Gutierrez v. Comm'r

RAFAEL M. GUTIERREZ AND ROSARIO GUTIERREZ, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Gutierrez v. Comm'r

No. 11393-02

United States Tax Court

T.C. Memo 2003-321; 2003 Tax Ct. Memo LEXIS 321; 86 T.C.M. (CCH) 611;

November 20, 2003, Filed

---

Judgment entered for respondent.

Jeffrey D. Moffatt, for petitioners.

Jean Song, for respondent.

Laro, David

---

LARO

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Petitioners petitioned the Court to redetermine a $ 43,812 deficiency in their 1998 Federal income tax and an accuracy-related penalty of $ 8,762.40 under section 6662(a). ^{section 7491(a). We hold that the burden of proof remains with petitioners.}

2. Whether petitioners underreported their Schedule C, Profit or Loss From Business, gross receipts by $ 137,221. We hold that they did.

3. Whether petitioners are liable for the accuracy-related penalty under section 6662(a). We hold that they are.

             FINDINGS OF FACT

Some facts were stipulated. The stipulated facts and the accompanying exhibits are incorporated herein by this reference. We find the stipulated facts accordingly. Petitioners are married individuals who filed a joint 1998 Federal income tax return. When the petition was filed, petitioners resided in Palmdale, California.

During 1998, petitioner *323 1998 Federal income tax return. In connection therewith, respondent considered petitioners' bank statements and cash transaction reports. Respondent determined from these statements and reports that petitioners underreported the gross receipts of the billiard hall sole proprietorship by $ 137,221.

Petitioners concede that they received $ 137,221, yet did not disclose it on their 1998 return. *324 various documents in Spanish, which they claimed would have verified the alleged sale and the subsequent reporting of same to the Mexican authorities. However, petitioners were barred from using these documents at trial because they did not translate and properly authenticate them.

                OPINION

I. Burden of Proof as to Deficiency

Taxpayers generally must prove respondent's determinations wrong in order to prevail. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115, 78 L. Ed. 212">78 L. Ed. 212, 54 S. Ct. 8">54 S. Ct. 8 (1933). As one exception to this rule, section 7491(a) places upon respondent the burden of proof with respect to any factual issue related to a taxpayers' tax liability if they maintained adequate records, satisfied applicable substantiation requirements, cooperated with respondent, and introduced during the court proceeding credible evidence on the factual issues. ^{Prince v. Comm'r, T.C. Memo 2003-247">T.C. Memo. 2003-247. The legislative history of section 7491(a) clarifies that taxpayers must prove that they have complied with the record-keeping, substantiation, and cooperation requirements before that section places the burden of proof upon the Commissioner. (1998), 3 C.B. 747">1998-3 C.B. 747, 993 ("The taxpayer has the burden of proving that it meets each of these conditions, because they are necessary prerequisites to establishing that the burden of proof is on the Secretary."). The legislative history provides further as to the term "credible evidence", which is not defined in the statute, that}

   Credible evidence is the quality of evidence which, after

   critical analysis, the court would find sufficient upon which to

   base a decision on the issue if no contrary evidence were

   submitted (without regard to the judicial presumption of IRS

   correctness). A taxpayer has not produced credible evidence for

   these purposes if the taxpayer merely makes implausible factual

   assertions, frivolous claims, or tax protestor-type arguments.

  The introduction of evidence will not meet this standard if the

   court is not convinced that it is worthy of belief. If after



   evidence from both sides, the court believes that the evidence



   is equally balanced, the court shall find that the Secretary has

   not sustained his burden of proof. [Id. at 240-241, 1998 3 C.B. at 994-995.]

We have in previous cases involving section 7491 applied the definition of the term "credible evidence" as discerned from the legislative history. E.g., Higbee v. Comm'r, 116 T.C. 438">116 T.C. 438, 442-443 (2001); Forste v. Comm'r, T.C. Memo. 2003-103; Managan v. Comm'r, T.C. Memo. 2001-192. We do likewise here. We conclude that section 7491(a) does not apply to place the burden of proof upon respondent in that petitioners have failed to introduce during this proceeding credible evidence on any factual issue. Petitioners' testimony, the only evidence in the record as to this subject, lacked credibility in that it was inconsistent and incoherent.

We also note that section 7491(a) is inapplicable here in that we do not find that petitioners maintained adequate records or satisfied applicable substantiation requirements. See Prince v. Comm'r, supra. We hold that the burden of proof remains with petitioners.

