Greg A. Ninke & Jane M. Ninke ( 2023 )

United States Tax Court
T.C. Memo. 2023-88GREG A. NINKE AND JANE M. NINKE,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 10110-20. Filed July 19, 2023.
—————
Ps failed to keep appropriate business records, and
R employed a bank deposits analysis to determine Ps’
unreported business income. R accepted that some cash
deposits were from excludable sources because it was clear
that deposited cash was transferred from, or had been
withdrawn from, another of Ps’ accounts. Ps argue that,
because PH did not receive cash payments in his business
and Ps’ cash withdrawals exceeded their cash deposits, all
cash deposits should be assumed to be from an excludable
source. Ps had at least eight accounts for which they
provided no statements to R during his examination of
their returns. Ps have not traced any contested cash
deposit to an excludable source.
Held: Ps failed to prove error in R’s bank deposits
analysis.
Held, further, accuracy-related penalties sustained.
—————
Greg A. Ninke and Jane M. Ninke, pro sese.
Zachary B. Friedman, Rachael J. Zepeda, and Ashleigh R. Wise
Friedman, for respondent.
Served 07/19/23
2
[*2] MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN, Judge: By notice of deficiency dated February 5,
2020, respondent determined deficiencies in, and accuracy-related
penalties with respect to, petitioners’ federal income tax as follows:
Year Deficiency Penalty
§ 6662(a) 1
2015 $26,260 $5,252
2016 11,500 2,300
2017 14,060 2,812
The parties have filed a Stipulation of Settled Issues. The issues
for decision are: (1) whether, and the extent to which, for each of the
years at issue, petitioners underreported their gross receipts from
business and (2) whether, for each of those years, they are liable for an
accuracy-related penalty. Other unsettled issues are computational,
and we need not address them here.
FINDINGS OF FACT
Preliminary Statement
Before making our findings of fact, we pause to address
petitioners’ failure to comply with Rule 151, which addresses briefs. We
conducted a trial in this case, and, at its conclusion, we ordered the
parties to file briefs, setting a schedule for seriatim briefs. Rule
151(e)(3) requires that an opening brief contain proposed findings of fact
in the form of numbered concise statements of essential fact, each
statement supported by reference to the pages of the transcript or the
exhibits or other sources relied on in support of the proposed finding.
The Rule directs that proposed findings precede both the points on which
the party relies and the party’s argument. Petitioners’ Seriatim
Opening Brief does contain proposed findings of fact in numbered
statements. It violates the Rule, however, in that it does not
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C., in effect for the years in question, regulation references are to
the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect for those years, and
Rule references are to the Tax Court Rules of Practice and Procedure. All dollar
amounts have been rounded to the nearest dollar.
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[*3] support those statements with references to transcript pages or
Exhibits.
Rule 151(e)(3) also requires that, in an answering or reply brief,
a party “set forth any objections, together with the reasons therefor, to
any proposed findings of any other party.” Respondent filed his Seriatim
Answering Brief, making 108 proposed findings of fact, and petitioners
asked for, and were granted, leave to file their Seriatim Reply Brief.
However, they filed no reply brief. Because petitioners have failed both
to provide us with useable findings of fact and to object to respondent’s
proposed findings, we must conclude that they have conceded
respondent’s proposed findings of fact as correct except to the extent
unsupported by, or inconsistent with, evidence in the record. See, e.g.,
Jonson v. Commissioner, 118 T.C. 106, 108 n.4 (2002), aff’d, 353 F.3d
1181 (10th Cir. 2003).
Stipulation
The parties have stipulated certain facts and the authenticity of
certain documents. The facts stipulated are so found, and the
documents stipulated are accepted as authentic.
Residence
When petitioners filed the Petition, they resided in Tempe,
Arizona.
Petitioners’ Businesses
During all years at issue, Mr. Ninke operated Tanner Media
Productions, which provided pornographic websites and other forms of
adult entertainment. During 2015, he operated an electronic book
publishing business under the name Tanner Media Publishing. During
2016 and 2017, he had an Uber and Lyft driving business. During 2017,
Mrs. Ninke worked as a model for one of her husband’s websites.
