Ahmad v. Commissioner

MEMORANDUM FINDINGS OF FACT AND OPINION

PARR, Judge: Prior to issuing a notice of deficiency, respondent made a jeopardy assessment against petitioner for 1991, 1992, and 1993, as follows:

Within 60 days of making the jeopardy assessment, respondent determined deficiencies in, and additions to, petitioner's Federal income tax for 1991, 1992, and 1993 as follows:

The issues for decision are: (1) Whether respondent's notice of deficiency was arbitrary. We hold it was not. (2) Whether petitioner has unreported income for the tax years 1991, 1992, and 1993. We hold he does, to the extent set out below. (3) Whether petitioner is liable for self-employment tax for 1991, 1992, and 1993. We hold he is. (4) Whether petitioner is liable for an addition to tax under section 6651(a) (1)¹ for 1991, 1992, and 1993 for failure to file *88 Federal income tax returns. We hold he is, to the extent set out below. (5) Whether petitioner is liable for an addition to tax under section 6654 for 1991, 1992, and 1993 for the failure to make estimated tax payments. We hold he is, to the extent set out below.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulated facts and the accompanying exhibits are incorporated into our findings by this reference. At the time the petition in this case was filed, petitioner resided in Calhoun, Georgia (Calhoun).

I. General Background--Petitioner

In 1984, petitioner came to the United States from the Kingdom of Jordan on a student visa to attend college. At the time petitioner came to this country, his brother, Mr. Saleh Rashid (Saleh), ² was already attending college at Kennesaw State College, later transferring to a different university. On April 1, 1989, petitioner received a bachelor *89 of science degree in Computer Science from Kennesaw State College.

During 1991, 1992, and 1993, petitioner held checking account XX. XX-XX7-133 (checking account) and savings accounts Nos.XX-XX8-873 (savings account # 1), XX-XX7-144 (savings account # 2), XX-XX6-293 (savings account # 3), and XX-XX6-304 (savings account # 4), with Wachovia Bank (Wachovia), 315 South Wall Street, Calhoun, Georgia. Petitioner made deposits in his checking and savings accounts totaling $ 24,300 in 1991, $ 90,120 in 1992, and $ 126,141 in 1993.

Petitioner married Tonia Judd (Tonia) in April 1991, and they were divorced on December 5, 1991. ³ During the divorce proceedings, petitioner withdrew *90 $ 11,000 from his bank accounts, including the proceeds of three certificates of deposit. ^4*91 He transferred $ 6,000 to a cousin and $ 5,000 to a friend, because of his fear that his wife "might get some of the money." Later that year, after the divorce papers were signed, the transferees returned the money, plus interest, by check, and petitioner redeposited the funds in his checking account.

Petitioner became a resident alien in 1991. Prior to that time, petitioner's immigration status did not permit him employment. The terms of the visa notwithstanding, petitioner worked in several restaurants during 1991, quitting whenever his employers pressed him for Social Security information. Petitioner earned income from these jobs but does not remember the amounts. Petitioner did not file an income tax return for 1991, because he was concerned about the consequences of working in contravention of the immigration law. Despite his efforts to avoid providing required information to his employers, petitioner did receive one Form W-2 (Wage and Tax Statement) reporting wage income of $ 585 for 1991.

During the years in issue, petitioner's brother, Saleh, owned a restaurant. During 1992, petitioner worked at Saleh's restaurant by covering for employees who would fail to come in. He also took Saleh's wife to the market and their children to the doctor. In exchange for his help, Saleh gave petitioner "some spending money." Petitioner did not report this income on a Federal *92 income tax return for 1992. At the time of trial, Saleh resided in Calhoun and owned a restaurant, the Atlanta Gate.

In September of 1992, petitioner began to cohabit with Samantha Gibson (Gibson). Gibson was married but separated from her husband and was employed as a waitress. In addition to wage and tip income, Gibson received support payments for her two children. At the time of trial, petitioner and Gibson were married and living together in Calhoun.

