Opinion ID: 782888
Heading Depth: 2
Heading Rank: 5

Heading: Bank Deposit Analysis

Text: 82 In examining Kanter's 1982 tax return, the IRS determined that inadequately documented deposits into three of Kanter's bank accounts during that year greatly exceeded the income Kanter reported on his federal tax return. Based on a comparison of the deposit amounts to Kanter's tax return for 1982, the Commissioner determined that Kanter had unreported gross income that year in an amount of $2,084,017, and issued an assessment of deficiency. After Kanter produced sufficient records documenting some of the deposits in question, the Commissioner reduced this deficiency to $1,303,207, which comprised the sum of four specific deposits: 83 ------------------------------------------------- DEPOSIT AMOUNT PAYOR OR SOURCE ------------------------------------------------- $787,129 The Holding Co. (THC) 24 ----------------------------------------------- $ 40,000 Computer Placement Services, Inc. (CPS) 25 ------------------------------------------------- $190,078 Administration Co. (Special E Account) ------------------------------------------------- $286,000 Administration Co. (Special Account) ------------------------------------------------- 84 The Tax Court found that the Commissioner had produced sufficient evidence to create a presumption of correctness in the indicated deficiency. The bank deposit analysis method was a reasonable method of reconstructing income, and deposits from THC, CPS and the Administration Co. accounts often included taxable income. Therefore it was proper, the Tax Court ruled, for the Commissioner to determine gross income from an analysis of total deposits to Kanter's bank account minus any deposits properly excluded from income and to assess a deficiency for the excess of that income over the reported income. The Tax Court found that Kanter had not adequately documented that the four deposits in question were loans, and they were properly included in his gross income under the deposit analysis. Moreover, the Court did not find the testimony of Kanter's accountant, Gallenberger, credible on the issue.
85 The Tax Court's determination that a taxpayer has unreported income is a finding of fact that we review for clear error. Reynolds, 296 F.3d at 612. The Commissioner's assessment of a deficiency is presumed correct, but can be overcome by rebuttal evidence presented by the taxpayer. Pittman, 100 F.3d at 1313. 86 Kanter has three arguments with respect to the deficiency determined by the bank deposit analysis: first, the change in the amount of the deficiency for 1982 under the bank deposit analysis constituted a new matter under Tax Court Rule 142 that required the burden of proof to shift to the Commissioner, and with that burden the Commissioner cannot prevail. Second, the lack of evidence on this issue made the deficiency a naked assessment, and it was, therefore, improper to give the Commissioner's assessment of a deficiency the usual presumption of correctness. See Weimerskirch v. Comm'r, 596 F.2d 358, 360 (9th Cir.1979) (finding no presumption of correctness when Commissioner's assessed deficiency lacks any reasonable foundation in the evidence). Finally, Kanter argues that the Tax Court clearly erred in finding a deficiency in light of the evidence presented. All of these arguments fail. 87 First, there is no merit in Kanter's contention that the Commissioner's reduction in the amount of deficiency assessed in 1982 under the bank deposit analysis is a new matter requiring a shift in the burden of proof. The Commissioner's concession that part of the original deficiency was properly excluded from Kanter's income is not a new theory, is not inconsistent with the original assessment of deficiency, does not require new or different evidence from Kanter and does not increase the assessed deficiency. See discussion supra Part III. The same theory of bank deposit analysis was being applied before and after the Commissioner's concessions, and the resulting deficiency was reduced, not increased, when Kanter produced documentation demonstrating to the Commissioner's satisfaction that certain deposits were not income. The remaining, insufficiently documented deposits, therefore, do not constitute a new matter. 88 Nor can Kanter escape the presumption of correctness by relying on the naked assessment exception of Weimerskirch. The general rule is that a presumption of correctness attaches to the Commissioner's deficiency determination; the taxpayer has the burden of disproving it. A narrow exception exists where the determination is arbitrary and erroneous or without rational foundation. Pfluger v. Comm'r, 840 F.2d 1379, 1382 (7th Cir.1988) (citations omitted). It is not disputed that before the Commissioner can rely on [the] presumption of correctness, the Commissioner must offer some substantive evidence showing that the taxpayer received income from the charged activity. Weimerskirch, 596 F.2d at 360. But the threshold for properly invoking the presumption is not as high as Kanter would have us believe, nor is the evidence presented by the Commissioner as thin as that presented in Weimerskirch. 