The opinion
T.C. Memo. 2006-271
UNITED STATES TAX COURT
BENNETT GEIGER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3289-05. Filed December 26, 2006.
Frank R. Keasler, Jr., for petitioner.
W. Benjamin McClendon, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined a deficiency in
petitioner’s 2000 Federal Income tax of $159,008 and an accuracy-
related penalty of $31,802 pursuant to section 6662(a).1 The
1
Unless otherwise noted, all section references are to the
Internal Revenue Code, as amended, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
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issues we must decide are: (1) Whether petitioner qualifies for
a theft loss deduction pursuant to section 165(c) in excess of
$5,586; (2) if petitioner is entitled to the deduction, whether
it is properly claimed for taxable year 2000; and (3) whether
petitioner is liable for the accuracy-related penalty pursuant to
section 6662(a).
FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated.
The parties’ stipulations of facts are incorporated herein by
reference and are found as facts. Petitioner resided in
Jacksonville, Florida at the time the petition was filed.
Petitioner is the sole shareholder in Big Ben Tree Service,
Inc. (BBTS), an S corporation. BBTS filed its Federal income tax
return for taxable year 2000 on June 25, 2001, on which it
claimed a theft of property held more than 1 year and valued at
$1,645,986.
BBTS issued to petitioner a Schedule K-1, Shareholder’s
Share of Income, Credits, Deductions, etc., attached to its
taxable year 2000 Federal income tax return, containing a loss
amount of $1,645,986 from previous years for inclusion on
petitioner’s return. BBTS also deducted a loss item of $155,227
for the current year from Form 4797, Sales of Business Property,
on its taxable year 2000 return. In attachments to their 2000
tax returns, both BBTS and petitioner alleged theft losses of:
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$63,704 in 1991, $93,292 in 1992, zero in 1993, $97,908 in 1994,
$167,085 in 1995, $259,292 in 1996, $275,506 in 1997, $355,273 in
1998, and $333,926 in 1999. All the alleged theft losses were
first discovered and therefore deducted in 2000.
Petitioner timely filed his Federal income tax return for
taxable year 2000. On that return, he reported a loss of
$1,645,986, income of negative $1,317,719, and a tax liability of
zero.
Petitioner filed a Form 1045, Application for Tentative
Refund (refund request), dated May 17, 2001, which was received
by the Internal Revenue Service (IRS) on May 21, 2001. On the
refund request, petitioner claimed an embezzlement loss of
$1,801,213. Respondent refunded petitioner $120,933 for taxable
year 1999, $99,816 for taxable year 1998, and $150,243 for
taxable year 1997.
After examination of his return by the IRS, petitioner
conceded that the amount of the theft loss for taxable year 2000
should be reduced by $1,096,713 to $704,500. As a result of that
reduction, petitioner remitted to the IRS the refunds previously
received, plus interest, for taxable years 1997, 1998, and 1999.
On November 15, 2004, respondent issued a notice of
deficiency, determining that petitioner failed to substantiate a
theft loss deduction for taxable year 2000 of $1,645,986. In the
notice, respondent also determined that petitioner failed to
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substantiate $149,641 of theft loss for taxable year 2000 and,
accordingly, allowed a theft loss of $5,586. Additionally,
respondent determined that petitioner was liable for an accuracy-
related penalty pursuant to section 6662.
Petitioner cannot identify specific checks whose amounts add
up to the $704,500 allegedly embezzled from BBTS. Additionally,
petitioner cannot identify checks whose amounts add up to the
$1,096,713 originally claimed as part of the embezzlement, which
was later identified as previously deducted business expenses.
Petitioner did list, in an exhibit attached to petitioner’s
answers to respondent’s interrogatories, checks totaling
$1,232,602.69 as allegedly embezzled.
Petitioner provided respondent with copies of some, but not
all, of the listed checks. Petitioner did not provide source
documents to the examining agent during the course of the audit.
Petitioner did not maintain the source documents underlying the
general ledgers of BBTS.
At trial, petitioner further reduced the claimed theft loss
by $139,789 to $564,711. Petitioner also conceded that all
checks in the amount of $1,500 were not embezzled, but did not
further change the total amount of theft claimed.
