, South Carolina, 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. November 7, 2012 SERVED Nov 07 2012 Capital Reporting Company McClelland Bench Opinion 9-11-2012 3 1 2 3 4 5 BENCH OPINION BY JUDGE DAVID GUSTAFSON RONALD W. MCLELLAND V. COMMISSIONER DOCKET NOS.: 15301-10 and 13221-11 SEPTEMBER 11, 2012 THE COURT: The Court has decided to render 6 oral Findings of Fact and Opinion in this case, and 7 the following represents the Court's oral Findings of 8 Fact and Opinion. The oral Findings of Fact and 9 Opinion shall not be relied on as precedent in any 10 other case. 11 This Bench Opinion is made pursuant to the 12 authority granted by section 7459(b) of the Internal 13 Revenue Code of 1986, as amended, and Rule 152 of the 14 15 16 Tax Court Rules of Practice and Procedure. By notices of deficiency dated April 29, 2010, and March 14, 2011, respondent determined 17 deficiencies in the Federal income tax of Petitioner 18 Ronald W. McClelland for the years 2004, 2006, 2007, 19 and 2008, plus additions to tax. For the reasons 20 explained hereafter, we will sustain those 21 deficiencies in part. 22 Trial of this case was conducted on 23 September 10, 2012, in Columbia, South Carolina. 24 Petitioner represented himself, and respondent was 25 represented by J. Craig Young. Petitioner Ronald W. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company McClelland Bench Opinion 9-11-2012 4 1 McClelland was the only witness. The parties' 2 Stipulation of Facts was admitted into evidence, 3 along with its Exhibits 1-J through 12-J. Also 4 admitted without objection were Exhibits 13-J, 14-P, 5 6 7 8 15-R, 16-R, and 17-R. We find the following facts: Findings Mr. McClelland did not file tax returns for the years 2003 through 2008. (Stip. 2.) He was 9 married in those years. The IRS determined, and Mr. 10 McClelland eventually stipulated, that he received 11 wages of $18,577 in 2006, $45,038 in 2007, and 12 13 14 15 16 $50,000 in 2008. (Stip. 11-16.) Mr. McClelland deposited into his bank non- wage amounts totaling $203,957 in 2004, $21,044 in 2006, and $5,775 in 2007. Of the amounts deposited in 2004, the IRS conceded before trial that $23,120 17 constituted non-taxable amounts, and at trial Mr. 18 McClelland proved, and the IRS admitted, that 19 additional amounts of $102,340 and $29,741 were 20 non-taxable loan proceeds. (See Ex. 14-P; Ex. 4-J, 21 entries for 03/24 and 10/27.) The remainder of the 22 deposits for 2004--$48,756-- was income. At trial 23 Mr. McClelland did not dispute that the amounts he 24 deposited in 2006 and 2007 were income. 25 On March 29, 2010, the IRS prepared (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company McClelland Bench Opinion 9-11-2012 5 1 2 substitutes for return ("SFRs") for 2004, 2006, and 2007(Exs. 10-J, 11-J, and 12-J) and issued its notice 3 of deficiency for those three years on April 29, 4 2010; and Mr. McClelland timely filed his petition in 5 docket No. 15301-10 on July 6, 2010. On January 10, 6 7 8 2011, the IRS prepared an SFR for 2008 (Ex. 17-R) and issued its notice of deficiency for 2008 on March 14, 2011; and Mr. McClelland timely filed his petition in 9 docket No. 13221-11 on June 6, 2011. Mr. McClelland 10 11 12 13 14 resided in Pennsylvania when he filed the petitions in this suit. (Stip. 1.) Opinion The IRS's determination is presumed correct, and the taxpayer bears the burden to prove any 15 to the income the IRS determined and to prove his 16 entitlement to any deductions he claims. Rule 17 18 19 142(a); Welch v. Helvering, 290 U.S. 111, 115(1933). I. Bank deposit income After the parties' respective concess1ons, 20 the only disputed income issue was $48,756 of the 2004 21 bank deposits. The taxpayer bears the responsibility 22 to maintain books and records that are sufficient to 23 establish his income. See sec. 6001; 26 C.F.R. sec. 24 1.446-1(a) (4). Mr. McClelland did not do so. 25 When a taxpayer fails to keep adequate (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company McClelland Bench Opinion 9-11-2012 6 1 2 3 4 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 5 U.S. 121, 130-132(1954). A bank deposit is prima 6 7 8 9 facie evidence of income, and bank deposits analysis is a method of income reconstruction that this Court has long accepted. Tokarski v. Commissioner, 87 T.C. 74,77 (1986) . When a taxpayer keeps inadequate or 10 incomplete books or records and has large bank 11 deposits, the IRS is not acting arbitrarily or 12 capriciously by resorting to the bank deposits 13 method. See DiLeo v. Commissioner, 96 T.C. 858, 867- 14 15 16 17 18 868 (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 that the deposits are not taxable. 