89 In Weimerskirch, the Commissioner assessed a deficiency based on more than $24,000 of unreported income from the taxpayer's alleged sale of heroin. Id. at 359. The Commissioner, however, presented no evidence from which one could even infer that Weimerskirch was involved in heroin sales in any way. There were, for example, no records of bank deposits, net worth, or cash expenditures. Id. at 361-62. The deficiency was calculated based on an IRS agent's purely hypothetical calculation of what income would be realized from a given level of heroin sales each week over a given period of time. Id. at 359. Not only was the deficiency calculation completely divorced from any evidence of actual or inferrable heroin sales by Weimerskirch, but the entire method of calculation used was unsupported by evidence. Id. The Commissioner's attempt to attach the presumption of correctness to the assessed deficiency in Weimerskirch was, in every sense of the word, naked. 90 In contrast, the presumption of correctness in the present case appears far more modestly appareled. The Commissioner's use of bank deposits as circumstantial evidence of gross income is an accepted methodology. See, e.g., United States v. Ludwig, 897 F.2d 875, 878 (7th Cir.1990). The Tax Court found evidence that Kanter was engaged in income producing businesses. And the court found that actual deposits were made that had the appearance of income. IRA, 78 T.C.M. (CCH) at 1104; see also United States v. Esser, 520 F.2d 213, 217 (7th Cir.1975) (describing test for implementing deposit analysis method of reconstructing income). There is no dispute about the evidence of deposits. Consequently, there was sufficient evidence to support the presumption of correctness. 91 Lastly, Kanter argues that the uncontradicted evidence at trial shows that the four deposits in question were loans and were not income. By uncontradicted, we can only assume Kanter means uncontradicted by any evidence beyond the evidence we have outlined, establishing, prima facie, that there was a deficiency during 1982. Because we have found that the Tax Court properly gave the Commissioner's assessed deficiency a presumption of correctness, we must interpret Kanter's argument as claiming that the evidence presented overcame the presumption. In that respect, Kanter's argument also fails. 92 In considering whether Kanter met his burden of proof, the Tax Court found Gallenberger's summary and Kanter's assertions unconvincing. No credible evidence was introduced to support Kanter's assertion that the deposits were loans.... We find the testimony of the accountant, Gallenberger, unreliable and her analysis fatally flawed.... IRA, 78 T.C.M. (CCH) at 1104. The Tax Court also recalled Gallenberger's regular practice of record destruction and the general lack of any documentation other than her summary and testimony. Id. at 1104-05. The evidence that Kanter asserts was uncontradicted was considered by the Tax Court and found wanting. Exhibit 9172PK, which, according to Kanter, demonstrates that the deposits from CPS, THC, and Administration Co. were loans, reflects a summary analysis by Linda Gallenberger that the Tax Court found not credible. Nor is it correct for Kanter to say that the Tax Court had determined previously that one of the deposits of money from Administration Co. was money already found to belong to Kanter. (Pet. Br. at 58.) Kanter cites to a sentence in the Tax Court's opinion as to issue 21 (allowable capital gains and losses in 1987) wherein the court states, As indicated previously, funds from the Administration Co. special E and PSAC special E accounts were Kanter's funds. IRA, 78 T.C.M. (CCH) at 1126. This sentence, in context, refers only to the specific funds from the accounts cited and used in the specific transactions at issue (five years after the deposits at issue here) in that section of the Tax Court opinion. These specific funds were Kanter's own funds, and he was entitled, therefore, to the basis he had claimed for the assets he had purchased with those funds. But Kanter seeks to generalize this statement about his ownership of specific money to mean that all the money in the Special E accounts, at all times, already belonged to Kanter. The Tax Court's opinion does not say this. 93 In conclusion, the Tax Court did not clearly err in its findings regarding Kanter's unreported income in 1982 as determined by bank deposit analysis. These findings are therefore affirmed. 94