# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T.C. Memo. 2000-121

UNITED STATES TAX COURT

THERON R. LIVINGSTON, SR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
MICHELE D. LIVINGSTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 8691-97, 15040-97.

Filed April 6, 2000.

H pleaded guilty to criminal tax evasion for taxable
year 1990, admitting to a specified amount of unreported
income as determined through R’s reconstruction of H’s 1990
income by the net worth method in the criminal proceeding.
Subsequently, for purposes of establishing H’s civil tax
liability for taxable years 1989 and 1990, R determined H’s
unreported income by relying directly on the criminal net
worth summary. R’s 1989 net worth computation assumed that
H had a zero opening net worth and was based on inconsistent
inclusions of H’s and W’s incomes, assets, and expenditures.
For taxable year 1990, H and W filed a joint Federal
income tax return. In her original petition, W sought
innocent spouse relief under former sec. 6013(e), I.R.C.
After the trial in this case, former sec. 6013(e), I.R.C.

- 2 was repealed and replaced by sec. 6015, I.R.C.
Subsequently, W filed administrative elections for relief
pursuant to sec. 6015(b) and (c), I.R.C. R made a full
concession of W’s liability under sec. 6015(c), I.R.C., but
made no determination under sec. 6015(b), I.R.C. W seeks
judicial determination of her entitlement to relief under
sec. 6015(b), I.R.C.
1. Held: for taxable year 1989, respondent’s determination
of H’s unreported income through use of the net worth method
is not sustained.
2. Held: for taxable year 1990, respondent’s determination
of H’s unreported income through use of the net worth method
is modified.
3. Held: for taxable year 1990, respondent having fully
conceded W’s tax liability pursuant to her election under
sec. 6015(c), I.R.C., the question of her entitlement to
relief under sec. 6015(b), I.R.C. is moot.

Ramsey R. Taylor and G. Norris Watson, for petitioner in
docket No. 8691-97.
Howard B. Teller, for petitioner in docket No. 15040-97.
Richard A. Stone, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge:

In these consolidated cases, respondent

determined deficiencies, additions to tax, and an accuracyrelated penalty in petitioners’ Federal income taxes as follows:

- 3 -

Year

Deficiency

Additions To Tax and Penalty
Sec. 6651(a)(1)
Sec. 6654
Sec. 6663

Theron Livingston, Sr.
1989
$3,424

$856

$232

—

Theron and Michele Livingston
1990
$24,676

---

—

$18,507

After concessions,1 the issues for decision are:
(1) Whether Theron Livingston, Sr. (petitioner husband), had
$14,690 of unreported income in taxable year 1989 as determined
by respondent’s income reconstruction using the net worth method;
(2) whether petitioners had $77,372 of unreported income in
taxable year 1990 as determined by respondent’s income
reconstruction using the net worth method; and (3) whether
respondent’s full concession as to the 1990 tax liability of
Michele Livingston (petitioner wife) pursuant to section 6015(c)
renders moot the question of petitioner wife’s entitlement to
relief pursuant to section 6015(b).2

1

Petitioner husband concedes that for taxable year 1989
additions to tax apply pursuant to secs. 6651(a)(1) and 6654 to
any underpayment for such year as determined by the Court. Also,
for taxable year 1990, petitioner husband concedes the imposition
of the fraud penalty pursuant to sec. 6663 on any underpayment as
determined by the Court.
2

Unless otherwise noted, 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.

- 4 FINDINGS OF FACT
The parties have stipulated some of the facts, which are
incorporated in our findings by this reference.

When the

petition was filed, petitioner husband was incarcerated in
Federal prison in Montgomery, Pennsylvania, and petitioner wife
resided in Severn, Maryland.
Petitioners were married on May 20, 1989, and remained
married at all times relevant to these cases.

Petitioner wife

has a daughter, Itesha, and petitioners have a son, Theron, Jr.
During the years in issue, petitioner husband was selfemployed in a disc jockey business.