II. Understatement of Income

The deficiency determination made by respondent enjoys the presumption of correctness, and the burden of proving otherwise rests with petitioners. Rule 142(a); Rapp v. Commissioner, 774 F.2d 932">774 F.2d 932, 935 (9th Cir. 1985). However, in the case of underreported income, the usual presumption in favor of respondent arises only if respondent's allegations are supported by a minimal factual foundation linking the taxpayer with an income-producing activity. Palmer v. United States, 116 F.3d 1309">116 F.3d 1309, 1313 (9th Cir. 1997).

Here, respondent has established that petitioners, in 1998, (1) had been engaged in an income-producing activity, to wit, their ownership and operation of the billiard hall and (2) had accumulated net deposits in the amount of $ 266,186, which is greater than the amount reported by them as taxable income by $ 137,221. Petitioners do not contest either the fact that they had owned and operated Playa Azul, or the fact that their bank deposits are in excess of their taxable income by the amount claimed by respondent.

In the absence of adequate record-keeping by petitioners, which is mandated by section 6001, the Commissioner is authorized to reconstruct petitioners' income by any reasonable method that clearly reflects income. See, e.g., sec. 446(b); Holland v. United States, 348 U.S. 121">348 U.S. 121, 130-132, 99 L. Ed. 150">99 L. Ed. 150, 75 S. Ct. 127">75 S. Ct. 127 (1954); Cracchiola v. Commissioner, 643 F.2d 1383">643 F.2d 1383, 1385 (9th Cir. 1981), affg. per curiam T.C. Memo 1979-3">T.C. Memo. 1979-3. One of the acceptable methods of reconstructing income is the bank deposits method. Clayton v. Commissioner, 102 T.C. 632">102 T.C. 632, 645 (1994); DiLeo v. Commissioner, 96 T.C. 858">96 T.C. 858, 867 (1991), affd. 959 F.2d 16">959 F.2d 16 (2d Cir. 1992).Bank deposits are considered prima facie evidence of income, and respondent need not prove a likely source of that income. Tokarski v. Commissioner, 87 T.C. 74">87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C. 651">64 T.C. 651, 656-657 (1975), affd. 566 F.2d 2">566 F.2d 2 (6th Cir. 1977). Under the bank deposits method, it is assumed that all money deposited in petitioners' bank accounts during the period in question, minus any money coming from a nontaxable source and deductible expenses known by the Commissioner, constitutes taxable income. Clayton v. Commissioner, supra at 645-646.

Petitioners do not dispute the existence of the excess amount in their bank accounts as calculated by respondent, and they fail to establish why this amount should not be taxed. Petitioners assert that the excess amount represents the proceeds from the sale of a market in Mexico to petitioner's brother. They further contend that they have complied with the applicable laws and regulations with respect to that sale in Mexico. ^{sections 871 and 992.}

Petitioners presented no admissible evidence to support any of their contentions. Their testimony is without merit because it is inconsistent, incoherent, and unreliable. For example, petitioner testified that his brother still owed him in 1998 approximately $ 130,000 from the purported sale. He also testified that in 1998 he brought from Mexico $ 175,000, which is a larger amount than what his brother allegedly owed him at that time. Because petitioners claim no other source of the excess amount besides the sale of the market to petitioner's brother, these two parts of testimony are irreconcilable.

Furthermore, if anything, petitioners' testimony supports the conclusion opposite from their contentions. For instance, although petitioner testified that he paid taxes in Mexico, he also stated that he did not report income from sale of the business to his brother to any authority in Mexico. Whatever legitimate explanation may exist for that fact, it certainly undermines petitioners' contentions that their income would be doubly taxed if they were to pay taxes on the proceeds from that sale in the United States.

Petitioners failed to corroborate their testimony by any documentary evidence. They attempted to introduce several documents in Spanish, which allegedly would have confirmed the existence of a contract between petitioner and his brother for the sale of the market, as well as petitioners' written communications with the Mexican Government in connection with that sale and other tax-related matters. Because petitioners failed to properly translate and authenticate the documents in question, despite the Court's order to do so, they were barred from using them at trial.

Aside from petitioners' failure to substantiate their contentions with respect to the foreign source of the unreported income, their reliance on the Treaty to avoid the U.S. tax is misguided. By filing a joint Federal income tax return for 1998, petitioners in effect admitted that neither of them was a nonresident alien during the year in question. See sec. 6013(a)(1). To the extent petitioners contend that they were not U.S. residents during 1998, they presented no evidence to that effect. Consequently, by virtue of the Treaty, petitioners are entitled to no exemption from U.S. tax, but only to a foreign tax credit for income taxes paid to the Mexican Government. Petitioners proffered no evidence to prove such payment. Therefore, as U.S. citizens or residents, petitioners must pay U.S. taxes in full, and the Treaty provides no relief to them in the present case.