19 The IRS need not show a likely source of the income 20 when using the bank deposits method, but the IRS must 21 take into account any nontaxable items or deductible 22 expenses of which the IRS has knowledge. See Price 23 v. United States, 335 F.2d 671,677 (5th Cir. 1964). 24 25 At trial Mr. McClelland contended that this $48,756 remainder was derived from gifts--$5,000 in (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company McClelland Bench Opinion 9-11-2012 1 cash from his now-deceased parents and multiple gifts 2 of $5,000 or $6,000 from friends whom he refused to 3 identify. He did not attempt to identify any 4 particular bank deposit with any of these alleged 5 gifts. He stated that these friends had given him 6 money to invest, but he stated that the investments 7 were for his own benefit, not theirs. In the absence 8 of any corroboration of any kind whatsoever, whether 9 testimonial or documentary, and in the absence of any 10 further detail or explanation as to why friends would 11 give such large gifts, Mr. McClelland's contentions 12 about these gifts are not credible. We therefore 13 hold that the $48,756 remainder of the 2004 bank 14 deposits was taxable income. 15 16 17 II. Self-employment tax If the taxable bank deposit income discussed above in part I was income from self-employment (as 18 defined in section 1402 (a)), then Mr. McClelland is 19 liable for self-employment tax on that income, pursuant 20 to section 1401(a). The IRS's notices of deficiency 21 determined that the bank deposit income was from 22 self- employment; the IRS asserted the issue in its 23 pretrial memorandum; and when the Court queried Mr. 24 McClelland at the opening of trial to determine which 25 issues were still in dispute, Mr. McClelland affirmed (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company McClelland Bench Opinion 9-11-2012 8 1 2 3 4 5 6 that he disputed the asserted liability for self- employment tax. The Court observed that liability for self-employment tax would turn on the nature of the income. However, Mr. McClelland's only evidence as to the nature of the income was his uncorroborated testimony that the unexplained deposits were gifts. 7 Since this testimony was not credible, Mr. McClelland 8 did not carry his burden to prove that the income was 9 other than self-employment income. The IRS's 10 determination of that liability is therefore 11 12 13 14 sustained, subject to recomputation. III. Additions to tax A. Failure to file Section 6651(a) (1) authorizes the imposition 15 of an addition to tax for failure to file a timely 16 return unless the taxpayer proves that such failure is 17 due to reasonable cause and is not due to willful 18 neglect. See United States v. Boyle, 469 U.S. 19 241,245 (1985). The parties' stipulation establishes 20 that Mr. McClelland filed no returns the years at 21 22 23 issue and satisfies respondent's burden of production under section 7491(c). The addition applies "unless it is shown 24 that such failure is due to reasonable cause and not 25 due to willful neglect". The record shows no basis (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company McClelland Bench Opinion 9-11-2012 1 for a claim of reasonable cause. Mr. McClelland 2 offers no plausible reason for his non-filing. For 9 3 4 5 6 7 8 9 10 11 12 2004 he makes only the implausible assertion that his income was gifts, and he admits receiving wages in 2006, 2007, and 2008. He failed to timely file his Forms 1040 for the years at issue, and we hold that he is liable for the addition to tax