Leslie Clark (Ms. Clark) and Ann Ellis (Ms. Ellis) are two
former employees of BBTS who petitioner alleges embezzled funds
from BBTS. Ms. Clark worked for BBTS while married to petitioner
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from 1980 until 1990. Ms. Clark was again employed at BBTS from
1995 until the summer of 1999. During the latter period of
employment, Ms. Clark and petitioner were engaged in an
extramarital relationship, including while petitioner was married
to Carrie White (Ms. White) and Ms. Clark was married to Ted
Clark.
Ms. Ellis began working for BBTS in 1988, left employment in
1990, and returned to BBTS in 1991 and continued to work there
until January 2001, when her employment was terminated. Ms.
Ellis was responsible for bookkeeping and accounting. Ms. Ellis
had signatory authority over BBTS’s corporate checking account.
She also signed payroll checks on behalf of BBTS during the
period of the alleged embezzlement. Ms. Ellis paid petitioner’s
personal bills, such as telephone, power, etc., from BBTS and
charged the amounts as shareholder distributions.
Ms. Ellis and Ms. Clark provided petitioner with operating
cash from BBTS’s corporate accounts at least weekly, except for
the periods when petitioner was on vacation or engaged in
vocational training. The cash was provided to petitioner by Ms.
Ellis’s writing a check to petitioner and endorsing it. Then,
she or Ms. Clark would cash the check and either deliver the cash
to petitioner or leave it in his office desk. Petitioner used
the cash for expenses (cash expenses) incurred in the field,
including but not limited to, maintenance and repairs to trucks
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and equipment, fuel, and dump fees.2 Each week, the cash
expenses regularly totaled between $5,000 and $6,000.3
Petitioner received all the cash he used for personal
spending money in the same manner as the cash he received for
cash expenses; i.e., by having Ms. Ellis cash a check from BBTS
and deliver the money to him. Petitioner did not use ATM cards
and could not withdraw currency directly from his personal
accounts.
During the IRS’s examination of petitioner’s return, Ms.
Clark and Ms. Ellis each signed an affidavit on July 8, 2002
(affidavit). The affidavits each stated that the respective
affiant did not embezzle any money from BBTS or petitioner.
Ms. White began working for BBTS in August 1999. Petitioner
and Ms. White were married during November 2000. Ms. White, on
petitioner’s behalf, investigated BBTS’s alleged theft loss. Ms.
White does not have any bookkeeping training or experience either
in general or with the specific accounting software BBTS used.
Ms. White prepared an analysis of the alleged theft loss at BBTS.
Although Ms. White could not distinguish an embezzled check from
a nonembezzled one, the original analysis she prepared claimed
2
Dump fees are fees paid by petitioner to dispose of the
wood removed from a customer’s property, as petitioner was not
allowed to leave the debris from a customer’s job for regular
garbage collection.
3
For example, BBTS deducted $111,600 in dumping fees alone
in 1997, $133,330 in 1998, $204,588 in 1999, and $43,934 in 2000.
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every check written to petitioner was embezzled, resulting in the
$1,801,213 total originally claimed in the refund request.
On January 24, 2001, Ms. White filed a police report with
the Jacksonville Sheriff’s Office. The police report did not
mention a sizable embezzlement loss.4 The police report is the
only report petitioner filed with law enforcement officials with
respect to the claimed theft loss.
Although petitioner and Ms. White have divorced since the
discovery of the alleged embezzlement, petitioner occasionally
sends Ms. White money. Petitioner gave Ms. White $1,000 for her
travel expenses from Pensacola to Jacksonville to testify at the
trial in the instant case. Petitioner also gave Ms. White $500 2
weeks prior to the $1,000 gift.
During 2001, petitioner filed a civil action against Ms.
Clark and Ms. Ellis seeking damages for the amount of the theft
loss. Petitioner entered into a settlement agreement with Ms.
Ellis and Ms. Clark on January 9, 2003, that required them to pay
petitioner $12,000 each. Ms. Ellis discharged her liability
under the settlement in a chapter 7 bankruptcy. On February 14,
2006, petitioner filed against Ms. Clark a motion for final
4
The police report claims the theft of personal property,
mostly tools and office equipment. Ms. White testified at trial
that “Some of those things have since been found.” The only
mention of checks is in the “Additional Information” section
after the enumeration of stolen items.
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judgment in the Circuit Court for the Fourth Judicial Circuit of
the State of Florida seeking $2,067,926.87 in damages.5
During the period of the alleged embezzlement, Ms. Clark
continued to use her credit card for personal purchases and
accumulated an unpaid balance of $10,000. Ms. Clark did not
provide an explanation of how that credit card debt was
consistent with her admission to the embezzlement of several
thousand dollars per week from BBTS.