We observe that despite petitioners' allegations, sections 871 and 992 have no application here. Section 871 does not apply because petitioners are residents of the United States. Likewise, section 992 does not apply because petitioners' billiard hall was not a corporation.

In view of the above, we hold that petitioners have failed to establish that the excess bank deposits came from a nontaxable source or were otherwise exempt from U.S. tax. Accordingly, we sustain respondent's determination with respect to the unreported income in the amount of $ 137,221.

III. Accuracy-Related Penalty

Section 6662 provides that a taxpayer may be liable for a penalty of 20 percent on the portion of an underpayment which is attributable to, among other things, substantial understatement of tax. Sec. 6662(d)(2)(A). The term "substantial understatement" is defined as the greater of 10 percent of the tax required to be shown on the return for the taxable year, or $ 5,000. Sec. 6662(d)(1)(A). Also, the amount of understatement is reduced to the extent it is attributable to a position (1) for which there is substantial authority, or (2) which the taxpayer adequately disclosed on his return and for which there is reasonable basis. Sec. 6662(d)(2)(B). We do not find that either of these conditions applies here. Accordingly, the base to which the accuracy-related penalty would apply equals the full underpayment, or $ 43,812 in this case.

The penalty may not be imposed with respect to an underpayment if the taxpayer's actions regarding it can be justified by a reasonable cause and were in good faith. Sec. 6664(c)(1). Pertinent facts and circumstances determine whether this exculpatory provision applies in a particular case. Sec. 1.6664-4(b)(1), Income Tax Regs.

Respondent bears the burden of production with respect to the accuracy-related penalty. Sec. 7491(c). In order to meet this burden, respondent must produce sufficient evidence establishing that it is appropriate to impose this penalty. Once respondent has done so, the burden of proof is upon petitioners to establish reasonable cause and good faith. Higbee v. Comm'r, 116 T.C. 438">116 T.C. 438, 449 (2001).

Here, respondent has satisfied his burden of production by showing that petitioners' understatement was substantial as it exceeded the requisite statutory amount. Petitioners have not established that their failure to pay Federal income tax liability in full was due to a reasonable cause. The record is devoid of any reliable evidence in favor of the conclusion urged by petitioners; namely, that the excess bank deposit amount was not subject to U.S. tax. Petitioners gave inconsistent and incoherent testimony and failed to comply with the Court's requests to have the documents proffered by them properly translated and certified, so as to render them admissible. Accordingly, we hold the "reasonable cause" exception inapplicable and sustain the imposition of the substantial understatement penalty.

We have considered all arguments made by the parties and have rejected those arguments not discussed herein as irrelevant or without merit.

Decision will be entered for respondent

---

Footnotes

• 1. Section references are to the applicable version of the Internal Revenue Code. Rule references are to the Tax Court Rules of Practice and Procedure.↩

• 2. When used in a singular form, the term "petitioner" refers to Rafael M. Gutierrez.↩

• 3. Petitioners conceded the $ 2,600 of the total deficiency amount solely for the purpose of qualifying this case for small tax case procedure and made an appropriate request in their petition. Ultimately, however, this case was not tried as a small tax case.↩

• 4. Petitioners refer to the Convention & Protocol for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, Sept. 18, 1992, U.S.-Mex., S. Treaty Doc. No. 103-07, reprinted in 2 Tax Treaties (CCH) at 5903.↩

• 5. The relevant language of sec. 7491provides:

       SEC. 7491. BURDEN OF PROOF.

       (a) Burden Shifts Where Taxpayer Produces Credible

     Evidence. --

          (1) General rule. -- If, in any court proceeding, a

       taxpayer introduces credible evidence with respect to any

       factual issue relevant to ascertaining the liability of the

       taxpayer for any tax imposed by subtitle A or B, the

       Secretary shall have the burden of proof with respect to

       such issue.

          (2) Limitations. -- Paragraph (1) shall apply with

       respect to an issue only if --

            (A) the taxpayer has complied with the

          requirements under this title to substantiate any

          item;

            (B) the taxpayer has maintained all records

          required under this title and has cooperated with

          reasonable requests by the Secretary for witnesses,

          information, documents, meetings, and interviews;

          * * *↩

• 6. The text of the statute requires that the taxpayer satisfy the remaining (credible evidence) requirement as a condition of placing the burden of proof upon respondent.↩

• 7. Petitioners state that they owed no taxes on the transaction because they sold the market at its cost.↩

• 8. Respondent also alleged negligence on part of petitioners for the purpose of providing an additional ground for imposing an accuracy-related penalty. In that we decide the accuracy- related penalty issue on the basis of understatement, we need not and do not address this argument.↩