II. Bank Deposits and Withdrawals

A. 1991

Petitioner deposited a total of $ 24,300 into his checking and savings accounts between June 13 and December 31, 1991. Some of the deposits were combination deposits; that is, deposits of both cash and checks. For example, on December 3, petitioner deposited $ 1,600 in cash in his checking account along with a $ 30 third-party check payable to Tonia. For 1991, petitioner's checking account deposits totaled $ 18,400; petitioner made eight cash deposits, totaling $ 7,220, and three check deposits, totaling $ 11,180. ^5*93

Petitioner made two deposits into savings account # 1; he deposited a check for $ 5,000 on December 10, and he deposited $ 900 in cash on December 31. The $ 5,000 check deposit was a transfer of funds by check from petitioner's checking account to the savings account. Petitioner also received $ 1.95 interest on this savings account.

B. 1992

Petitioner deposited a total of $ 90,120 in his checking and savings accounts in 1992. Petitioner made 16 deposits into his checking account, totaling $ 14,210. At least 12 of these deposits, totaling $ 11,350, were cash deposits. ^6*94

Petitioner made 24 deposits, totaling $ 62,310, into savings account # 1. All of the deposits, except one, were cash deposits. The sole noncash deposit of $ 50 was a refund petitioner received from a dating service. On July 2, petitioner deposited $ 15,000 into this account, which was the proceeds of a loan he received from Wachovia. On August 28, he withdrew $ 14,748 to repay the balance remaining on this loan.

Between April 29 and November 4, petitioner made three deposits, totaling $ 10,000, into his savings account # 3. At least one deposit, of $ 2,000, was in cash. ^7*95 On the same dates that petitioner made deposits into savings account # 3, he also made deposits into savings account # 4. The three deposits into savings account # 4 totaled $ 3,600. At least two of the deposits, in the amounts of $ 1,000 and $ 2,000, were deposits of cash. ⁸

Petitioner received $ 23 interest on his checking account; $ 486 on savings account # 1; $ 128 on savings account # 3; and $ 77 on savings account # 4.

Petitioner wire transferred $ 2,750 sometime between January 15 and February 12; ⁹ $ 1,000 on May 13; and $ 10,000 on November 13, 1992, from savings account # 1 to his father, Ahmad Mohammed Rashid Ahmad, in Jordan. On July 3, petitioner wire transferred $ 15,000 from savings account # 1 to Omaha, Nebraska.

C. 1993

Petitioner deposited a total of $ 126,141 in his checking and savings accounts in 1993. Petitioner made 20 deposits, totaling $ 75,478, in his checking account. ¹⁰ At least 17 of the deposits, totaling $ 29,881, were deposits of cash. *96 ¹¹ Some of the deposits were combination deposits. For example, on June 30, petitioner withdrew $ 1,988 from his checking account, and a week later he deposited a third-party check payable to Gibson in the same amount, along with $ 1,030 in cash. ¹²

Between January 6 and November 3, petitioner made 19 deposits, totaling $ 41,613, in savings account # 1. At least 13 of the deposits, totaling $ 35,024, were deposits of cash. ¹³ Two of the deposits were combination deposits. ^14*97 Petitioner made one deposit each to savings accounts # 3 and # 4. On April 15, petitioner deposited $ 6,000 in cash into savings account # 3, and on April 14, he deposited $ 3,050 in cash into savings account # 4.

Petitioner received $ 150 of interest on his checking account; $ 600 on savings account # 1; $ 162 on savings account # 3; and $ 87 on savings account # 4.

Petitioner closed savings accounts # 3 and # 4 on July 12, 1993, by withdrawing the balances, $ 16,302 and $ 8,623, respectively. Petitioner closed savings account # 1 on November 16, 1993, by withdrawing the balance of $ 40,544 and depositing it into his checking account.

Petitioner transferred $ 2,200 by wire from savings account # 1 on September 15, to his father in Jordan. On November 30, he transferred $ 15,000, and on December 28, $ 16,000, from his checking account to an account in his name at the Cairo Bank in Amman, Jordan.

Between April 16 and December 28, 1993, petitioner's bank, Wachovia, filed nine Currency Transaction Reports (Form 4789) detailing his cash transactions. In the identification section of the form, Wachovia reported petitioner's occupation as "Cook at Local Restaurant".

