Finkbinder v. Commissioner

MEMORANDUM FINDINGS OF FACT AND OPINION

PARKER, Judge: Respondent determined deficiencies in petitioners' Federal income taxes and additions to the tax under section 6653(a) ¹ as follows:

The issues for decision by the Court are:

(1) Whether petitioners understated their income for the taxable years 1976 and 1977; and

(2) Whether their underpayments of tax for those years were due to negligence or intentional disregard of rules and regulations within the meaning of section 6653(a).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Petitioners are husband and wife, and at the time they filed their petition in this case they resided in Taylor, Michigan. They timely filed their joint Federal income tax returns for the calendar*516 years 1976 and 1977, using the cash receipts and disbursements method of accounting.

During the years 1976 and 1977, petitioners were engaged in business as a sole proprietorship under the name of Lester Trucking. Petitioners maintained a business checking account (No. 06-42-0817-5) during those years at the Wyandotte Savings Bank. Petitioner June Finkbinder (hereinafter Mrs. Finkbinder) maintained a personal checking account (No. 06-32-2046-3) at the same bank.

Upon audit of their tax returns, petitioners produced their bank statements, conceled checks, purchase invoices(in envelopes for each month), loan accounts, and two savings passbooks reflecting small amounts of savings. Petitioners either did not maintain or did not produce for respondent or the Court any cash receipts Journal, any sales invoices, or any sales journal. The only record for gross receipts for the trucking business was certain monthly lists of gross receipts that petitioners turned over to their accountant for preparation of their tax returns, including their Schedule C's, for each year. Petitioners either did not maintain or failed to produce any original book of entry reflecting gross receipts for*517 Lester Trucking.

On audit respondent determined that petitioners paid personal living expenses by checks written on their business account in the amounts of $ 16,900.18 in 1976 and $ 11,840.29 in 1977. Respondent also determined that petitioners wrote checks to "cash" on their business account in the amounts of $ 8,067.50 for 1976 and $ 13,745 in 1977. ² Many of the checks on the business account written to "cash" were deposited in Mrs. Finkbinder's personal checking account. These business account checks for payment of personal expenses and those written to "cash" were in addition to the business expense deductions claimed on petitioners' Schedule C's. On audit respondent verified the business expenditures claimed on petitioners' Schedule C's, but could not verify gross receipts for either year. However, the bank deposits to petitioners' business bank account exceeded gross receipts reported on the Schedule C's to such an extent as to suggest understatements of gross receipts. Respondent reconstructed or recomputed petitioners' income by means of a source and applications (expenditures) method, and issued a statutory notice of deficiency based thereon.

*518 The sources and applications of funds for the years 1976 and 1977, based upon the statutory notice and further evidence adduced at the trial, were as follows:

New Loans by St. Alfred's Credit Union:

*520 New loans for St. Alfred's Credit Union:

Petitioners had unreported income from Lester Trucking of $ 16,281.89 for 1976 and $ 5,707.24 for 1977, as follows:

ULTIMATE FINDINGS OF FACT

Petitioners failed to maintain or to produce for respondent or the Court adequate records of sales or gross receipts from*522 their business.

Respondent's reconstruction of taxable income by the source and applications of funds method, as supplemented at the trial, is proper.

Petitioners have not established that their underpayments of tax were not due to negligence or intentional disregard of rules and regulations.

OPINION

Petitioners failed to maintain or at least failed to produce for respondent or the Court any records of their gross receipts from their trucking business. In the absence of such records, respondent may of course use indirect methods of proof to reconstruct the taxpayers' income. Here respondent used the source and applications of funds method to determine that petitioners had understated their gross receipts and hence their taxable income from the business.

The source and applications of funds method of income reconstruction has long been accepted by this Court. . The method assumes that the amount by which the taxpayers' applications of funds during a taxable year exceeds their known sources of funds for that year is taxable income. Here respondent's source and applications of funds determinations, as modified*523 by the Court to reflect the evidence adduced at the trial, show unreported income of $ 16,281.89 for 1976 and $ 5,707.24 for 1977. Petitioners have the burden of proof to establish any errors in these determinations, and they have not sustained their burden.

Respondent imposed negligence additions under section 6653(a) in this case. Petitioners also have the burden to establish that their underpayments of tax were not due to negligence or intentional disregard of rules and regulations. ; . They have not done so, and we sustain respondent's imposition of the negligence additions.

To reflect the above holdings,

Decision will be entered under Rule 155.