UNITED STATES TAX COURT

T.C. Memo. 2003-208

UNITED STATES TAX COURT

THOMAS RICE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17356-94.

Filed July 15, 2003.

Thomas Rice, pro se.

Richard A. Stone, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge:

Respondent determined the following income

tax deficiencies and additions to tax with respect to

petitioner’s Federal income tax:

- 2 -

Year

Deficiency

1982

1983

1984

1985

1986

1987

1

$14,041

3

15,785

12,953

27,178

19,911

5,430

Sec.

6653

(b)(1)

$7,021

7,893

6,477

13,589

––-

Additions to tax

Sec.

Sec.

Sec.

6653

6653

6653

(b)(2) (b)(1)(A) (b)(1)(B)

2

4

5

6

––-

––––$14,933

4,073

––––7

8

Sec.

6654

$1,359

964

814

1,558

963

294

1

This deficiency is subject to a prepayment credit

adjustment of $73.

2

50 percent of the interest due on $13,968.

3

This deficiency is subject to a prepayment credit

adjustment of $19.

4

50 percent of the interest due on $15,766.

5

50 percent of the interest due on $12,953.

6

50 percent of the interest due on $27,178.

7

50 percent of the interest due on $19,911.

8

50 percent of the interest due on $5,430.

All section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

After concessions,1 the issues for decision are:

1

In the notice of deficiency dated June 27, 1994, respondent

determined that petitioner: (1) Received unreported interest

income during 1982, 1983, 1984, 1985, 1986, and 1987 of $84,

$290, $22, $114, $110, and $19, respectively; (2) received

unreported income from forgiveness of indebtedness during 1986 of

$3,471; and (3) is liable for self-employment taxes for all years

at issue. Petitioner did not raise these issues in his petition

or at trial. We deem these issues conceded. See Rule 34(b)(4).

Additionally, in his petition petitioner alleged that

respondent erred in determining that petitioner: (1) Is not

entitled to various deductions claimed on Schedule A, Itemized

Deductions, in addition to those allowed by respondent for all

years at issue; (2) is not entitled to head-of-household filing

status under sec. 2(b) for all years at issue; (3) is not

entitled to the child care credit under sec. 21 for all years at

(continued...)

- 3 (1) Whether petitioner received unreported income from the

sale of tax shelters and insurance during 1982, 1983, 1984, 1985,

1986, and 1987 of $56,701, $46,744, $16,939, $27,783, $49,346,

and $23,406, respectively;

(2) whether petitioner is entitled to various deductions

claimed on Schedule C, Profit or Loss from Business, in addition

to those allowed by respondent for all years at issue;

(3) whether petitioner is entitled to claim dependency

exemptions under section 151 for his two children2 for 1982 and

1986;3 and

(4) whether petitioner is liable for additions to tax for

fraud pursuant to section 6653(b)(1) and (2) for 1982 through

1

(...continued)

issue; and (4) is liable for additions to tax pursuant to sec.

6654 for failure to make estimated tax payments for all years at

issue. Because petitioner failed to address these issues at

trial or on brief, we deem these issues conceded. See Rule

151(e)(4) and (5); Petzoldt v. Commissioner, 92 T.C. 661, 683

(1989); Money v. Commissioner, 89 T.C. 46, 48 (1987).

Petitioner conceded in the stipulation of facts that he

received taxable income from: (1) Wages during 1982 and 1983 of

$4,549 and $165, respectively; (2) partnership distributions

during 1983 and 1984 of $4,834 and $3,416, respectively; and (3)

dividends during 1984 and 1985 of $25,773 and $46,884,

respectively.

2

In his petition, petitioner asserted that he was entitled

to dependency exemptions for three children for the years at

issue. The record indicates that petitioner has only two

children.

3

In the notice of deficiency, respondent allowed dependency

exemptions for two of petitioner’s children during 1983, 1984,

1985, and 1987.

- 4 1985 and pursuant to section 6653(b)(1)(A) and (B) for 1986 and

1987.

FINDINGS OF FACT

Some of the facts have been deemed established for purposes

of this case in accordance with Rule 91(f).4

We incorporate

these facts into our findings by this reference.

Petitioner

resided in Washington, D.C., on the date his petition was filed.

During the years at issue, petitioner conducted business as

a financial planner and consultant through four companies:

Rice

& Associates; Ridgeway, Rice & Dill, Inc.; Integrated Financial

Concepts, Inc. (IFC); and Life Investors Group, Inc.