OPINION

Issue 1. Whether Respondent's Notice of Deficiency *98 Was Arbitrary

Respondent determined that petitioner has a deficiency of $ 5,957 for 1991, $ 24,457 for 1992, and $ 28,416 for 1993. These deficiencies are based on income in the amounts of $ 24,592, $ 74,634, and $ 86,464 for 1991, 1992, and 1993, respectively. Petitioner asserts that because the Commissioner did not produce evidence linking him to an income-producing activity, the Commissioner was arbitrary and erroneous in her determination so that she bears the burden of proof. Petitioner cites Portillo v. Commissioner, 932 F.2d 1128 (5th Cir. 1991), affg. in part and revg. in part T.C. Memo. 1990-68, and Senter v. Commissioner, T.C. Memo. 1995-311, in support of his position. As discussed below, petitioner's reliance on these cases is misplaced. We sustain respondent's determinations for the taxable years at issue, except as set out below.

The first issue to be decided is who bears the burden of proof in this case. A statutory notice of deficiency ordinarily carries with it a presumption of correctness. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). Due to this presumption, taxpayers generally have both the burden of proof and the burden of going forward with evidence. Dellacroce v. Commissioner, 83 T.C. 269, 280 (1984). *99 However, if the taxpayer shows that the statutory notice is arbitrary or without foundation, the burden of going forward with the evidence shifts to the Commissioner. Id.

In asking this Court to find that the notice of deficiency is arbitrary, petitioner is asking us to explore the underpinnings of that notice. As a general rule, we will not look behind the statutory notice to examine the evidence used in making the determination. Petzoldt v. Commissioner, 92 T.C. 661, 688 (1989); Llorente v. Commissioner, 74 T.C. 260, 264 (1980), affd. in part and revd. and remanded in part 649 F.2d 152 (2d Cir. 1981); Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). The rare exception to this rule is where the Commissioner, in a case involving unreported income, introduces no direct evidence but rests on the presumption of correctness and the taxpayer challenges the deficiency on the grounds that it is arbitrary. Portillo v. Commissioner, supra at 1133; Schad v. Commissioner, 87 T.C. 609, 618 (1986), affd. without published opinion 827 F.2d 774 (11th Cir. 1987); Llorente v. Commissioner, supra at 264.

In Portillo v. Commissioner, supra, the taxpayer was a painting contractor *100 who received a Form 1099 (Miscellaneous Income) that he claimed was not correct. Other than the uncorroborated testimony of a witness who testified that he had paid the taxpayer the disputed amount of income, there was no evidence supporting the Commissioner's determination. The Court of Appeals for the Fifth Circuit noted that, like this Court, it is reluctant to look at the facts underlying the Commissioner's notice of deficiency. The Court of Appeals also held, however, that it will "not give effect to the presumption of correctness in a case involving unreported income if the Commissioner cannot present some predicate evidence supporting its determination." Id. at 1133. More specifically, the Court of Appeals articulated its rule as follows:

before we will give the Commissioner the benefit of the presumption of correctness, he must engage in one final foray for truth in order to provide the court with some indicia that the taxpayer received unreported income. The Commissioner would merely need to attempt to substantiate the charge of unreported income by some other means, such as by showing the taxpayer's net worth, bank deposits, cash expenditures, or source and application of *101 funds. * * * [Id. at 1133-1134; emphasis added.]

In Senter v. Commissioner, supra, the Commissioner based her determination solely on the assertion that the taxpayer filed no returns for 1987 through 1991. The Commissioner reconstructed the taxpayer's income for those years based on income he reported in 1984, increased by the consumer price index. There was no evidence presented by either party regarding whether the taxpayer had taxable income during the years in issue. Because the Commissioner produced no predicate evidence supporting the determination, we found respondent's determination arbitrary and erroneous. Moreover, citing Portillo v. Commissioner, supra at 1133, we concluded that the rule in the Court of Appeals for the Fifth Circuit, to which any appeal of Senter would lie, is that once the presumption of correctness disappears, the Commissioner bears the burden of proof.