Petitioner wife was employed

by Merrill Lynch in Severn Park, Maryland, performing various
clerical duties.
On or about June 30, 1989, petitioners purchased a 1983
Nissan Maxima in the name of petitioner wife.

Of the $4,240

total purchase price, they paid $2,240 cash and financed the
balance.

On or about October 5, 1989, petitioners traded in the

1983 Maxima for a 1984 BMW in the name of petitioner wife.

Of

the $6,860 total purchase price, they paid $3,000 cash, received
$1,200 net credit for the trade-in, and financed the balance.
On February 28, 1990, petitioners and Itesha were involved
in an automobile accident.

Petitioners settled three personal

- 5 injury cases in connection with the accident.

Their net

settlement proceeds were as follows:
Theron Livingston, Sr.
Michelle Livingston
Itesha Livingston

$3,333
3,523
667

Total

7,523

On or about August 10, 1990, petitioners used these
settlement proceeds to purchase a 1988 Alfa Romeo Milano in the
name of petitioner wife.

Of the $10,547 total purchase price,

they paid $7,547 cash and financed the balance.
For taxable year 1989, petitioner husband filed no Federal
income tax return, and petitioner wife filed a Federal income tax
return with a filing status of married filing separately,
reporting wages of $12,290.

For taxable year 1990, petitioners

filed a joint Federal income tax return.

The Schedule C, Profit

or Loss From Business, included as part of the 1990 joint return
reported $10,300 gross receipts and $632 net income from
petitioner husband’s disc jockey business.

Petitioners’ 1990

joint return also reported petitioner wife’s wages of $12,356.
On June 11, 1994, petitioner husband signed a plea agreement
in which he agreed to plead guilty to income tax evasion pursuant
to section 7201 for taxable year 1990 and to a May 1993 offense
for distribution of cocaine base.

Petitioner husband was

sentenced to 60 months of incarceration on the tax evasion count,

- 6 to run concurrently with a 70-month sentence on the drug-related
count.
In the plea agreement, petitioner husband agreed that “the
amount of additional income attributable to * * * [petitioner
husband] in 1990 is $63,610 and the additional amount of tax owed
to the United States is $20,659”.
The statement of facts in the criminal proceeding contained
a summary of the net worth analysis (hereinafter referred to as
the criminal net worth computation), as follows:
Particulars
Total assets
Less: Total liabilities
Net worth
Less: Prior years
net worth
Increase in net worth
Plus: Expenditures
Less: Deductions
Corrected taxable
income
Reported taxable income
Understatement
1

12/31/89

12/31/90

12/31/91

1

2

$82,791
6,100
76,691
4,845

$86,643
6,100
80,543
76,691

71,846
18,591
6
27,412
63,025

3,852
35,337
19,858
19,331

(585)
63,610

1,091
18,240

$7,445
2,600
4,845
-04,845
16,511
5
6,000
15,356

3

-015,356

4

This amount comprises a $608 checking account balance and the 1984 BMW.

2

This amount comprises a $423 checking account, the 1984 BMW and the 1988
Alfa Romeo Milano, and “investments” of $65,000 in a music shop, Steady Beat
Records.
3
This amount comprises personal living expenses of $13,477, including
expenditures made jointly by petitioner husband and petitioner wife, as well as an
item characterized as “non-deductible personal loss 1983 Maxima” in the amount of
$3,034.
4

This amount comprises of personal living expenses, income taxes paid, and
Social Security taxes paid.
5

This amount represents personal exemptions.

6
This amount comprises $12,356 of wages for petitioner wife, $6,856 for
petitioners’ settlement of their injury claims from the automobile accident, and
$8,200 for personal exemptions.

- 7 After petitioner husband’s plea agreement, Gim Baker
(Baker), a revenue agent for the Internal Revenue Service (IRS),
was assigned to examine petitioner husband’s 1989 Federal income
tax liability and petitioners’ 1990 joint Federal income tax
return.

