Olsen v. Commissioner

MEMORANDUM FINDINGS OF FACT AND OPINION

KORNER, Judge: Respondent determined a deficiency in petitioners' income tax for the year 1976 in the amount of $21,092, together with additions to tax under section 6653(a) in the amount of $1,055. ¹ After concessions by both parties, the issues which remain for us to determine are: (1) the correctness of respondent's redetermination of petitioners' taxable income for the year 1976, using the bank deposits method; (2) the liability of petitioner Don E. Olsen for self-employment tax; (3) the propriety of additions to tax under section 6653(a); and (4) whether petitioner Marjorie E. Olsen is properly to be relieved from liability for any resulting deficiency, additions and interest, under the provisions of section 6013(e).

Petitioners, who were married throughout the year 1976, *64 filed a joint Federal income tax return for that year. At the time of filing their petition herein, petitioners, who were divorced in 1977, lived at separate addresses in Salt Lake City, Utah, to which duplicate notices of respondent's statutory notice of deficiency were sent.

During 1976, petitioner Don E. Olsen (hereinafter "Don") operated a sole proprietoriship known as Don Olsen Trailers. Petitioner Marjorie T. Olsen (hereinafter "Marjorie") was employed by the Sperry Rand Corporation, maintained a separate personal checking account in her own name, and knew little about the operations of Don Olsen Trailers. Don maintained a separate business checking account under the name Don Olsen Trailers. That account was used for the business operations of Don's business, which was the retail sales of horse trailers, together with monies derived from Don's dealings in automobiles.

Don failed to maintain adequate records from which the taxable income of his business could be determined. Upon audit of petitioners' 1976 return, respondent accordingly redetermined his income by use of the bank deposits method, which resulted in respondent's determination that petitioners had unreported*65 taxable income in the amount of $52,465, consisting of Don's unreported business gross income in that amount. Respondent's determination was based upon the following computation:

As the result of stipulations entered into between the parties prior to trial, and as the result of further concessions made by respondent at trial, respondent has conceded that his original computation should be amended in petitioners' favor so as to exclude from the total bank deposits additional amounts which have been identified as nonincome items. Pursuant to such recomputation, and giving effect to all respondent's concessions, as above, the remaining unexplained bank deposits*66 which respondent has treated as taxable income are as follows:

Where no adequate books and records have been kept from which the taxpayer's income may be determined (and Don has conceded this is the case), respondent may reconstruct income by any reasonable method, section 446(b); , and the use of the bank deposits method is such a reasonable method, ,*67 affd. . Respondent's determination based upon a reasonable method is presumptively correct, cf. , affg. a Memorandum Opinion of this Court and petitioner has the burden of proof to show error therein. ; Rule 142(a). We hold that petitioner Don Olsen has failed to carry his necessary burden of proof to show error in respondent's determination, over and above the amounts which the parties stipulated prior to trial, plus additional amounts conceded by respondent at trial. We accordingly find that petitioner Don Olsen had additional unreported income from his business operations in 1976 in the amount of $15,146.30.

Since the above finding involves additional unreported business income from the conduct of a proprietorship business, it constitutes self-employment income within the meaning of section 1402. The joint return filed by petitioners for 1976 showed a net loss from self-employment of $1,980, and petitioner Don Olsen's liability for self-employment tax must be recomputed accordingly.

With respect to*68 the issue concerning additions to tax under section 6653(a), as determined by respondent, the burden of proof on this issue is likewise on petitioners. . Petitioners offered no satisfactory explanation of any kind as to the failure to keep adequate business records, and we must accordingly approve respondent's determination on this point.

The only issue remaining for disposition is whether Marjorie should be relieved of liability for any deficiencies and additions to tax herein, under the provisions of section 6013(e). Respondent has stipulated and conceded that Marjorie is entitled to relief under the provisions of this section, if we find that Don's understatement of gross income is in excess of 25 percent of the gross income reported in the joint return for 1976. All respondent's adjustments in his statutory notice were with respect to Don's income, and Marjorie is involved herein solely by reason of having filed a joint return with Don. The relevant statutory provisions are set forth in the following footnote. ³

*69 The percentage of unreported gross income for purposes of section 6013(e) is computed as follows:

Since the omission of gross income in the petitioners' 1976 joint return was in excess of 25 percent, as defined by section 6013(e), it follows that Marjorie is entitled to be relieved from liability for the deficiency, addition to tax and interest, resulting from our decision.

To give effect to the concessions by the parties on other issues, as well as our disposition of the issues herein,

Decision will be entered under Rule 155.