T.C. Memo. 2016-58



                         UNITED STATES TAX COURT



                 LUIS ALEJANDRO REY, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 10409-14.                          March 29, 2016.



      Luis Alejandro Rey, pro se.

      William J. Gregg and Maria F. Di Miceli, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      LAUBER, Judge: With respect to petitioner’s Federal income tax for 2010,

the Internal Revenue Service (IRS or respondent) determined a tax deficiency of

$56,063, a late-filing addition to tax of $2,783 under section 6651(a)(1), and an
                                        -2-

[*2] accuracy-related penalty of $11,213 under section 6662(a).1 After

concessions, the sole issue for decision is whether the IRS properly determined

omissions from petitioner’s gross income by use of a bank deposits analysis. With

certain exceptions noted below, we will sustain respondent’s determinations.

                               FINDINGS OF FACT

      The parties submitted a stipulation of facts at trial. We incorporate that

stipulation and the attached exhibits by this reference. Petitioner resided in Vir-

ginia when he filed his petition.

      During 2010 petitioner worked as a consultant for the Inter-American De-

velopment Bank (IADB) performing computer-related services. His work entailed

some foreign travel, for example, to IADB meetings overseas. He maintained with

the IADB credit union several accounts, which formed the basis for respondent’s

bank deposits analysis. During 2010 petitioner also had a Virginia real estate

license and received in connection with his real estate activity income of $9,343,

which was reported by the payors on three Forms 1099-MISC, Miscellaneous

Income.


      1
       Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, as amended and in effect for the taxable year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure. We round all
monetary amounts to the nearest dollar.
                                        -3-

[*3] Petitioner filed his Form 1040, U.S. Individual Income Tax Return, as “mar-

ried filing separately.” He received an extension of time until October 15, 2011,

to file that return. Because that day was a Saturday, petitioner’s return was due for

filing on Monday, October 17. He filed the return on October 24, 2011, one week

late.

        Petitioner attached to his Form 1040 a Schedule C, Profit or Loss From

Business, reporting income and expenses from his consulting business. He report-

ed gross receipts of $162,365 and total expenses of $150,181, thus showing a net

profit of $12,184. Upon examination of that return, the IRS allowed deductions in

the aggregate amount of $43,263 for legal and professional fees, taxes and licen-

ses, travel, meals, and home office expense. The IRS disallowed for lack of sub-

stantiation deductions in the aggregate amount of $106,918 for returns and allow-

ances, office expense, repairs and maintenance, and supplies. Petitioner produced

no substantiation for any of the latter expenses and conceded at trial that the IRS

had correctly disallowed Schedule C expenses in the amount of $106,918.

        The IRS determined that petitioner had engaged in a separate Schedule C-2

business as a real estate professional in which he had earned a net profit of $9,343,

the aggregate amount reported on the Forms 1099-MISC. Petitioner conceded at

trial that he had earned taxable income in that amount from his real estate activity
                                           -4-

[*4] during 2010. The IRS determined that petitioner was liable for a late-filing

addition to tax under section 6651(a)(1) and an accuracy-related penalty under

section 6662(a). Petitioner conceded at trial that he was liable for both.

          The only subject of dispute at trial concerned unreported income from peti-

tioner’s consulting business. The notice of deficiency determined, on the basis of

the revenue agent’s bank deposits analysis, that petitioner had omitted $70,671 of

income from this business.2 Petitioner contended that certain of the deposits the

agent treated as taxable should have been excluded as nontaxable.

          At the close of trial the Court ordered one round of seriatim briefs. Respon-

dent timely filed his brief on January 19, 2016. Petitioner did not file a post-trial

brief.3




          2
        The revenue agent determined omitted income of $80,014 overall. But
because the agent allocated $9,343 of this sum to petitioner’s Schedule C-2 real
estate business, the omitted income allocable to petitioner’s Schedule C-1 con-
sulting business was reduced to $70,671.
          3
       When a party fails to file a brief on issues that have been tried, we may
consider those issues waived or conceded. See, e.g., Nicklaus v. Commissioner,

, 120 n.4 (2001); Stringer v. Commissioner, 

, 704-708
(1985), aff’d without published opinion, 

(4th Cir. 1986). We will
exercise our discretion not to do so here.
                                        -5-

[*5]                                 OPINION

I.     Burden of Proof

       The IRS’ determinations in a notice of deficiency are generally presumed

correct. Rule 142(a); Welch v. Helvering, 

, 115 (1933). The U.S.

Court of Appeals for the Fourth Circuit, the appellate venue here absent stipula-

tion to the contrary, has held that the usual presumption of correctness applies in

omitted-income cases where the IRS employs a “reasonable method of determin-

ing income,” such as the bank deposits method. Williams v. Commissioner, 

, 763-764 (4th Cir. 1993), aff’g T.C. Memo. 1992-153. Other courts have

required the Commissioner in unreported income cases to establish a “minimal

evidentiary showing” connecting the taxpayer with the income-producing activity.

Blohm v. Commissioner, 

, 1548-1549 (11th Cir. 1993), aff’g T.C.

Memo. 1991-636. If that threshold showing were required here, respondent met it

by introducing bank records establishing that petitioner received (as he concedes)

unreported income from his consulting business. Petitioner thus bears the burden

of proving by a preponderance of the evidence that respondent’s determinations

are arbitrary or erroneous. See 

(citing Helvering v.

