Decision will be entered under
HALPERN,
| 2003 | $6,143 | $1,965 | $1,229 |
| 2004 | 24,275 | 6,733 | 4,855 |
| 2005 | 6,771 | 1,693 | 1,354 |
The issues for decision are whether petitioner (1) underreported his income, (2) is liable for additions to tax for failure to timely file, and (3) is liable for the accuracy-related penalties. 1
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, 2013 Tax Ct. Memo LEXIS 3">*4 and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts have been rounded to the nearest dollar.
Petitioner resided in Florida at the time he filed the petition. He is a cash method taxpayer who makes his return on the basis of a calendar year.
*5 Designer Gallery is a furniture store in Wellington, Florida. During the years in issue, petitioner was employed there as a sales manager. His duties included selling furniture, receiving payments therefor, and installing furniture purchased in the store in customers' homes.
During the years in issue, petitioner was married to Melina Kampanarou Cherry. Ms. Cherry was unemployed during 2003 and was self-employed as a personal trainer during 2004 and 2005. Ms. Cherry never worked for Designer Gallery or any other furniture store.
On March 24, 2005, petitioner was arrested and charged with grand theft and the fraudulent use of other person's personal identification (credit card) information. He pleaded guilty to those charges and was incarcerated from March 24, 2005, to mid-December 2006. Petitioner's 2005 gain from his credit-card-related criminal activity was $17,863. As part of 2013 Tax Ct. Memo LEXIS 3">*5 the plea agreement, petitioner was ordered to make restitution payments in that amount. Petitioner did not make any restitution payments in 2005.
Petitioner obtained extensions of time to file his 2003, 2004, and 2005 Federal income tax returns until October 15, 2004, 2005, and 2006, respectively.
*6 The Internal Revenue Service (IRS) received those returns on April 17, 2007. On each return, petitioner elected the filing status "Married filing separately".
Stanley Lottman is a revenue agent employed by respondent. In March 2005, after he read a newspaper account of petitioner's arrest for theft, he began an investigation of petitioner's Federal income tax compliance. He looked first at petitioner's filing history and discovered that petitioner had not filed a Federal income tax return for 2003. He then contacted the Palm Beach sheriff's office, which provided him with a copy of petitioner's arrest report and with bank records that the office had obtained during its investigation of petitioner. The arrest report showed thefts of items worth approximately $17,000. Working with the bank records that he had obtained, Mr. Lottman identified three bank accounts 2013 Tax Ct. Memo LEXIS 3">*6 that he believed were associated with petitioner: (1) a personal checking account at Wachovia Bank, account number ending in 1614 (personal account); (2) a joint checking account of petitioner and Ms. Cherry's at Washington Mutual Bank, account number ending in 8236 (joint account); and (3) a business checking account opened by Ms. Cherry at Wachovia Bank in the name "The Design Gallery", account number ending in 1579 (Design Gallery account). Mr. Lottman obtained additional information from the banks with respect to those accounts.
The Design Gallery account was opened in September 2003 by Ms. Cherry, who signed the account application as president of "The Design Gallery". She opened the account at the direction of petitioner, who had explained to her that he was partnering with the owner of Designer Gallery, they were doing some extra business, and it would be good for her have a business account in her name in order to build up her credit history. Between September 10, 2003, and March 14, 2005, petitioner (or, on three occasions, Ms. Cherry, on his behalf) deposited 123 checks into the Design Gallery account. Petitioner obtained all of those checks from customers 2013 Tax Ct. Memo LEXIS 3">*7 of Designer Gallery, who had given him the checks in payment for furniture or other items purchased from the store. Wachovia Bank issued a debit card associated with the Design Gallery account (Design Gallery debit card). Petitioner had sole possession of the card, and he regularly used it to make purchases for himself. In April 2005, after petitioner was arrested, Ms. Cherry closed the Design Gallery account. She did so at petitioner's direction, and, also at his direction, she used the funds withdrawn from the closed account to pay petitioner's criminal attorney, their home mortgage, and other expenses.
Mr. Lottman continued his investigation of petitioner until and after April 2007 when the IRS received (and filed) petitioner's 2003-05 returns. In part on the basis of his examination of bank records for the personal, joint, and Design Gallery accounts, Mr. Lottman concluded that petitioner had on those returns underreported his income. He believed petitioner to have sufficient dominion and control over the Design Gallery account that he should be considered its owner. He believed that the funds deposited to the account represented petitioner's unreported income. 2013 Tax Ct. Memo LEXIS 3">*8 To determine the amounts of income that petitioner had each year deposited into those accounts and not reported, he employed a bank deposits analysis pursuant to which he (1) identified the year's total deposits into each account, (2) determined which of those deposits were taxable and which were not (e.g., transfers between accounts of amounts already taken into account), (3) subtracted from the year's total taxable deposits the gross income petitioner reported on that year's return, and (4) concluded that the difference was unreported gross income. He further determined that, for 2005, petitioner had failed to report the $17,863 that, for that year, petitioner had obtained from his credit-card-related criminal activity.