Petitioner

sold insurance, promoted and sold various tax shelters, and

referred clients to his associate, Jim Dill (Mr. Dill), for tax

return preparation services.

When petitioner received clients’ payments for tax shelter

investments, he deposited them into his personal checking

accounts.5

Petitioner also deposited into his accounts the

proceeds from financial investment counseling fees, sales

4

On Oct. 18, 2002, respondent filed a motion to show cause

why proposed facts in evidence should not be accepted as

established under Rule 91(f) and attached a proposed stipulation

of facts based on admissions. Petitioner failed to respond to

the Court’s order to show cause under Rule 91(f) issued on Oct.

18, 2002. As a result, on Nov. 15, 2002, the Court made the

order to show cause under Rule 91(f) absolute and deemed

established the facts and evidence set forth in respondent’s

proposed stipulation of facts.

5

Over the course of the years at issue, petitioner used 12

personal checking accounts.

- 5 commissions, tax preparation fees, loans, and real estate sales.

Throughout the years at issue, petitioner had two children,

Jamal and Joshua, who lived with petitioner and his wife.

For

the taxable years 1982 and 1986, petitioner’s wife filed as

married filing separately and claimed Jamal and Joshua as

dependents.

In March 1993, petitioner pled guilty to (1) conspiring to

defraud the Government by impeding, impairing, obstructing, and

defeating the lawful functions of the Internal Revenue Service in

the ascertainment, computation, assessment, and collection of

revenue, in violation of 18 U.S.C. sec. 371, and (2) two counts

of bank fraud, in violation of 18 U.S.C. sec. 1014.6

Petitioner’s criminal conviction stemmed from his practice of

opening interest-bearing bank accounts under false names,

addresses, and Social Security numbers in an attempt to conceal

his financial activities.

Despite petitioner’s awareness of the requirements to file

Federal income tax returns and maintain books of account and

records of his business activities, petitioner consistently

failed to comply with either requirement.

Consequently,

respondent subpoenaed petitioner’s bank records in order to

reconstruct petitioner’s income for all years at issue.

Respondent’s examination of petitioner’s bank records led

6

Petitioner received a Federal prison sentence of 2 years

followed by 3 years of probation.

- 6 respondent to issue the notice of deficiency dated June 27, 1994.

On September 23, 1994, petitioner filed a timely petition

with the Court.

A trial was held on December 5 and 23, 2002.

This Court established a posttrial briefing schedule that

required respondent to file an opening brief on or before March

10, 2003, and required petitioner to file an answering brief on

or before May 22, 2003.

Only respondent filed the required

posttrial brief.

OPINION

Respondent contends that from 1982 through 1987 petitioner

failed to report income he received from the sale of tax shelters

and insurance.

In addition, respondent alleges that the entire

underpayment for all 6 years is attributable to fraud.

Petitioner contends that respondent’s determinations for all

years at issue are incorrect and denies that he committed fraud.

I.

Income Tax Deficiencies

A.

Unreported Income

Gross income is defined as “all income from whatever source

derived” and includes gross income derived from business

(Schedule C taxable income).

Sec. 61(a)(2).

Section 6001

requires a taxpayer to maintain books of account or records

sufficient to establish his gross income, deductions, and

credits.

Sec. 1.6001-1(a), Income Tax Regs.; see also Estate of

Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d 2

(6th Cir. 1977).

When a taxpayer fails to keep adequate records,

- 7 the Commissioner may use an indirect method of proving income,

such as the bank deposits method, in order to determine the

taxpayer’s taxable income.

supra at 656.

Estate of Mason v. Commissioner,

Under the bank deposits method, bank deposits are

prima facie evidence of income.

Tokarski v. Commissioner, 87

T.C. 74, 77 (1986); Estate of Mason v. Commissioner, supra.

Because petitioner failed to file tax returns and maintain

adequate books and records, respondent used the bank deposits

method to compute petitioner’s taxable income.

Specifically,

respondent examined petitioner’s deposit tickets, bank

statements, transcripts from related bank accounts, and canceled

checks.

After excluding transfers of funds between accounts and

deposits related to petitioner’s wife’s income and other nonSchedule-C items, respondent determined that petitioner received

unreported Schedule C taxable income during all years at issue.

Respondent’s determinations are presumed correct, and petitioner

bears the burden of proof.7

290 U.S. 111, 115 (1933).

Rule 142(a)(1); Welch v. Helvering,

Petitioner generally contests

respondent’s determinations and asserts that he shared the bank

accounts with his business associates.