Baker issued letters to both petitioners, requesting

them to provide documentation such as income records and expense
records.

In response, petitioner husband sent Baker a letter

stating that it was impossible for him to collect the necessary
documents while he was incarcerated and requesting that the civil
examination be postponed until his projected release in 2000.
Petitioner wife–-whose liability related only to taxable year
1990--refused to provide the requested information until the IRS
showed her what information it had in its possession.
In conducting the civil investigation, Baker relied on the
criminal net worth computation rather than performing an
independent income reconstruction for either year in issue.
Except for her unsuccessful attempt to procure information from
petitioners, Baker conducted no investigation regarding
petitioners’ finances and did not verify the numbers contained in
the criminal net worth summary.

Instead, she copied the criminal

net worth summary that was attached to petitioner husband’s plea
agreement, using identical numbers to calculate the increases in
net worth for each of the taxable years 1989 and 1990 but making
certain modifications.

For instance, in drafting the notice of

- 8 deficiency for 1989, Baker reduced from $16,511 to $9,845 the
amount of personal expenditures contained in the 1989 criminal
net worth computation3 and disallowed the $6,000 personal
exemption that had been allowed in the criminal net worth
computation.

The net result of these two changes was a decrease

in the amount of petitioner husband’s unreported income.

In

drafting the notice of deficiency for 1990, Baker increased by
$12,421 the offset allowed for income reported on the return, but
omitted the $27,412 of “deductions”–-comprising $12,356 for
petitioner wife’s wages, $6,856 for petitioners’ settlement of
their injury claims from the automobile accident, and $8,200 for
personal exemptions–-that had been allowed in the criminal net
worth computation, resulting in an increase in the amount of
petitioner husband’s unreported income.4

3

The record does not reveal the basis upon which Baker
determined this lesser amount of personal expenditures.
4

The net worth analyses included in the 1989 and 1990
statutory notices of deficiency were as follows:
Particulars
Understatement of income
Total assets
Less: Total liabilities
Net worth
Less: Prior years net worth
Increases in net worth
Plus: Expenditures
Understatement of income
(Increase in net worth
plus expenditures)

12/31/89
$14,690
$7,445
(2,600)
4,845
( -0-)
4,845
9,845
14,690
======
(continued...)

- 9 OPINION
Taxpayers are required to keep adequate books or records
from which their correct tax liability can be determined.
sec. 6001.

See

In the absence of adequate books and records, the

Commissioner may reconstruct a taxpayer’s taxable income by any
reasonable method.
131 (1954).

See Holland v. United States, 348 U.S. 121,

The courts have long recognized the net worth method

as a reasonable method.

See id.; Manzoli v. Commissioner, 904

F.2d 101 (1st Cir. 1990), affg. T.C. Memo. 1989-94 and T.C. Memo.
1988-299; United States v. Sorrentino, 726 F.2d 876 (1st Cir.
1984); Estate of Mazzoni v. Commissioner, 451 F.2d 197 (3d Cir.
1971), affg. T.C. Memo. 1970-144 and T.C. Memo. 1970-37.
Under the net worth method, taxable income is computed by
reference to the change in the taxpayer’s net worth during a

4

(...continued)
Particulars

Understatement of income
Total assets
Less: Total liabilities
Net worth
Less: Prior years net worth
Increases in net worth
Plus: Expenditures
Less: Income reported on
return
Understatement of income
(Increase in net worth plus
expenditures less income
reported on return)

12/31/90
$77,372
$82,791
( 6,100)
76,691
( 4,845)
71,846
18,591
(13,006)
77,372
======

- 10 year, increased for nondeductible expenses such as living
expenses, and decreased for items attributable to nontaxable
sources such as gifts and loans.

The resulting figure may be

considered to represent taxable income, provided:

(1) The

Commissioner establishes the taxpayer’s opening net worth with
reasonable certainty; and (2) the Commissioner either shows a
likely source of unreported income or negates possible nontaxable
sources.