Ms. Clark maintained, until she met with respondent’s
counsel on March 14, 2006, that she did not embezzle any money
from BBTS or petitioner. In February 2006, petitioner threatened
Ms. Clark, who had recently applied for a real estate license,
that, if at the trial of the instant case she did not admit to
embezzling from BBTS, he would take out an ad in the
newspaper calling her a liar and thief.6 Ms. Clark did not admit
to the alleged embezzlement on her application for a real estate
license. Ms. Clark, before testifying at trial, received legal
advice from petitioner’s attorney regarding the statutes of
5
We note that this roughly coincides with the timing of
petitioner’s threat to Ms. Clark, see infra, and may have been an
attempt to influence her testimony in the instant case. Ms.
Clark had not made a payment under the agreement since May 18,
2004, yet petitioner waited almost 2 years to file for a
judgment. Additionally, Ms. Ellis received a threatening phone
call 2 weeks before trial, although the identity of the caller is
not in evidence.
6
Petitioner intended to intimidate Ms. Clark with the threat
of losing her license or future business.
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limitations for criminal prosecution, as well as assessment of
taxes and penalties against her for substantial understatement.
Notwithstanding her prior denials, Ms. Clark testified at
trial that she and Ms. Ellis embezzled money from BBTS. Ms.
Clark’s testimony, however, did not provide even a general amount
of money that she allegedly embezzled, nor could she reconstruct
an amount by linking any specific items purchased with allegedly
embezzled funds.
Ms. Clark claimed that Ms. Ellis invited her to join an
ongoing embezzlement scheme shortly after Ms. Clark resumed
working at BBTS. Ms. Ellis was aware that Ms. Clark was
petitioner’s former wife and that Ms. Clark and petitioner were
engaged in a personal relationship at the time.
Ms. Clark’s then husband, Ted Clark, supposedly knew of Ms.
Clark’s embezzlement. Ted Clark did not testify at the trial.
OPINION
As a general rule, the Commissioner’s determinations are
presumed correct, and the taxpayer bears the burden of proving
otherwise. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115
(1933). Section 7491(a)(1) provides that the burden of proof
will shift to the Commissioner when the taxpayer has introduced
credible evidence with respect to any factual issue relevant to
ascertaining the liability of the taxpayer for any tax. However,
the burden of proof does not shift to the Commissioner unless the
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taxpayer complied with all substantiation requirements,
maintained all required records, and cooperated with reasonable
requests by the Service “for witnesses, information, documents,
meetings, and interviews”. Sec. 7491(a)(2); Higbee v.
Commissioner, 116 T.C. 438, 440-441 (2001). Section 7491(c)
provides that the Commissioner shall have the burden of
production with respect to any penalty. See also Higbee v.
Commissioner, supra at 446-447.
A taxpayer who provides only self-serving testimony and
inconclusive documentation is not considered to have provided
credible evidence. See Blodgett v. Commissioner, 394 F.3d 1030
(8th Cir. 2005) affg., T.C. Memo. 2003-212; Higbee v.
Commissioner, supra at 445-446.
Credible evidence is evidence that, “after critical
analysis, the Court would find sufficient upon which to base a
decision on the issue if no contrary evidence were submitted”.
Higbee v. Commissioner, supra at 442 (citing H. Conf. Rept. 105-
599, at 240-241 (1998), 1998-3 C.B. 747, 994-995). Evidence is
not credible if the Court is not convinced that it is worthy of
belief. Id.
On the basis of the record before us, we conclude that
petitioner did not introduce credible evidence with respect to
the factual issues presented under section 165. Petitioner
provided only incomplete and inconclusive documentation, along
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with self-serving and incredible testimony. Because petitioner
did not introduce credible evidence with respect to those factual
issues, the burden of proof does not shift to respondent under
section 7491(a)(1).7 Accordingly, we need not decide whether
petitioner has complied with the applicable requirements of
section 7491(a)(2). The burden of proof rests with petitioner to
prove that he qualifies for a theft loss deduction in excess of
the amount respondent allowed in the notice of deficiency.
Section 165(a) allows a deduction for “any loss sustained
during the taxable year and not compensated for by insurance or
otherwise.” Concerning theft losses, section 165(a) is
applicable for the year “in which the taxpayer discovers such
loss.” Sec. 165(e). For purposes of section 165(e), theft
includes embezzlement. Sec. 1.165-8(d), Income Tax Regs.