We think the facts of the instant case are distinguishable from those of Portillo v. Commissioner, supra, and Senter v. Commissioner, supra.In both of those cases, the Commissioner did not present predicate evidence in support of the determination that the taxpayer had unreported income. In the present *102 case, however, the respondent substantiated the charge with predicate evidence; she used the bank deposits and cash expenditures method of income reconstruction. Portillo v. Commissioner, supra at 1133-1134. Thus, respondent's deficiency determination was not arbitrary. See also Blohm v. Commissioner, 994 F.2d 1542, 1549 (11th Cir. 1993), affg. T.C. Memo. 1991-636 (once the Tax Court has found the Commissioner has made a minimal evidentiary showing, the deficiency determination is presumed correct); Erickson v. Commissioner, 937 F.2d 1548, 1551 (10th Cir. 1991), affg. T.C. Memo. 1989-552 (the key is connecting taxpayers to assets, not to a business).

Since respondent's deficiency notice was not arbitrary, petitioner has the burden of going forward with the evidence as well as the ultimate burden of persuasion. See Dellacroce v. Commissioner, supra at 280.

Issue 2. Unreported Income for 1991, 1992, and 1993

Utilizing the bank deposits and cash expenditures method of income reconstruction, respondent determined petitioner had income in the amounts of $ 24,592, $ 74,634, and $ 86,464 for 1991, 1992, and 1993, respectively.

Every taxpayer is required to maintain adequate records of taxable *103 income. Sec. 6001. Petitioner did not file a Federal income tax return or make any estimated Federal income tax payments for any of the years in issue. Nor did he maintain adequate records from which the amount of his income or Federal income tax liability for any of the years in issue could be computed. In the absence of such records, the Commissioner may reconstruct the taxpayer's income by any method that, in her opinion, clearly reflects income. Sec. 446(b); Parks v. Commissioner, 94 T.C. 654, 658 (1990). The Commissioner's method need not be exact but must be reasonable. Holland v. United States, 348 U.S. 121 (1954).

The bank deposits method for computing unreported income has long been sanctioned by the courts. DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992). Though not conclusive, bank deposits are prima facie evidence of income. Price v. United States, 335 F.2d 671, 677 (5th Cir. 1964) (the bank deposits method assumes that all money deposited in a taxpayer's bank account during a given period constitutes taxable income); ¹⁵Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C. 651, 656-657 (1975), affd. *104 566 F.2d 2 (6th Cir. 1977); Jones v. Commissioner, 29 T.C. 601 (1957). Where the taxpayer has failed to maintain adequate records as to the amount and source of his income, and the Commissioner has determined that the deposits are income, the taxpayer has the burden of showing that the determination is incorrect. Rule 142(a); Clayton v. Commissioner, 102 T.C. 632, 645 (1994); Parks v. Commissioner, supra;Estate of Mason v. Commissioner, supra.Furthermore, in such cases the Commissioner is not required to show a likely source of income. Clayton v. Commissioner, supra;Parks v. Commissioner, supra;Estate of Mason v. Commissioner, supra.

In challenging respondent's income reconstruction, petitioner introduced evidence that was intended to corroborate his claim that the deposits were due to nontaxable sources. This evidence primarily consists of his testimony, selected checking and savings account *105 statements, five canceled checks, and three written statements by his friends. The written statements constitute ex parte affidavits and are not treated as evidence under Rule 143(b). Upon review of the evidence presented, we are not persuaded that the source of the deposits was from nontaxable income items, except to the extent as follows.

A. 1991

For 1991, petitioner deposited a total of $ 24,300 in his checking and savings accounts. Except for the following amounts, we find the deposits are income to petitioner that is subject to tax pursuant to section 61(a). Based on the entire record, we are persuaded that the deposits of the checks for $ 5,119 and $ 6,031 are the return of funds, plus interest, that petitioner transferred to associates with the intent to prevent his first wife, Tonia, receiving any money in settlement of divorce. ¹⁶ In addition, we find the check for $ 30 payable to Tonia that petitioner cashed for her by depositing it in his account is not taxable income to him. Petitioner's testimony regarding the source of these amounts is corroborated by the canceled checks which correlate with petitioner's bank statements. Finally, the parties stipulated that the $ 5,000 *106 deposit in savings account # 1 on December 10 was a transfer of petitioner's funds from his checking account. This amount is a redeposit; therefore, it is not gross income.