Petitioners’ Bank Accounts and Prepaid Debit Card Accounts
During the years at issue, petitioners had between 12 and 20
accounts at various banks, including Bank of America, E*Trade, Paxum,
Salliemae, SunTrust Bank, US Bank, and TCF National Bank.
Petitioners also maintained prepaid debit card accounts at financial
service providers, including Paxum, FirstChoicePay/Payoneer, and
NetSpend. Mr. Ninke received at least some payments for his
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[*4] businesses by way of direct bank deposits and additions to one of
his prepaid debit cards.
Petitioners’ Returns
For the years at issue, petitioners made joint income tax returns
on Forms 1040, U.S. Individual Income Tax Return. For each of those
years, they included with Form 1040 one or more Schedules C, Profit or
Loss From Business. For each year, they included a Schedule C for
Tanner Media Productions (Schedule C–1). For 2015, they included a
Schedule C for Tanner Media Publishing (Schedule C–2). During 2017,
Ms. Ninke received gross receipts from her modeling business, but
petitioners did not report any income from that business on their 2017
return. The parties refer to respondent’s adjustment for unreported
gross receipts for Ms. Ninke’s modeling business as the “Schedule C–3”
adjustment (and so shall we).
2015 Return, Schedules C–1 and C–2 2
On the 2015 Schedule C–1, petitioners reported gross receipts of
$191,121, expenses of $175,261, a separately listed expense of $1,939 for
business use of their home, and a net profit of $13,921. On the 2015
Schedule C–2, they reported gross receipts of $543, expenses of zero, and
a net profit of $543.
2016 Return, Schedule C–1
On the 2016 Schedule C–1, petitioners reported gross receipts of
$66,847, expenses of $66,240, and a net profit of $607.
2017 Return, Schedule C–1
On the 2017 Schedule C–1, petitioners reported gross receipts of
$20,728, expenses of $16,582, and a net profit of $4,146.
2 Petitioners filed their 2015 return on April 15, 2016. On or around June 7,
2016, petitioners amended their joint 2015 return, attaching an updated 2015
Schedule C–1. The updated 2015 Schedule C–1 reported increased gross receipts and
expenses and a greater net profit. On or about October 12, 2017, petitioners amended
their 2015 return a second time, attaching a further updated 2015 Schedule C–1,
reverting to the information reported on the original 2015 Schedule C–1. Respondent
appears not to have relied on the first amended return. We report the information on
the identical first and third 2015 Schedules C–1.
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[*5] Respondent’s Examination
Respondent examined petitioners’ returns for the years at issue.
Revenue Agent (RA) Ian Smith conducted the examination. Petitioners
did not maintain proper records for their Schedule C businesses. To
determine whether petitioners had reported all receipts from those
businesses, RA Smith conducted a bank deposits analysis, comparing
reported Schedule C receipts to bank deposits. He treated the prepaid
debit card accounts as if they were checking accounts. He reviewed the
account statements that petitioners provided to him. He created
spreadsheets, wherein he listed all deposits made in the respective
accounts, identified the source of each deposit, and categorized each (i.e.,
transfer, deposit, loan, refund, adjustment, etc.). He then created a
summary sheet for each year, on which he entered the year’s deposits,
subtracted deposits from identifiable nontaxable sources, e.g., bank-to-
bank transfers, counter credits, and items such as Social Security
disability payments, and compared the difference with the gross income
petitioners reported for the year. For each year, the difference exceeded
petitioners’ reported gross income, and he treated the difference as
unreported gross receipts from petitioners’ Schedule C businesses.