See United States v. Massei, 355 U.S. 595, 595-596

(1958); Holland v. United States, supra at 132-138; Brooks v.
Commissioner, 82 T.C. 413, 431-432 (1984), affd. without
published opinion 772 F.2d 910 (9th Cir. 1985).
The use of the net worth method requires “the exercise of
great care and restraint” to prevent a taxpayer from being
“ensnared in a system” which is hard for the taxpayer to refute.
Holland v. United States, supra at 129.
net worth is of critical importance.

The taxpayer’s opening

“The importance of accuracy

in this figure is immediately apparent, as the correctness of the
result depends entirely upon the inclusion in this sum of all
assets on hand at the outset.”

Id. at 134.

“If the opening

statement is not substantially reliable, the whole intricate
house of cards falls.”

Estate of Phillips v. Commissioner, 246

F.2d 209, 213 (5th Cir. 1957).

Respondent must establish the

opening net worth with reasonable certainty.

See London v.

Commissioner, T.C. Memo. 1998-346; Campfield v. Commissioner,

- 11 T.C. Memo. 1996-383, affd. without published opinion 133 F.3d 906
(2d Cir. 1997).
Respondent’s 1989 Income Reconstruction for Petitioner Husband
Respondent’s net worth computations in this civil proceeding
were derived directly from the criminal net worth computation.
In each case, respondent assigned petitioner husband a 1989
opening net worth of zero.

The record does not reveal

respondent’s factual basis, if any, for this determination.5
Given that petitioner husband was self-employed in a disc jockey
business in 1989, however, an opening net worth of zero is
suspect.
Respondent’s 1989 net worth computation purports to relate
solely to petitioner husband’s unreported income, yet is based on
inconsistent inclusions of petitioner husband’s and petitioner
wife’s incomes, assets, and expenditures.

For example, the 1989

net worth computation counts among petitioner husband’s assets
two automobiles that petitioners bought together in the name of
petitioner wife.
5

Similarly, the 1989 net worth computation takes

As far as is revealed by the record, petitioner husband
was under criminal investigation for tax evasion only for taxable
year 1990. If so, the only relevance of the 1989 criminal net
worth computation would be to establish petitioner husband’s 1989
ending net worth, which was used as his opening net worth in the
1990 criminal net worth computation. Because the 1989 opening
net worth would be of little or no consequence to the 1990
criminal net worth computation, it is inferable that respondent
merely assumed a zero opening net worth for 1989, without any
investigation. Such an inference is not contradicted by any
evidence in the record.

- 12 into account various expenditures made jointly by petitioner
husband and petitioner wife.

The 1989 net worth computation

effectively treats these asset purchases and other joint
expenditures as being financed by petitioner husband’s unreported
income.

The 1989 net worth computation does not, however,

account for assets and income attributable to petitioner wife.
In particular, it fails to account for petitioner wife’s aftertax income of $10,239, which exceeds the $9,845 of expenditures
reflected in respondent’s net worth computation as included in
the 1989 notice of deficiency.6
In addition, petitioner wife credibly testified that
petitioners received approximately $3,000 to $4,000 in wedding
6

In an attempt to overcome the failure of the 1989 criminal
net worth summary to account for assets and income of petitioner
wife, respondent argued for the first time at trial that the 1989
notice of deficiency understated petitioners’ 1989 personal
expenditures. On brief, respondent asserts for the first time
that petitioners’ 1989 expenditures exceeded $20,000. Respondent
contends that this sum includes an indeterminate amount of
expenditures (relating either to petitioners jointly or else to
petitioner wife) for which respondent admits there is no
documentation in the record, instead basing his contentions on
various assumptions. Respondent has never sought an increased
deficiency for 1989 based on any such increased amount of
expenditures and has never sought to amend his pleading in this
case. We will not consider this issue that was raised for the
first time at trial. See Vetco, Inc. v. Commissioner, 95 T.C.
579, 589 (1990). In any event, even if we were to consider this
issue, the newly asserted amount of joint personal expenditures
would not cure the fundamental defects and internal
inconsistencies of the 1989 net worth computation, as described
in the text above.