under section 6651(a) (1) for those years. B. Failure to pay Section 6651(a) (2) imposes an addition to tax for failure to pay the amount of tax shown on a return. The addition to tax under section 6651(a) (2) 13 applies only when an amount of tax is shown on a 14 15 16 17 18 19 return. Cabirac v. Commissioner, 120 T.C. 163,170 (2003) . The Commissioner's burden of production with respect to the section 6651 (a) (2) addition to tax requires him to introduce evidence that a return showing the taxpayer's tax liability was filed for the year in question. Wheeler v. Commissioner, 127 T.C. 20 200,210(2006), aff'd. 521 F.3d 1289 (10th Cir. 2008). 21 22 In a case such as this one where the taxpayer did not timely file returns for the tax 23 years at issue, the Commissioner must introduce 24 evidence that a valid substitute for return was made 25 pursuant to section 6020(b). Sec. 6651(g) (2). The (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company McClelland Bench Opinion 9-11-2012 10 1 2 SFRs in evidence satisfy section 6020(b), and respondent has therefore satisfied his burden of 3 production under section 7491(c) with respect to the 4 5 section 6651(a) (2) addition to tax. As with the addition under 6651(a) (1), the 6 addition under section 6651(a) (2) applies "unless it 7 8 is shown that such failure is due to reasonable cause and not due to willful neglect". Mr. McClelland does 9 not claim reasonable cause for non-payment, and the 10 record shows no basis for such a claim. Accordingly, 11 we hold that Mr. McClelland is liable for the 12 addition to tax under section 6651(a) (2) for the 13 years at issue. (Of course, the calculation of this 14 addition to tax will take into account all tax 15 withholding shown in the record. See, e.g., Exhibits 16 7-J through 9-J. ) 17 18 C. Failure to pay estimated tax Section 6654 imposes an addition to tax on an 19 individual taxpayer who underpays his estimated tax. 20 A taxpayer has an obligation to pay estimated tax for 21 22 a particular year if he has a "required annual payment" for that year. Sec. 6654 (d) . A "required 23 annual payment" is defined in section 6654 (d) (1) (B) 24 in pertinent part, as "the lesser of (i) 90 percent 25 of the tax shown on the return for the taxable year (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company McClelland Bench Opinion 9-11-2012 11 1 2 3 4 (or, if no return is filed, 90 percent of the tax for such year)", or (ii) if the individual filed a return for the preceding taxable year, then "100 percent of the tax shown on the return of the individual for the 5 preceding taxable year." Thus, respondent's burden 6 of production under section 7491(c) requires him to 7 produce, for each year for which the addition is 8 asserted, evidence that the taxpayer had a required 9 annual payment under section 6654 (d); and in order to 10 11 12 13 14 15 do so he must demonstrate the tax shown on the taxpayer's return for the preceding year or that the taxpayer filed no return. For the four years at issue-- 2004, 2006, 2007, and 2008--the "preceding taxable year[s]" are 2003, 2005, 2006, and 2007. In conjunction with the finding that Mr. McClelland had 16 unreported taxable income in each of the years at 17 18 issue, the parties' stipulation that Mr. McClelland filed returns for none of the years 2003 through 2008 19 meets the Commissioner's burden of production to show 20 that Mr. McClelland is liable for the section 6654 21 addition for all of the years at issue. (Again, the 22 calculation of this addition to tax will take into 23 account all tax withholding shown in the record.) 24 The IRS's notice of deficiency is upheld in 25 part, to the extent shown above. So that the liability (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company McClelland Bench Opinion 9-11-2012 can be recalculated, decision will be entered pursuant 12 to Rule 155. This concludes the Court's oral Findings of 1 2 3 4 Fact and Opinion in this case. (Whereupon, at 11:32 a.m., the bench opinion in the above-entitled matter was for the day.) 5 6 7 8 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2012