Although petitioner and his wife were listed as the sole

account holders, petitioner contends that the bank accounts did

7

Respondent’s examination in this case commenced before July

22, 1998, the effective date of sec. 7491. See Internal Revenue

Service Restructuring and Reform Act of 1998, Pub. L. 105-206,

sec. 3001(c), 112 Stat. 727.

- 8 not belong to him exclusively.

Petitioner insists that he and

his partners, Mr. Ridge8 and Mr. Dill, shared the bank accounts

and the funds deposited into them.

We find no support in the

record for this assertion.

Petitioner has presented little evidence concerning the

individual bank deposits at issue.

Addressing the 1982

deficiency at trial, petitioner characterized the 1982 deposits

as clients’ payments toward tax shelter investments.

Petitioner

did not produce any corroborating evidence, but rather asked “to

be given the benefit of the doubt.”

Petitioner did not

specifically address the individual bank deposits for 1983

through 1987.

Besides his testimony described above, the only evidence

petitioner submitted was the testimony of his pro bono attorney,

William Davidson (Mr. Davidson).9

Mr. Davidson testified that

when he visited respondent’s office to examine petitioner’s bank

records, he found the records in a state of “disarray”.

After he

examined the bank records, Mr. Davidson doubted whether

respondent had properly considered “interbank transfers”, noting

the large number of bank accounts petitioner used.

However, Mr.

Davidson did not allege any specific errors or otherwise

8

The record does not contain Mr. Ridge’s full name.

9

William Davidson assisted petitioner with his case pro bono

during the time leading up to trial, but he did not enter an

appearance before the Court on petitioner’s behalf.

- 9 elaborate on his observations.

On the record as developed, petitioner has not offered

sufficient evidence to show that respondent’s determinations of

petitioner’s unreported Schedule C taxable income were in error.

We therefore sustain respondent’s determinations concerning

petitioner’s Schedule C taxable income for the years 1982 through

1987.

B.

Schedule C Deductions

Section 162(a) provides a deduction for ordinary and

necessary expenses that a taxpayer pays or incurs during the

taxable year in carrying on a trade or business (Schedule C

expenses).10

When using the bank deposits method to determine

taxable income, the Commissioner must take into account any

deductible expenses, including Schedule C expenses, of which the

Commissioner has knowledge.

DiLeo v. Commissioner, 96 T.C. 858,

872 (1991), affd. 959 F.2d 16 (2d Cir. 1992).

If a taxpayer

claims any deductible expenses that the Commissioner did not

allow, the taxpayer must prove their existence.

Id.

On the basis of the examination of petitioner’s personal

bank accounts, respondent concluded that petitioner had Schedule

C expenses of $25,065 in 1982, $4,001 in 1983, zero in 1984 and

10

Respondent does not question whether petitioner engaged in

a trade or business during the years at issue.

- 10 1985, $3,955 in 1986,11 and zero in 1987.

In his petition,

petitioner contended that he-incurred for all years relevant to the Notice, various

and certain deductible business expenses, ordinary and

necessary for the conduct of his businesses, including

businesses involving the ownership of certain real

property, all of which businesses during certain years

incurred both capital and net operating losses which

the Commissioner erroneously disallowed.

Petitioner failed to produce any evidence of his alleged

business expenses.

At trial petitioner blamed the lack of

evidence on respondent, contending that respondent had all of

petitioner’s business records and was unwilling to share them

with petitioner.12

Petitioner’s contention lacks merit.

The only records of

petitioner that respondent had in his possession and used in

making his determination were petitioner’s bank records that

respondent had obtained from various financial institutions by

summons.

The record shows that petitioner had numerous

opportunities to inspect the bank records in respondent’s

possession during the time before and between the two dates of

11

On Mar. 1, 1986, IFC lost its corporate charter. The

Schedule C expenses respondent allowed for 1986 are those IFC

incurred from March through December of 1986.

12

Specifically, petitioner asserted that the business

records had been in the possession of his former partner, Mr.

Dill, and were at some point “confiscated” by “the IRS.”

According to respondent, any business records held by the

Government relating to Mr. Dill had nothing to do with

petitioner. In fact, petitioner’s lack of business records

necessitated respondent’s use of the bank deposits method.

- 11 his trial.

Petitioner did not avail himself of these

opportunities.

Because petitioner has failed to carry his burden of proof,

we sustain respondent’s determinations concerning petitioner’s

Schedule C expenses for the years 1982 through 1987.