- 13 gifts in 1989.

This testimony is corroborated by bank records

reflecting petitioners’ numerous small deposits of cash and
checks shortly after their wedding.

Petitioner wife also

testified that at the time of her marriage in 1989, she had at
least $400 in two bank accounts.

She testified that her

grandmother used funds placed under her guardianship after the
death of petitioner wife’s mother to help pay for Itesha’s
private Christian schooling.

The record also indicates numerous

other instances of gifts or loans to petitioners from family and
friends.
In sum, the 1989 net worth computation is premised on an
apples-and-oranges comparison of petitioner husband’s opening net
worth (unreliably assumed to be zero) and petitioners’ joint
ending net worth, counting petitioners’ joint assets and
expenditures to petitioner husband’s disadvantage, while failing
to count petitioner wife’s 1989 income–-upon which she has
already paid Federal income tax–-or separate assets, which were
available to fund petitioners’ joint expenditures.
Taxpayers may not avoid the imposition of legally due taxes
by concealing facts, but neither may the Commissioner base his
determination on a “‘strong underlying element of guesswork.’”
Jacobs v. Commissioner, T.C. Memo. 1974-73 (quoting Polizzi v.
Commissioner, 265 F.2d 498, 502 (6th Cir. 1959)).

Taking into

consideration the warnings in Holland v. United States, 348 U.S.

- 14 at 121, we believe that the 1989 net worth computation is so
unreliable as to negate any presumption of correctness.

As in

Jacobs v. Commissioner, supra, with regard to taxable year 1989,
respondent has failed to “show the correct amount of petitioner’s
reconstructed taxable income or [to] provide any basis for
estimating it.”
367.

See also Gallo v. Commissioner, T.C. Memo. 1983-

Accordingly, this issue is decided for petitioner husband.

Respondent’s 1990 Income Reconstruction for Petitioners
For taxable year 1990, by his criminal plea petitioner
husband explicitly admitted that he had unreported income of
$63,610, as determined by respondent’s 1990 criminal net worth
calculation, which was predicated on an opening net worth of
$4,845.

Petitioner did not appear at trial to refute his prior

admission.

Cf. Toushin v. Commissioner, T.C. Memo. 1999-171.

Petitioner husband’s admission is strong evidence of the
validity of the 1990 criminal net worth computation, and
consequently of the 1990 civil net worth computation, which was
derived directly therefrom.

Petitioner husband’s admission in

the criminal proceeding does not collaterally estop him, however,
from challenging the specific deficiency amount in this
proceeding, because “the determination of an exact liability was
not essential to the judgment, a prerequisite to the application
of the doctrine of collateral estoppel.”

Moore v. United States,

360 F.2d 353, 356 (4th Cir. 1965) (internal quotation marks

- 15 omitted); see Wapnick v. Commissioner, T.C. Memo. 1997-133;
Larson v. Commissioner, T.C. Memo. 1993-188.
Petitioners have challenged respondent’s determination for
taxable year 1990 with credible evidence.

Respondent’s civil net

worth analysis followed the criminal net worth analysis in
imputing to petitioner husband a $65,000 “investment” in Steady
Beat Records.

Petitioner husband’s mother testified credibly

that she was the sole owner of Steady Beat Records, and that she,
rather than petitioner husband, made the $65,000 investment.
This testimony is corroborated by documentation that in 1990 she
applied for the Maryland business license for Steady Beat Records
and signed the lease agreement for its leased premises.

In

addition, a friend of the mother’s testified credibly that she
had lent the mother money for the investment.
As evidence that petitioner husband owned Steady Beat
Records, respondent offered the testimony of George Harvell,
petitioner husband’s sometime acquaintance, who testified
unconvincingly that petitioner husband had admitted to him these
and other matters.