To carry his burden, petitioner must establish that the
alleged theft loss occurred and that the requirements of section
165 have been met. See Allen v. Commissioner, 16 T.C. 163, 166-
167 (1951). Petitioner must establish, inter alia, the existence
of a theft within the meaning of section 165 and the amount of
the claimed theft loss. See Elliott v. Commissioner, 40 T.C.
304, 311 (1963). Whether certain actions constitute theft for
7
We note that, although the burden of proof did not shift,
respondent did produce a full source and applications analysis of
petitioner’s business and personal income. The analysis shows no
missing funds.
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purposes of section 165 depends on the law defining the crime of
theft in the jurisdiction where the alleged theft occurred.
Monteleone v. Commissioner, 34 T.C. 688, 692 (1960).
Fla. Stat. Ann. sec. 812.014 (West 2000) provides:
(1) A person commits theft if he or she knowingly
obtains or uses, or endeavors to obtain or to use, the
property of another with intent to, either temporarily
or permanently:
(a) Deprive the other person of a right to the
property or a benefit from the property.
(b) Appropriate the property to his or her own
use or to the use of any person not entitled to the
use of the property.
In the instant case, petitioner has failed to prove that a
theft occurred under Florida law. Despite producing, as multiple
exhibits at trial and on brief, several lists of checks from
BBTS,8 including those in response to respondent’s
interrogatories, petitioner has not provided the Court with any
credible documentation that supports a theft in the total amount
of $1,801,213, $704,500, or $564,711.9
8
We note that several of these lists include information
about checks that are not a part of the record and are not in
evidence.
9
For example, petitioner’s reply brief includes three lists
of checks. The list entitled “TOTAL Theft Loss” includes 427
checks with a total amount of $909,449.66. There is a “TOTAL
DOUBLE DATED CHECKS” list for each of the years 1996-2000, which
lists cumulatively include 275 checks totaling $593,940.76. The
list entitled “Missing Check Total Amount” includes 348 checks
totaling $762,810.34.
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Petitioner argues that reasonable inferences support the
conclusion that there was an embezzlement case and that such
inferences are sufficient to support a decision in his favor.
Petitioner cites Moore v. Commissioner, T.C. Memo. 1983-671, for
the proposition that a court may rely on reasonable inferences in
an embezzlement case. In fact, the actual holding in that case
is that the Court will not make or rely upon assumptions without
some basis in the evidence. The taxpayer in Moore, like
petitioner, failed to produce sufficient evidence to raise his
claim of embezzlement from a bare assumption to a reasonable
inference. Moore also fails to support petitioner’s position in
that the existence and amount of money missing in Moore were not
in issue, only the characterization of the money as stolen from
the taxpayer versus misappropriated from a partnership. On the
basis of the record, we conclude that petitioner has not provided
sufficient credible evidence to support a reasonable inference of
embezzlement.
Petitioner further argues that, after inferring that some
money was embezzled, the Court can now estimate the amount of
loss. Petitioner cites Mann v. Commissioner, T.C. Memo 1981-684,
for the proposition that the Court may estimate an embezzlement
loss, applying the rule of Cohan v. Commissioner, 39 F.2d 540
(2d Cir. 1930). Although Mann did involve both an embezzlement
and an estimation, there was no estimation of an embezzlement.
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In Mann, a secretary embezzled money from the taxpayer by forging
checks. The embezzlement portion of the opinion does not deal
with the amount of embezzlement by the secretary at all, only the
proper year of deductibility. The taxpayer in Mann also was the
victim of theft by a business partner. The taxpayer had given a
business partner $10,200 to open a store. The partner did open a
store, but shortly thereafter closed it and absconded with the
remaining capital. Using the Cohan rule, the Court estimated
that $5,000 of the $10,200 had been embezzled and allowed
ordinary loss treatment for that amount. The Court ruled that
the rest of the loss was a capital loss resulting from the
failure of the store. The Court clearly stated: “Neither the
fact that petitioner sustained a loss nor the amount of such loss
is in dispute.” Id. In the light of the lack of credible
evidence to support the conclusion that there was an embezzlement
in any amount, we decline to apply Mann and Cohan in the instant
case.