Taylor, 

, 515 (1935)); Tokarski v. Commissioner, 

(1986).
                                         -6-

[*6] II.     Analysis

       Section 61(a) defines gross income as “all income from whatever source de-

rived,” including income derived from business. A taxpayer must maintain books

and records establishing the amount of his or her gross income. See sec. 6001.

When a taxpayer does not keep accurate books of account, the IRS may determine

his income “under such method as, in the opinion of the Secretary, does clearly

reflect income.” Sec. 446(b); see Petzoldt v. Commissioner, 

, 693

(1989). And where the taxpayer has unexplained bank deposits, the IRS may em-

ploy the bank deposits method to estimate his income. Estate of Hague v. Com-

missioner, 

(2d Cir. 1943), aff’g 

(1941); Estate of

Mason v. Commissioner, 

, 657 (1975), aff’d, 

(6th Cir.

1977). The IRS has great latitude in reconstructing a taxpayer’s income, and the

reconstruction “need only be reasonable in light of all surrounding facts and cir-

cumstances.” Petzoldt, 

.

       Bank deposits are prima facie evidence of income. The bank deposits meth-

od starts with the presumption that all money deposited in a taxpayer’s bank ac-

count during a given period constitutes taxable income. Price v. United States,

, 677 (5th Cir. 1964). This presumption is rebutted to the extent the

deposits are shown to include nontaxable amounts, and “the Government must
                                        -7-

[*7] take into account any non-taxable source * * * of which it has knowledge.”

Ibid.; DiLeo v. Commissioner, 

, 868 (1991), aff’d, 

(2d

Cir. 1992).

      After the IRS reconstructs a taxpayer’s income and determines a deficiency,

the taxpayer bears the burden of proving that the IRS’ implementation of the bank

deposits analysis was unfair or inaccurate. See Clayton v. Commissioner, 

, 645 (1994); DiLeo, 

. The taxpayer may do so by

showing (among other things) that certain deposits came from nontaxable sources.

See Clayton, 

. Nontaxable sources include funds attributable to

inter-account bank transfers and returned checks, as well as “loans, gifts, inheri-

tances, or assets on hand at the beginning of the taxable period.” Burgo v. Com-

missioner, 

, 743 n.14 (1978) (quoting Troncelliti v. Commissioner,

T.C. Memo. 1971-72).

      The revenue agent employed the bank deposits method to reconstruct peti-

tioner’s income. He used petitioner’s account statements (which are part of the

record) to prepare schedules listing all deposits. After eliminating nontaxable

receipts of which he had knowledge, the revenue agent prepared, and provided to

petitioner, schedules that initially determined unreported income in excess of

$150,000.
                                         -8-

[*8] In response petitioner provided the revenue agent with a spreadsheet listing

$114,170 of alleged nontaxable deposits. This list, which was included in the

revenue agent’s report, comprised inter-account transfers of $81,120, a returned

check of $2,050, an alleged loan of $1,000 from a coworker, and an alleged loan

of $30,000 from New York Life. The revenue agent agreed that all of these de-

posits, with the exception of the $30,000 item, should be treated as nontaxable and

revised his bank deposits analysis accordingly. This reduced the unreported in-

come from petitioner’s Schedule C-1 consulting business to $70,671.

      Petitioner subsequently supplied the revenue agent with a revised spread-

sheet listing $118,081 of alleged nontaxable deposits. This list, which was intro-

duced into evidence at trial, was substantially identical to the previous list, except

that it included two additional items: a deposit of $689, which petitioner alleged

was a “transfer from coworker account,” and a deposit of $3,222, which petitioner

alleged was “per diem paid by IADB for overseas expenses.” The revenue agent

declined, for lack of substantiation, to treat either of these additional items as a

nontaxable deposit.

      At trial petitioner did not identify, or provide any evidence concerning, any

other deposits that he alleged to be nontaxable. Respondent conceded during trial

that petitioner had supplied enough documentation concerning the loan from New
                                        -9-

[*9] York Life to treat this $30,000 deposit as nontaxable. And respondent con-

ceded in his opening brief that petitioner’s unreported income should be reduced

by $689 because the deposit to which petitioner refers had been counted twice.

      This leaves the proper treatment of the $3,222 deposit as the only issue for

this Court to decide. Petitioner contends that this sum constituted reimbursement

from IADB for expenses he incurred during overseas travel. We agree with re-

spondent that petitioner did not carry his burden of proof. He produced no evi-

dence concerning IADB’s reimbursement policy, no evidence that the $3,222

constituted reimbursement, and no evidence substantiating that he incurred $3,222

of expenses to which the alleged reimbursement corresponded.

      We accordingly find that petitioner received during 2010 unreported income

from his Schedule C-1 consulting business of $39,982, that is, $70,671 as deter-

mined in the notice of deficiency minus ($30,000 + $689). On the basis of peti-

tioner’s concessions, we sustain respondent’s other adjustments to his 2010 in-

come and expenses and conclude that he is liable for a late-filing addition to tax

and an accuracy-related penalty in amounts to be determined. To reflect the

foregoing,


                                              Decision will be entered under

                                       Rule 155.