2015 Adjustments
RA Smith determined 2015 Schedule C–1 unreported gross
receipts of $20,132, which he computed as follows:
Schedule C–1 bank deposits $408,830
Plus: FirstChoicePay deposits 4,367
Plus: NetSpend deposits 4,685
Total Schedule C–1 deposits $417,882
Less: Excludable deposits 203,329
Less: Bills.Com and NetSpend adjustments 3,300
Total taxable Schedule C–1 deposits per exam $211,253
Less: Schedule C–1 receipts per return 191,121
Schedule C–1 adjustment $20,132
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[*6] RA Smith determined 2015 Schedule C–2 unreported gross
receipts of $2,052, which he computed as follows:
Schedule C–2 bank deposits $2,595
Less: Schedule C–2 receipts per return 543
Schedule C–2 adjustment $2,052
In total, RA Smith made 2015 Schedule C adjustments of $22,184,
computed as follows:
Schedule C–1 adjustment $20,132
Schedule C–2 adjustment 2,052
Schedule C adjustments $22,184
The parties stipulate that an additional $3,190 of deposits is
excludable 2015 Schedule C–1 deposits, which they further stipulate
reduces RA Smith’s 2015 Schedule C–1 adjustment to $16,942. They
stipulate the following 2015 Schedule C gross receipts in dispute:
Schedule C–1 adjustment $16,942
Schedule C–2 adjustment 2,052
Total $18,994
On brief, respondent does not mention the stipulated $3,190 of
additional Schedule C–1 excludable deposits. However, he concedes
“additional” 2015 Schedule C–1 excludable deposits of $4,540.
Respondent proposes that we find a 2015 Schedule C–1 adjustment of
$15,592, which equals RA Smith’s Schedule C–1 adjustment of $20,132
less $4,540 ($15,592 = $20,132 − $4,540). That would result in the
following 2015 Schedule C gross receipts in dispute:
Schedule C–1 adjustment $15,592
Schedule C–2 adjustment 2,052
Total $17,644
Were we to subtract from RA Smith’s Schedule C–1 adjustment
of $20,132 both the stipulated $3,190 and the conceded $4,540 of
additional excludable deposits, the resulting 2015 Schedule C–1
adjustment would be $12,402 ($12,402 = $20,132 − $3,190 − $4,540).
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[*7] That would result in the following 2015 Schedule C gross receipts
in dispute:
Schedule C–1 adjustment $12,402
Schedule C–2 adjustment 2,052
Total $14,454
2016 Adjustment
RA Smith determined 2016 Schedule C–1 unreported gross
receipts of $24,595, which he computed as follows:
Schedule C–1 bank deposits $185,730
Plus: FirstChoicePay deposits 16,370
Plus: NetSpend deposits 69
Total Schedule C–1 deposits $202,169
Less: Excludable deposits 110,728
Total taxable Schedule C–1 deposits per exam $91,442 3
Less: Schedule C–1 receipts per return 66,847
Schedule C–1 adjustment $24,595 4
RA Smith did not determine any 2016 Schedule C–2 unreported
deposits.
The parties stipulate that an additional $46 of deposits is
excludable 2016 Schedule C–1 deposits, which they further stipulate
reduces RA Smith’s 2016 Schedule C–1 adjustment to $24,549.
On brief, as for 2015, respondent does not mention the stipulated
additional $46 of excludable deposits but concedes “additional” 2016
excludable deposits of $46. Respondent proposes that we find a 2016
Schedule C–1 adjustment of $25,548 (apparently correcting the $1 math
error in the stipulation).
Were we to subtract from RA Smith’s Schedule C–1 adjustment
of $24,594 both the stipulated and conceded adjustments of $46, the
3 Sic: correctly, $91,441.
4 Sic: correctly, $24,594.
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[*8] resulting Schedule C–1 adjustment would be $24,502 ($24,502 =
$24,594 − $46 − $46).
2017 Adjustment
RA Smith determined 2017 Schedule C–1 unreported gross
receipts of $29,642, which he computed as follows:
Schedule C–1 bank deposits $109,080
Plus: FirstChoicePay deposits 9,507
Plus: NetSpend deposits 4,759
Total Schedule C–1 deposits $123,346
Less: Excludable deposits 72,976
Total taxable Schedule C–1 deposits per exam $50,370
Less: Schedule C–1 receipts per return 20,728
Schedule C–1 adjustment $29,642
RA Smith did not determine any 2017 Schedule C–2 unreported
deposits.
RA Smith determined 2017 Schedule C–3 unreported gross
receipts of $3,784.
In total, RA Smith made 2017 Schedule C adjustments of $33,426.