We find unconvincing petitioner’s contention that any time
more than one check was written to petitioner during any
particular day, there must have been embezzlement. Given
petitioner’s extensive use of cash for business expenses and
commingling of personal funds and expenses with those of BBTS,
petitioner’s bare assertions regarding the number of checks in a
day is insufficient to prove theft.
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Moreover, Ms. Clark’s testimony lacks credibility. For
years, Ms. Clark maintained that she did not embezzle from BBTS,
including in an affidavit and on her application for a real
estate license. Furthermore, during February 2006, petitioner
threatened Ms. Clark with libel, after which she first admitted
to the embezzlement. Additionally, Ms. Clark’s admission to the
embezzlement during the testimony at trial was made after
receiving legal advice from petitioner’s counsel that she could
no longer be prosecuted criminally or be liable for additional
taxes from the alleged embezzlement. Also at trial, Ms. Clark
could not explain why she continued to carry a credit card
balance while allegedly embezzling from BBTS. Likewise, she did
not provide convincing testimony regarding the amount of the
embezzlement or what she did with the money. Finally, it is
implausible to us that Ms. Ellis would recruit Ms. Clark to
embezzle from BBTS, knowing Ms. Clark was formerly married to
petitioner and was in a relationship with him at the time. On
the basis of the record, we hold that petitioner has failed to
prove that he is entitled to any embezzlement deduction beyond
the amount respondent allowed in the notice of deficiency.
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Because petitioner failed to prove that a theft loss in
excess of $5,586 occurred,10 we do not reach the question of
timing.
Section 7491(c) provides that the Commissioner bears the
burden of production with respect to the liability of any
individual for any addition to tax or penalty. Consequently,
respondent must produce sufficient evidence to demonstrate that
the accuracy-related penalty is appropriate. See Higbee v.
Commissioner, 116 T.C. at 446.
Section 6662(a) imposes a 20-percent accuracy-related
penalty with respect to the portion of any underpayment of tax
attributable to a substantial understatement of income tax. An
“understatement” is the excess of the amount of tax required to
be shown on the return over the amount of tax that is actually
shown on the return. Sec. 6662(d)(2)(A). A “substantial
understatement” of income tax exists if the amount of the
understatement for the taxable year exceeds the greater of (1) 10
percent of the tax required to be shown on the return or (2)
$5,000. Sec. 6662(d)(1)(A).
On his return, petitioner indicated a tax liability of zero.
Respondent determined the appropriate tax was $159,008. The
10
Although the evidence at trial suggests that no theft at
all occurred, on brief respondent has maintained the same
position as taken in the notice of deficiency and does not seek
to disallow the deduction allowed in the notice of deficiency.
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difference between $159,008 and zero exceeds both 10 percent of
$159,008, or $1,590, and $5,000. Accordingly, the understatement
was substantial.
Section 6664(c)(1) provides that the accuracy-related
penalty shall not apply to any portion of an underpayment if it
is shown that there was reasonable cause for the taxpayer’s
position with respect to that portion and that the taxpayer acted
in good faith with respect to that portion. The determination of
whether a taxpayer acted with reasonable cause and in good faith
within the meaning of section 6664(c)(1) is made on a case-by-
case basis, taking into account all of the pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most
important factor is the extent of the taxpayer’s effort to assess
his proper tax liability for the year. Id. “Circumstances that
may indicate reasonable cause and good faith include an honest
misunderstanding of fact or law that is reasonable in light of
all of the facts and circumstances, including the experience,
knowledge, and education of the taxpayer.” Id.
Petitioner does not qualify for section 6664(c)(1) relief.
Under the circumstances, petitioner’s failure to consult an
accountant or other tax professional was unreasonable. See Marr
v. Commissioner, T.C. Memo. 1995-250 (finding taxpayer negligent
for claiming theft loss without consulting tax professional).
Petitioner claimed a very large deduction that resulted in
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claiming zero tax liability for the current year and refunds for
several prior years. Petitioner did not consult an accountant to
prepare the loss but rather relied on his then wife, Ms. White,
who has no experience in bookkeeping. Ms. White’s analysis
yielded a total of $1,801,213. However, once consulted,
petitioner’s accountant quickly reduced that amount to $704,500.
Accordingly, petitioner does not qualify for the reasonable cause
exception in section 6664(c)(1), and we hold that petitioner is
liable for the penalty pursuant to section 6662 for a substantial
understatement of income tax.
We have considered all of petitioner’s contentions, and, to
the extent they are not discussed herein, they are moot,
irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.