*9 Following a review of Mr. Lottman's adjustments to petitioner's 2003-05 income by respondent's Appeals Office, respondent issued the notice, which, among other things, increased petitioner's income by $32,668, $96,854, and $41,310 for 2003, 2004, and 2005, respectively. 2
Petitioner gained $17,863 in 2005 from his credit-card-related criminal activity that he did not report on his 2005 return. Petitioner concedes that the $17,863 constitutes gross income, and we agree.
Petitioner does not disagree with certain aspects of respondent's bank deposits analysis. He does not disagree with respondent's determinations of the amounts of the deposits to the personal, joint, and Design Gallery accounts. He argues, however, that he "did not open, control, 2013 Tax Ct. Memo LEXIS 3">*10 or have access [to] or dominion [over]" the Design Gallery account and that he did not fail to report any income for any of the years in issue "because he did not receive income from the [Design Gallery] account." He also objects to respondent's classification of three 2004 cash deposits ($2,000, $3,800, and $8,000) into the joint account as taxable deposits. He claims the three deposits were nontaxable loans.
Petitioner was not a credible witness. Ms. Cherry was. On the basis of her testimony, we have found that she opened the Design Gallery account at his direction, that he regularly deposited checks into the account, that he obtained those checks from Designer Gallery's customers, that he had sole possession of the Design Gallery credit card, which he regularly used to make purchases for himself, and that, on liquidation of the account, Ms. Cherry used the proceeds in part to pay his criminal defense expenses and their joint expenses. We believe that petitioner used the money in the Design Gallery account for personal purposes and, by doing *11 so, demonstrated his dominion and control over the account. For tax purposes, therefore, he must be considered owner of the account. As we put 2013 Tax Ct. Memo LEXIS 3">*11 it in Unless the nontaxable nature of deposits is established, gross income includes deposits to bank accounts where the taxpayer has dominion and control of the funds. See
While unexplained bank deposits are ordinarily sufficient evidence of unreported income,
With respect to respondent's classifying three 2004 cash deposits to the joint account as taxable deposits, petitioner does not contest his receipt of those amounts, claiming only that the amounts deposited were nontaxable proceeds of loans. Petitioner bears the burden of proving that respondent's determinations of income using the bank deposits method are erroneous.
*13 We thus sustain respondent's adjustments increasing petitioner's gross income for each of the years in issue.
After extensions, petitioner's Federal income tax returns for 2003, 2004, and 2005 were due by October 15, 2004, 2005, and 2006, respectively. The parties *14 stipulated that respondent received petitioner's returns for all three years on April 17, 2007. Thus, there is sufficient evidence to find, and we do find, that it was appropriate for respondent to impose on petitioner a
Petitioner 2013 Tax Ct. Memo LEXIS 3">*15 contends that he should not be liable for the additions to tax because he had an "unavoidable absence" because of his incarceration. The mere fact that petitioner was incarcerated at the time his return was due does not constitute reasonable cause for his failure to timely file.
Petitioner's incarceration began on March 24, 2005. Petitioner was not incarcerated until after the extended due date for his 2003 return. For all years, moreover, petitioner has failed to show that his untimely filing was due to reasonable cause and the absence of willful neglect. We sustain respondent's determination of additions to tax under
Negligence has been defined as a lack of due care or failure 2013 Tax Ct. Memo LEXIS 3">*16 to do what a reasonably prudent person would do under like circumstances.
The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances. * * * Generally, the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability. Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of * * * law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer. 2013 Tax Ct. Memo LEXIS 3">*17 * * *
*16 Respondent bears the burden of production with respect to the penalty.
By demonstrating petitioner's failure to report as income the funds in the Design Gallery account and the stolen merchandise, respondent has met his burden of production. To avoid the penalty, petitioner must come forward with evidence that he acted with reasonable cause and in good faith.
Petitioner asserts that he did not understate his income because the money in the Design Gallery account and the alleged loans were not income. For the reasons discussed
Petitioner is liable for the deficiencies, additions to tax, and penalties as determined herein.
1. The deficiencies also reflect computational adjustments based on the phaseout of itemized deductions under
2. Respondent has made certain concessions with respect to the amount of petitioner's 2005 unreported income, which the parties can take into account in the computation to be made pursuant to