Schedule C–1 adjustment $29,642
Schedule C–3 adjustment 3,784
Schedule C adjustments $33,426
The parties stipulate that an additional $1,387 of deposits is
excludable 2017 Schedule C–1 deposits, which they further stipulate
reduces RA Smith’s 2017 Schedule C–1 adjustment to $28,255. They
stipulate the following 2017 Schedule C gross receipts in dispute:
Schedule C–1 adjustment $28,255
Schedule C–3 adjustment 3,784
Total $32,039
On brief, as for 2015 and 2016, respondent does not mention the
stipulated additional $1,387 of 2017 Schedule C–1 excludable deposits
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[*9] but concedes “additional” 2017 Schedule C–1 excludable deposits of
$1,518. Respondent proposes that we find a 2017 Schedule C–1
adjustment of $28,124, which equals RA Smith’s Schedule C–1
adjustment of $29,642 less $1,518 ($28,124 = $29,642 − $1,518). That
would result in the following 2017 Schedule C gross receipts in dispute:
Schedule C–1 adjustment $28,124
Schedule C–3 adjustment 3,784
Total $31,908
Were we to subtract from RA Smith’s Schedule C–1 adjustment
of $29,642 both the stipulated $1,387 and the conceded $1,518 of
additional excludable deposits, the resulting 2017 Schedule C–1
adjustment would be $26,737 ($26,737 = $29,642 − $1,387 − $1,518).
That would result in the following 2017 Schedule C gross receipts in
dispute:
Schedule C–1 adjustment $26,737
Schedule C–3 adjustment 3,784
Total $30,521
Penalties
RA Smith properly obtained written supervisory approval of an
accuracy-related penalty for each year at issue.
Trial Exhibits
At trial, we received into evidence from petitioners lists of
deposits that they believe respondent should have accepted as
excludable deposits. Many of the deposits on petitioners’ lists were
among those respondent allowed while others petitioners sourced to
bank accounts and prepaid debit card account statements that they had
not identified to RA Smith. Petitioners conceded at trial at least eight
bank accounts or prepaid debit card accounts for which they had
provided no information to RA Smith.
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[*10] OPINION
I. Introduction
To reiterate, the issues we must decide are (1) respondent’s
adjustments increasing petitioners’ gross receipts from their Schedule C
business activities and (2) the accuracy-related penalties.
II. Burden of Proof
Petitioners bear the burden of proof. See Rule 142(a). 5
Nevertheless, because this case involves unreported income, respondent
must make a minimal evidentiary showing connecting petitioners with
an alleged income-producing activity or demonstrate that they actually
received unreported income. See Walquist v. Commissioner, 152 T.C. 61,
67 (2019). The requisite evidentiary foundation to connect a taxpayer
with an income-producing activity is minimal and need not include
direct evidence. See, e.g., Banister v. Commissioner, T.C. Memo. 2008-
201, 2008 WL 3925877, at *2, aff’d, 418 F. App’x 637 (9th Cir. 2011).
Petitioners’ Schedule C businesses provided a likely income-
producing source for the disagreed cash deposits, and, in any event, for
purposes of sustaining an adjustment in a notice of deficiency increasing
gross income, a bank deposit is prima facie evidence of income. Tokarski
v. Commissioner, 87 T.C. 74, 77 (1986). Respondent has carried his
burden of connecting petitioners with an income-producing activity.
Respondent also bears the burden of production with respect to
the penalties, which we discuss infra.
III. Unreported Income
A. Bank Deposits Analysis
Gross income includes “income derived from business.” § 61(a)(2).
Taxpayers must maintain books and records sufficient to establish their
income and expenses. § 6001; Treas. Reg. § 1.6001-1(a). If they fail to
5 Petitioners have not raised the applicability of section 7491(a), which shifts
the burden of proof to the Commissioner in certain situations. We conclude that
section 7491(a) does not apply here because petitioners have not produced evidence
that they have satisfied the preconditions for its application. Indeed, we have found
that petitioners failed to maintain proper records for their Schedule C businesses.
Proper record keeping is a condition to the application of section 7491(a). See
§ 7491(a)(2)(B).
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[*11] do so, the Commissioner may reconstruct income through any
reasonable method that clearly reflects income. § 446(b); Petzoldt v.