B. 1992

Petitioner deposited a total of $ 90,120 in his checking and savings accounts in 1992. Except for the two following amounts, we find the deposits are income to petitioner that is subject to tax pursuant to section 61(a). The parties stipulated the $ 15,000 deposit made on July 2 was the deposit of loan proceeds that petitioner received from Wachovia. It is well established that gross income does not include loans. James v. United States, 366 U.S. 213, 219 (1961); United States v. Rochelle, 384 F.2d 748, 751 (5th Cir. 1967). ¹⁷ Petitioner submitted a bank copy of the dating service's canceled $ 50 refund check. Thus, petitioner provided evidence that corroborates his testimony regarding the source of the sole noncash deposit for 1992 into this savings account. The $ 50 deposit is the return of a personal expenditure for which petitioner received no tax benefit and is, therefore, *107 not taxable income.

C. 1993

Petitioner deposited a total of $ 126,141 in his checking and savings accounts in 1993. Except for the following amounts, we find the deposits are income to petitioner that is subject to tax. The parties stipulated that the deposit of $ 40,544 into petitioner's checking account was a transfer of the balance of savings account # 1. This amount is a redeposit; therefore, it is not gross income. Based on the entire record, we find petitioner has met his burden of proving the check for $ 1,988 payable to Gibson, which petitioner cashed for her by depositing in his account, is not taxable income to him.

Our finding that petitioner has met the burden of proof as to the source of these deposits is not a grant of credence to petitioner's claims regarding the source of his other deposits. Nor does the evidence presented by petitioner, which showed that some of the deposits were not income, establish that the use of the bank deposits method was invalid or arbitrary. Estate of Mason v. Commissioner, 64 T.C. at 656. Having reached that conclusion, we will comment in more detail on petitioner's evidence.

Petitioner testified that the sources of *108 his other deposits were family transfers, repayments of loans he earlier made to friends and associates, and cash reimbursements for checks he wrote to pay the bills of others. Petitioner provided scant evidence to corroborate his claims. For example, to substantiate his claim that family members transferred money to him, petitioner submitted a copy of a wire transfer that originated in Jordan and was sent to Saleh in Calhoun. The wire transfer is for $ 15,000 and is dated April 12, 1990. We find, however, that this wire transfer does not support petitioner's testimony because the transfer was sent to Saleh, not to petitioner. Accordingly, without evidence corroborating petitioner's claim that Saleh transferred the funds he received to petitioner, the copy of this wire transfer does not show that petitioner received any funds from his family.

Petitioner also introduced his check register into evidence to corroborate his claim that he made many loans to friends. Petitioner's reliance on his check register settles on a single entry that verifies he issued a check on December 8, 1991, for $ 1,000 to "Guss". This single entry is woefully inadequate to perform the task petitioner would *109 assign it. The entry does not indicate the purpose of the amount paid, the intent of the parties, or any of the other indicia necessary to substantiate the existence of a loan. ¹⁸ We find this entry in petitioner's check register does not provide documentary evidence to establish the existence of the claimed loans.

Petitioner's claim that he paid the bills of others by check and received cash reimbursements which he deposited suffers from similar deficiencies. For example, petitioner testified that during 1992, he often paid Saleh's rent, utilities, and other expenses by check, and Saleh reimbursed him in cash. This claim is allegedly supported by a single check petitioner *110 wrote to Barnett Bank. ¹⁹ Petitioner was unable to offer any evidence to corroborate his claim of the purpose of the check, nor was he able to produce evidence of a reimbursing cash deposit in the amount of the check. We find, therefore, that this check does not corroborate petitioner's claims with respect to the funds that he claimed are cash reimbursements of checks he wrote on behalf of others.

