Opinion ID: 158254
Heading Depth: 2
Heading Rank: 2

Heading: Year of Reportable Income

Text: Petitioners claim that the tax court erred in determining that they received income as a result of dealings with M&L and its principle, Robert Joseph, in 1990, rather than in 1993, after they settled with the bankruptcy trustee. We uphold the tax court’s findings of fact unless they are clearly erroneous, see Jeppsen v. Commissioner, 128 F.3d 1410, 1415 (10th Cir. 1997), and conclude that the court committed no error in finding that the Balabanians received income in 1990 as a result of dealings with M&L and Mr. Joseph. A taxpayer is required to keep those records necessary to establish gross income. See 26 U.S.C. § 6001; see also United States v. Gosnell, 961 F.2d 1518, 1520 (10th Cir. 1992). Petitioners kept inadequate records of their income. They were advised by their tax preparer that if they came out ahead in any given year from the check exchanges with M&L, the difference would constitute income. In addition, they failed to record or report any of the interest or broker’s fees or car payments credited or paid to them by M&L and there was an unexplained deposit to their account in the amount of $207,000. When the taxpayer’s records are inadequate, the government may reconstruct income and expenses in any reasonable manner, see Anaya v. Commissioner, 983 F.2d 186, 188 (10th Cir. 1993); Gosnell, 961 F.2d at 1518, as the government did here using a bank deposits analysis. -3- Once the deficiency is determined, the taxpayer bears the burden of proving that “the determination is arbitrary and erroneous.” Gosnell, 961 F.2d at 1520 (internal quotation marks and citations omitted). Unexplained bank deposits are prima facie evidence of income and need not be refuted by the government. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Petitioners have failed to demonstrate that the government erred in its analysis of their income. Their argument that the tax court improperly applied the claim of right doctrine to find that the money Petitioners received from the check scheme was taxable in 1990 is not persuasive, and totally ignores the other unexplained items. “There is a claim of right when funds are received and treated by a taxpayer as belonging to him.” Healy v. Commissioner, 345 U.S. 278, 282 (1953). The tax court found that the Balabanians claimed the money as their own in 1990, did not make any claim in the bankruptcy estate until 1993, denied liability regarding the trustee’s claim against them, and had been told that, if they were ahead of M&L at the close of the taxable year, they were liable to report that amount as income. See Balabanian, 74 T.C.M. (CCH) 1439 (1997). We cannot say that the court clearly erred in so finding, and these facts support its proper application of the claim of right doctrine. We uphold the tax court’s decision because the Balabanians have not carried their burden of overcoming the presumption of correctness accorded to the -4- Commissioner’s assessment. The tax court made extensive findings of fact after hearing testimony and making its own credibility determinations, and these findings are amply supported by the record and the law. See LDL Research & Dev. II, Ltd. v. Commissioner, 124 F.3d 1338, 1344 (10th Cir. 1997) (a trial court’s witness credibility determinations are entitled to great deference).