Commissioner, 92 T.C. 661, 693 (1989). This Court has long accepted
the bank deposits method for this purpose. Clayton v. Commissioner,
102 T.C. 632, 645 (1994). The bank deposits method assumes all money
deposited in a taxpayer’s bank account during a given period constitutes
either an item of gross income or a gross receipt. See DiLeo v.
Commissioner, 96 T.C. 858, 868 (1991). If, however, the Commissioner
has knowledge that a deposit is from an excludable source (e.g., is a gift)
he must exclude it from his tally of taxable deposits. See id.Because respondent believed that petitioners had not reported all
income from their Schedule C businesses for the years at issue, and
because they had not maintained proper business records, respondent’s
agent, RA Smith, conducted a bank deposits analysis, which resulted in
his determination that petitioners had underreported their Schedule C
income for each of the years at issue. Neither at trial nor on brief do
petitioners challenge the accuracy of the account statements on which
RA Smith relied.
B. Parties’ Arguments
1. Petitioners’ Argument
Petitioners identify as the only fault with respondent’s bank
deposits analysis his failure to treat as nontaxable transfers between
bank accounts all cash deposits that they made during the years at
issue. They spend approximately half of their brief listing individual
cash deposits and withdrawals from their bank accounts and prepaid
debit card accounts during the years at issue. They show deposits
totaling $28,550 and withdrawals totaling $44,639. They ask us to find
that Mr. Ninke’s clients did not pay him in cash. That presumed fact,
together with the excess of withdrawals over deposits, they argue,
“strongly suggests that the deposits made by the petitioners was [sic] a
transfer, made out of cash previously withdrawn by petitioners. There
is no reasonable explanation for the cash deposits other than that the
funds were being transferred.” They concede that “respondent accepted
that certain cash deposits were actually transfers, but only when . . . the
cash deposit was close in time and/or in [an] amount [equal] to the prior
withdrawal.” They argue: “[R]espondent should not be allowed to
arbitrarily decide whether the petitioner[s] deposited their cash
withdrawal fast enough or in an amount close enough to the
withdrawal.”
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[*12] 2. Respondent’s Arguments
Respondent rejects petitioners’ proposed finding that Mr. Ninke’s
clients did not pay him in cash as “uncorroborated, self-serving, and not
supported by credible evidence.” Respondent also rejects petitioners’
claim that RA Smith acted arbitrarily in treating only some cash
deposits as excludable deposits. He points out that, despite petitioners’
lack of records, RA Smith treated as deposits from excludable sources
deposits that he could associate with a withdrawal shown on a bank
account statement provided to him by petitioners. Respondent adds
that, in support of their claim that all cash deposits to their bank
accounts were no more than nontaxable transfers from other of their
accounts, they rely in part on claimed withdrawals from bank accounts
and prepaid debit accounts for which they provided no statements to RA
Smith (and which did not figure into his tally of bank deposits). With
postexamination adjustments to be discussed, respondent claims that
RA Smith did not err in his bank deposits analysis.
C. Discussion
Petitioners’ burden is to identify additional cash deposits from
excludable sources beyond the deposits accepted as such by RA Smith.
Their claim is that all cash deposits during the years at issue were
transfers from one or another of their bank accounts. It is well settled
that we need not accept a taxpayer’s self-serving testimony when the
taxpayer fails to present credible, corroborative documentary evidence.
See, e.g., Shilgevorkyan v. Commissioner, T.C. Memo. 2023-12, at *7. At
more than one point during the trial, we explained to petitioners that
their task on brief would be to tie deposits that respondent had not
treated as coming from an excludable source to a transfer or a
withdrawal from an account previously identified to respondent. They
have made no attempt to do so. Showing that cash withdrawals
exceeded cash deposits for the years at issue does not prove that any
deposit was of cash withdrawn from the same account or any other
account of petitioners. And even were we to accept petitioners’ claim
that Mr. Ninke’s clients did not pay him in cash, their introduction at
trial of evidence of withdrawals from bank accounts and prepaid debit
card accounts that they had not disclosed to RA Smith raises the
possibility of unreported income (whether paid in cash or otherwise)
deposited to undisclosed accounts, withdrawn as cash, and redeposited
13
[*13] in accounts of which RA Smith did know. Such deposits would not
ultimately be from an excludable source.