Petitioner relies on only his testimony to carry the burden of proving the source of the balance of his deposits. ²⁰ Thus, the issue is one of credibility wherein we must determine the extent to which the proffered testimony is believable. See Schad v. Commissioner, 87 T.C. at 620. It is well established that we are not required to accept self-serving testimony in the absence of corroborating evidence. Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992); Tokarski v. Commissioner, 87 T.C. at 77. Petitioner failed to produce any corroborating evidence to support *111 his testimony. Although petitioner testified that his wife, mother, and father, all of whom live in the same apartment with petitioner, and Saleh, who also lives in Calhoun, are the sources for his deposits, petitioner failed to call any family members to testify in an effort to verify his stories.^21*113 We cannot assume the testimony of absent witnesses would have been favorable to petitioner. Rather, the normal inference is that it would have been unfavorable. Tokarski v. Commissioner, supra at 77; Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d 409 (5th Cir. 1968); Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947). Moreover, our analysis of petitioner's testimony reveals inconsistencies that cast doubt upon his credibility. ²² Thus, there is no credible evidence that the deposits were from nontaxable sources. Based on the entire record, we simply do not believe that the money came from the sources petitioner claims. We find, therefore, that petitioner has not met his burden of proof with respect to the funds that he claims are family transfers, cash repayments of loans he made earlier, or reimbursements for *112 checks he wrote on behalf of others.

Issue 3. Self-Employment Tax

Respondent determined that petitioner had income in the amounts of $ 24,592, $ 74,634, and $ 86,464 for 1991, 1992, and 1993, respectively, and that he is liable for self-employment tax of $ 3,351, $ 8,862, and $ 9,435 for those *114 years.

Section 1401 imposes a tax on self-employment income. Self-employment income consists of gross income from any trade or business carried on by an individual less allowable deductions attributable to the trade or business. Sec. 1402(a). Respondent's determination that petitioner is liable for self-employment tax is presumed to be correct, and petitioner bears the burden of proving that it is erroneous. Rule 142(a); Kasey v. Commissioner, 33 T.C. 656, 660 (1960).

At trial, petitioner testified that during 1991 and 1992 he worked at several restaurants. Petitioner also testified, however, that he made very little money working at these restaurants, and the only Form W-2 petitioner received reported a mere $ 585 of wage income, which gives credence to his claim. We are persuaded that petitioner did not earn the unreported income determined by respondent, except for the amount reported on the Form W-2, as an employee.

Although petitioner has persuaded this Court that the source of his unreported income was not wages, he has not met his burden of proving that he did not receive such amounts from self-employment. Thus, we find petitioner is liable for self-employment tax on the unreported *115 income as determined by respondent for 1991, 1992, and 1993, except for the $ 585 of wage income reported on the Form W-2 and the amounts that we have found hereinbefore are not income.

Issue 4. Additions to Tax Under Section 6651(a) (1)

Respondent determined petitioner is liable for additions to tax for failure to file income tax returns for 1991, 1992, and 1993 under section 6651.

Section 6651(a) (1) imposes an addition to tax for failure to file a return on the date prescribed (determined with regard to any extension of time for filing), unless it is shown that such failure is due to a reasonable cause and not due to willful neglect. Sec. 6651(a)(1). The taxpayer has the burden of proving the addition is improper. Rule 142(a); United States v. Boyle, 469 U.S. 241, 245 (1985).

Petitioner did not file income tax returns for the years in issue. There is no evidence in the record that suggests petitioner's failure to file a Federal income tax return for any year in issue was due to reasonable cause and not due to willful neglect. Accordingly, we sustain respondent's determination with respect to this issue.

Issue 5. Additions to Tax Under Section 6654

Respondent determined that petitioner *116 is liable for the addition to tax under section 6654(a) for his failure to make estimated tax payments for 1991, 1992, and 1993.

Subject to exceptions provided by the statute, the imposition of the addition to tax is otherwise automatic if the amounts of the withholdings and estimated tax payments do not equal statutorily designated amounts. Niedringhaus v. Commissioner, supra at 222; Grosshandler v. Commissioner, 75 T.C. 1, 20-21 (1980). Petitioner bears the burden of showing that respondent's determination that section 6654 applies to all 3 taxable years is in error. Rule 142(a); Niedringhaus v. Commissioner, supra.Petitioner has made no such showing. For the years in issue petitioner had substantial taxable income, yet he made no estimated tax payments. Therefore, we hold he is liable for the additions to tax under section 6654(a) for those years.

To reflect the foregoing,

Decision will be entered under Rule 155.