We did not find George Harvell to be a

credible witness.7

Accordingly, we conclude and hold that

7

In 1990, Harvell pleaded guilty to income tax evasion
pursuant to sec. 7201. In exchange for his testimony against
several people, including petitioner husband, the Government
refrained from charging Harvell with cocaine distribution.

- 16 petitioner husband’s 1990 understatement should be reduced by
$65,000.
We also conclude that respondent’s determination of
petitioners’ 1990 understatement should be reduced by the $7,523
in settlement proceeds that petitioners and Itesha received from
their automobile accident.8
Petitioner Wife’s Innocent Spouse Claim
In her original petition, petitioner wife sought innocent
spouse relief under former section 6013(e).
trial was held in this case.

On May 21, 1998, a

On July 22, 1998, section 6015 was

enacted, replacing former section 6013(e), which was repealed
generally as of the same date.

See Internal Revenue Service

Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3201(a), (e)(1), 112 Stat. 734.

On August 3 and 18, 1998,

petitioner wife filed administrative elections pursuant to
section 6015(b) and (c), respectively.

On January 13, 1999,

respondent notified petitioner wife that she is entitled to
relief pursuant to section 6015(c) and mailed her a proposed

8

The 1990 criminal net worth analysis did in fact reflect
an offset of $6,856 for petitioners’ settlement of their own (but
not Itesha’s) injury claims from the automobile accident.
Respondent has offered no satisfactory explanation why he
departed from this approach in failing to include any offset in
the civil net worth analysis. Furthermore, in light of the fact
that the entire $7,523 of settlement proceeds appears to have
been included in petitioners’ assets in both the criminal and
civil net worth computations, it is appropriate to include an
offset for the entire amount.

- 17 decision representing a concession that she has no liability for
any amount of the deficiency or penalty in dispute.

Respondent

made no determination whether petitioner wife qualifies for
relief under section 6015(b).

With leave of the Court,

petitioner wife amended her petition, requesting the Court to
require respondent to make a determination under former section
6013(e) and/or section 6015(b).9
The controversy before the Court concerns petitioner wife’s
liability for the deficiency respondent determined for taxable
year 1990.

Respondent’s concession under section 6015(c)

relieves petitioner wife of all liability for taxable year 1990
and resolves the controversy between her and respondent that is
before us.
(1975).

Cf. LTV Corp. v. Commissioner, 64 T.C. 589, 593

A decision regarding petitioner wife’s eligibility for

relief under section 6015(b) would amount to an advisory opinion
and would contravene the “sound principle of judicial
administration that courts will not gratuitously decide complex

9

On brief, petitioner wife does not press the issue of her
entitlement to relief under former sec. 6013(e), and we deem her
to have conceded it. In any event, since the disputed tax
liability arose before July 22, 1998, but remained unpaid as of
that date, former sec. 6013(e) is no longer effective with
respect to the instant case, which is governed instead by the
provisions of sec. 6015. See Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3201(e)(1), 112 Stat. 734.

- 18 issues that cannot affect the disposition of the case before
them.”

Id. at 595.

Petitioner wife suggests on brief that a decision as to her
eligibility for relief under section 6015(b) could enhance her
future efforts to petition this Court for an award of attorney’s
fees.

It would be inappropriate to protract this proceeding to

enhance an award of fees.

See sec. 7430(b)(3).

Moreover, any

consideration as to whether petitioner wife is entitled to
litigation and administrative costs, including attorney’s fees,
is inappropriate at this stage of these proceedings.

Should

petitioners desire to pursue this matter, they must comply with
Rules 230 and 231.
Remaining contentions not addressed herein we deem
irrelevant, without merit, or unnecessary to reach.
To reflect the foregoing and concessions by the parties,

Decisions will be entered
under Rule 155.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A72f5dadc48ba7e1d. Public record. Not legal advice.