Petitioners have failed to carry their burden of showing cash
deposits from excludable sources more than the cash deposits accepted
as such by respondent.
Finally, we have the issue of the parties’ stipulating additional
Schedule C–1 excludable deposits of $3,190, $46, and $1,387 for 2015,
2016, and 2017, respectively, while, on brief, respondent—not
mentioning those stipulations—concedes “additional” Schedule C–1
deposits of $4,540, $46, and $1,518 for those years. We resolve that
discrepancy in petitioners’ favor and assume that respondent means for
each year that the sum of the two amounts be considered additional
Schedule C–1 deposits from excludable sources.
We sustain positive adjustments to Schedule C gross receipts of
$14,454, $24,502, and $30,521 for 2015, 2016, and 2017, respectively.
IV. Accuracy-Related Penalty
A. Introduction
Section 6662(a) and (b)(1) provides for an accuracy-related
penalty of 20% of the portion of an underpayment of tax required to be
shown on a return attributable to negligence or disregard of rules and
regulations (without distinction, negligence). Section 6662(a) and (b)(2)
provides for the same penalty on the portion of an underpayment of tax
attributable to any substantial understatement of income tax. In the
case of an individual, there is a substantial understatement of income
tax for a year if the amount of the understatement exceeds the greater
of (1) 10% of the tax required to be shown on the return for the tax year
or (2) $5,000. § 6662(d)(1)(A). Section 6664(c)(1) provides a reasonable
cause exception to imposition of the section 6662(a) accuracy-related
penalty on that portion of an underpayment for which it is shown that
there was reasonable cause and the taxpayer acted in good faith.
Only one accuracy-related penalty may be applied with respect to
any given portion of an underpayment even if that portion is subject to
the penalty on more than one of the grounds set out in section 6662(b).
Treas. Reg. § 1.6662-2(c).
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[*14] B. Burden of Production
1. Introduction
The Commissioner bears a burden of production with respect to
the accuracy-related penalty, including making a prima facie case that
the section 6751(b)(1) requirement for written supervisory approval has
been met. E.g., DeCrescenzo v. Commissioner, T.C. Memo. 2023-7,
at *18. Section 6751(b)(1) provides: “No penalty under this title shall be
assessed unless the initial determination of such assessment is
personally approved (in writing) by the immediate supervisor of the
individual making such determination or such higher level official as the
Secretary may designate.”
2. Penalty Approval
The parties stipulate, and we have found, that RA Smith properly
obtained written supervisory approval of an accuracy-related penalty for
each year at issue. Respondent has made a prima facie case with respect
to the penalty approval required by section 6751(b)(1).
3. Grounds for the Penalty
Respondent has also made a prima facie case for the accuracy-
related penalties on the grounds that, for each year at issue, petitioners’
underpayment of tax resulted from negligence. Petitioners did not
maintain proper records for their Schedule C businesses. Negligence
includes any failure by the taxpayer to keep adequate books and records
or to substantiate items properly. See Diesel Country Truck Stop, Inc.
v. Commissioner, T.C. Memo. 2000-317, 2000 WL 1478654, at *17;
Treas. Reg. § 1.6662-3(b)(1).
Respondent claims as an alternative basis for the accuracy-
related penalty that petitioners substantially understated their income
tax for the years at issue. We need not reach that question.
C. Burden of Proof
Respondent having met his burden of production with respect to
the penalty, the burden of proof (viz, the risk of nonpersuasion) is with
petitioners and includes the burden to prove any affirmative defense.
See, e.g., Fabian v. Commissioner, T.C. Memo. 2022-94, at *38.
Petitioners argue that they acted reasonably in reporting any income
reported to them on information returns and did not believe that they
15
[*15] had any additional cash receipts that were income. Petitioners
ignore that RA Smith found unreported income for each year at issue
well in excess of cash deposits that petitioners claim were redeposits of
transfers or withdrawals from their various bank accounts and prepaid
debit card accounts. Petitioners have failed to prove that there was
reasonable cause for their underpayments and that they acted in good
faith.
We sustain the accuracy-related penalties for the years at issue.
V. Conclusion
To reflect the foregoing,
Decision will be entered under Rule 155.