C.

Dependency Exemptions

A taxpayer may claim exemptions for individuals who qualify

as the taxpayer’s dependents.

Sec. 151(a), (e)(1).13

Section

152(a)(1) permits a taxpayer to claim his children as dependents

if the taxpayer provided over half of their support during the

calendar year.

When petitioner’s wife filed as married filing separately in

1982 and 1986, she claimed their two children as dependents.

Petitioner asserts that he was entitled to the dependency

exemptions.

Under such circumstances, the right to claim the

dependency exemptions belongs to the parent who provided over

half of the children’s support.

Llorente v. Commissioner, 74

T.C. 260, 269 (1980), affd. in part and revd. in part on other

grounds 649 F.2d 152 (2d Cir. 1981).

Petitioner failed to provide any evidence with respect to

this issue other than his own testimony.

We are not required to

accept petitioner’s self-serving testimony in the absence of

13

For taxable years beginning after Dec. 31, 1986, sec.

151(e)(1) was redesignated sec. 151(c)(1) by the Tax Reform Act

of 1986 (TRA), Pub. L. 99-514, sec. 103(b), 100 Stat. 2103.

- 12 corroborating evidence.

77.

See Tokarski v. Commissioner, 87 T.C. at

Consequently, we sustain respondent’s determination

disallowing petitioner any dependency exemptions for 1982 and

1986.

D.

Conclusion

We sustain respondent’s determinations of income tax

deficiencies for the taxable years at issue.

II.

Additions to Tax for Fraud

Section 6653(b)14 authorizes the imposition of an addition

to tax for underpayments of tax due to fraud.

Before amendments

by the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 1085

(the 1986 amendments), the addition to tax for fraud consisted of

50 percent of the underpayment amount, plus 50 percent of the

interest due on the portion of the underpayment attributable to

fraud.

Sec. 6653(b)(1) and (2).

After the 1986 amendments,

section 6653(b)(1) and (2) became section 6653(b)(1)(A) and (B),

respectively, and imposed an addition to tax for fraud of 75

percent of the portion of the underpayment attributable to fraud,

plus 50 percent of the interest due on that portion of the

underpayment.

Section 6653(b)(1) and (2) governs petitioner’s

income tax liabilities for 1982 through 1985; section

14

Sec. 6653(b) was amended by the Technical and

Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec.

1015(b)(2)(B), 102 Stat. 3569, and the Omnibus Budget

Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(c)(1), 103

Stat. 2399. Sec. 6663(a) contains the current version of the

fraud penalty.

- 13 6653(b)(1)(A) and (B) applies to the 1986 and 1987 liabilities.15

“Fraud is established by proving that the taxpayer intended

to evade tax believed to be owing by conduct intended to conceal,

mislead, or otherwise prevent the collection of such tax.”

Recklitis v. Commissioner, 91 T.C. 874, 909 (1988).

The presence

of fraud is not presumed, and the Commissioner bears the burden

of proving fraud by clear and convincing evidence.

Sec. 7454(a);

Rule 142(b); Beaver v. Commissioner, 55 T.C. 85, 92 (1970).

The

existence of fraud is a factual question resolved by an

examination of the entire record.

at 874.

DiLeo v. Commissioner, 96 T.C.

In order for the Commissioner to prove fraud by clear

and convincing evidence, the Commissioner must establish for each

year at issue that (1) the taxpayer underpaid his taxes, and (2)

some part of the underpayment is attributable to fraud.16

Id. at

886. The Commissioner may establish fraud by circumstantial

15

1986.

16

The 1986 amendments apply to returns due after Dec. 31,

TRA sec. 1503(e), 100 Stat. 2743.

For purposes of the sec. 6653(b)(1) additions to tax for

1982 through 1985, the Commissioner must prove that a portion of

the underpayment in each year is due to fraud, but for purposes

of the sec. 6653(b)(2) additions to tax for 1982 through 1985,

the Commissioner must prove the specific portion of each year’s

underpayment that is due to fraud. DiLeo v. Commissioner, 96

T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992). For

purposes of the sec. 6653(b)(1)(A) and (B) additions to tax for

1986 and 1987, if the Commissioner proves that any portion of the

underpayment for a year is attributable to fraud, the entire

underpayment for that year is treated as attributable to fraud,

except with respect to any portions of the underpayment that the

taxpayer establishes are not attributable to fraud. Sec.

6653(b)(2).

- 14 evidence, id. at 875, which includes the various indicia or

badges of fraud relied upon by the courts, see Bradford v.

Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo.

1984-601; DiLeo v. Commissioner, supra at 875.

A combination of

several badges of fraud constitutes persuasive circumstantial

evidence of fraud.

Niedringhaus v. Commissioner, 99 T.C. 202,

211 (1992); Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989).

Respondent has established that petitioner underpaid his

income tax for each of the years at issue.

The bank deposits

analysis reflects substantial deposits into petitioner’s bank

accounts for each year.

The record contains substantial credible

evidence that the deposits were income to petitioner.

When this

fact is coupled with the uncontested fact that petitioner was

required to file but failed to file tax returns for the years at

issue, we find that the record contains clear and convincing

proof that petitioner underpaid his income tax for each of the

years at issue.

Respondent’s proof that petitioner’s underpayments are

attributable to fraud consists primarily of petitioner’s deemed

admissions.

We have held that deemed admissions are sufficient

to satisfy the Commissioner’s burden of proof with respect to the

issue of fraud.

See Doncaster v. Commissioner, 77 T.C. 334, 336-

338 (1981).

According to respondent, petitioner’s deemed admissions

establish the following indicia or badges of fraud for all years

- 15 at issue:

(1) Understatement of income; (2) failure to keep

adequate books and records; (3) failure to file tax returns; (4)

acts designed to conceal income and/or assets; (5) false,

misleading, inconsistent, or implausible explanations of

behavior; (6) failure to cooperate with respondent’s agents; (7)

engaging in illegal activities; (8) awareness of tax laws; (9)

attempts to conceal illegal activities; (10) high education level

and sophistication; and (11) a pattern of inaction and delay

during the pretrial and trial proceedings.

We agree that petitioner’s deemed admissions contain several

badges of fraud.

returns.

Petitioner knew of the requirement to file tax

Nevertheless, petitioner consistently failed to report

substantial amounts of income over several years, behavior which

strongly evidences fraudulent intent.

See Farber v.

Commissioner, 43 T.C. 407, 419-420 (1965).

Petitioner also knew

of the requirement to maintain adequate books or records of

account but failed to do so.

This record-keeping omission,

combined with petitioner’s failure to file tax returns,

constitutes persuasive evidence of petitioner’s intent to conceal

income and evade taxes.

Petzoldt v. Commissioner, supra at 701.

Other badges of fraud contained in petitioner’s deemed

admissions include petitioner’s involvement in illegal

activities, as evidenced by petitioner’s criminal convictions and

practice of opening bank accounts under false names, addresses,

- 16 and Social Security numbers;17 petitioner’s failure to make

estimated tax payments; and petitioner’s failure to cooperate

with respondent’s agents’ attempts to reconstruct his income.

Bradford v. Commissioner, supra at 308; DiLeo v. Commissioner,

supra at 875; Petzoldt v. Commissioner, supra at 701-702.

Petitioner has not presented any persuasive evidence to

rebut respondent’s proof of fraud.

Mr. Davidson testified that

his review of petitioner’s bank records did not reveal any

evidence “that would give rise to a claim of fraud, insofar as

intentional withholding of information or anything of that sort.”

Other than Mr. Davidson’s comments, the only evidence petitioner

offered was his own testimony denying that he committed fraud.

The badges of fraud contained in petitioner’s deemed

admissions strongly indicate that petitioner intended to conceal

his income and avoid paying taxes.

We conclude that respondent

has met his burden of proof, establishing by clear and convincing

evidence that all of petitioner’s underpayments for 1982 through

1987 were attributable to fraud.

17

Petitioner is liable for

At trial, respondent stated that the deemed admissions

relevant to the fraud issue contained information directly taken

from the criminal indictment. The record lacks additional

details about petitioner’s criminal conviction, making it unclear

whether the conspiracy and bank fraud charges related to work

that petitioner performed for a client or pertained solely to

petitioner’s personal financial activities and whether the

charges covered all of the years at issue. Regardless, however,

of the period or the activities covered by petitioner’s criminal

case, sufficient indicia of fraud still exist to support a

finding of fraud for each of the years at issue.

- 17 section 6653(b)(1) and (2) additions to tax for 1982 through 1985

and section 6653(b)(1)(A) and (B) additions to tax for 1986 and

1987.

We have considered the remaining arguments of both parties

for results contrary to those expressed herein and, to the extent

not discussed above, find those arguments to be irrelevant, moot,

or without merit.

To reflect the foregoing,

Decision will be entered

for respondent.