Caulfield v. Commissioner

JOSEPH P. CAULFIELD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Caulfield v. Commissioner

Docket Nos. 304-89, 305-89

United States Tax Court

T.C. Memo 1993-423; 1993 Tax Ct. Memo LEXIS 434; 66 T.C.M. (CCH) 710;

September 14, 1993, Filed

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Decisions will be entered for respondent.

For petitioner: Jerry L. Suddarth.

For respondent: Anthony S. Gasaway.

WHALEN

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WHALEN

MEMORANDUM FINDINGS OF FACT AND OPINION

WHALEN, Judge: Respondent determined deficiencies in, and additions to, petitioner's Federal income tax for 1982 and 1984, as follows:

		Additions to Tax
		Sec.	Sec.	Sec.
Year	Deficiency	6653(a)(1)	6653(a)(2)	6661
1982	$ 21,974	$ 1,099	50% of the	--
			interest due
			on $ 21,974
1984	15,949	797	50% of the	$ 3,987
			interest due
			on $ 15,949

All section references are to the Internal Revenue Code in effect for the years in issue.

The issues for decision are: (1) Whether petitioner realized unreported income of $ 50,538 in 1982, and $ 66,979 in 1984, as determined by respondent; (2) whether petitioner is liable for self-employment tax pursuant to section 1401; (3) whether petitioner is liable for additions to tax for negligence pursuant to section 6653(a)(1) and (2); and, (4) whether petitioner is liable for the addition to tax for substantial understatement of his 1984 tax pursuant to section 6661.

FINDINGS OF FACT

The parties have stipulated some of the facts in these cases. The Stipulation of Facts and the Supplemental Stipulation of Facts filed by the parties, and the exhibits attached thereto, are hereby incorporated herein by reference. The oral stipulations recited by the parties at the start of trial are also incorporated herein by reference. Petitioner resided in St. Peters, Missouri, at the time each of the petitions which are at issue in these cases was filed on his behalf.

During the years in issue, petitioner was engaged in the business of being a public insurance adjuster. He pursued that activity as a sole proprietor. For Federal income tax purposes, petitioner reported income and deductions under the cash receipts and disbursements method of accounting. Attached to petitioner's Federal income tax returns for 1982 and 1984 are Schedules C, Profit or (Loss) From Business or Profession, which report the following income and deductions from his public insurance adjuster business:

	1982	1984
Gross receipts	$ 380,891.55	$ 760,249
Cost of Goods Sold	(160.35)	--
Total income	380,731.20	760,249
Advertising	5,762.36	11,836
Bank service charges	482.00	596
Car and truck expenses	8,802.90	11,829
Commissions	52,897.17	132,894
Depreciation	5,013.65	9,677
Dues and publications	761.31	2,848
Employee benefit programs	3,447.76	12,818
Freight	2,400.00	--
Insurance	2,679.00	7,000
Int. on bus. indebtedness	9,513.69	14,082
Laundry and cleaning	850.00	--
Legal and prof. service	21,146.48	17,822
Office supplies and postage	4,671.58	6,577
Rent on bus. prop.	6,641.00	9,546
Repairs	2,068.28	2,202
Supplies	6,446.20	2,891
Taxes	3,710.68	7,637
Travel and entertainment	25,652.37	25,930
Utilities and telephone	8,115.99	14,568
Wages	20,140.00	18,172
Escrow	173,851.15	446,552
Board up and Temp.	4,925.40	8,853
Son's labor	2,600.00	--
Business church	780.00	--
Political contribution	615.00	--
Christmas party	1,556.25	--
Business charities	3,808.92	--
Misc. general $ 20/week	1,040.00	2,080
Other expenses	--	6,790
Total deductions	380,379.14	773,200
Net profit or (loss)	352.06	(12,951)

Respondent audited petitioner's 1982 and 1984 returns, and found an "absence of adequate records" from which to compute petitioner's taxable income. Accordingly, respondent reconstructed petitioner's income using the bank deposits plus cash expenditures method.

Petitioner maintained two bank accounts during 1982. He maintained an account at the Brentwood Bank in St. Louis, Missouri (the first Brentwood account), which he used primarily, but not exclusively, for business purposes. He also maintained an account at the Southwest Federal Bank in St. Louis, Missouri (the Southwest account), which he used for personal purposes.

During the audit of petitioner's returns, respondent's agent found that the balances of the above accounts on January 1, 1982, the total deposits made to the accounts during 1982, the transfers between the accounts during 1982, the deposit of loan proceeds into the accounts during 1982, the aggregate checks written on the accounts in 1981 that were outstanding at the beginning of 1982, the aggregate checks written in 1982 that were outstanding at the end of 1982, and the balances of the accounts at the end of 1982, were as follows:

	First
	Brentwood	Southwest
	Account	Account	Total
Balance 1/1/82	--	$ 2,259	$ 2,259
Total deposits	$ 394,029	43,018	437,047
made in 1982
Transfers between	--	--	23,018
accounts
Deposit of	10,000	20,000	30,000
loan proceeds
Checks written in 1981	--	--	--
outstanding on 1/1/82
Checks written in 1982	--	--	--
outstanding on 12/31/82
Balance 12/31/82	5,492	9,993	15,485

Based upon the stipulations of the parties, we find that the correct amounts are set out below:

	First
	Brentwood	Southwest
	Account	Account	Total
Balance 1/1/82	$ 18,984.26	$ 1,772.21	$ 20,756.47
Total deposits	393,608.35	44,004.66	437,613.01
made in 1982
Transfers between	--	21,600.00	21,600.00
accounts
Deposit of	10,000.00	20,000.00	30,000.00
loan proceeds
Checks written in 1981	2,858.87	1,251.19	4,110.06
outstanding on 1/1/82
Checks written in 1982	866.34	257.26	1,123.60
outstanding on 12/31/82
Balance 12/31/82	5,492.30	5,237.16	10,729.46

Petitioner maintained four bank accounts during 1984. They included the first Brentwood account and the Southwest account mentioned above. Petitioner also maintained a second account at the Brentwood Bank (the second Brentwood account) which, like the first Brentwood account, he used primarily, but not exclusively, for business purposes. He maintained an account at the St. John's Bank in St. Louis, Missouri (the St. John's account), under the name "John R. Caulfield". The record does not explain why petitioner maintained this account under a different name, or the purpose of the account.

Respondent's agent found that the balances of the above accounts on January 1, 1984, the total deposits made to the accounts during 1984, the transfers between the accounts during 1984, the aggregate checks written on the accounts in 1983 that were outstanding at the beginning of 1984, the aggregate checks written in 1984 that were outstanding at the end of 1984, and the balances of the accounts at the end of 1984 were as follows:

	First		Second
	Brentwood	Southwest	Brentwood	St. John's
	Account	Account	Account	Account	Total
Balance 1/1/84	$ 10,821	$ 1,298	$ 11,719	$ 60,403	$ 84,241
Total deposits	714,509	23,691	858,563	--	1,596,763
made in 1984
Transfers	554,113	9,200	262,005	--	825,318
between
accounts
Check written	45,989	307	--	--	46,296
in 1983
outstanding
on 1/1/84
Checks written	7,184	--	--	--	7,184
in 1984
outstanding
on 12/31/84
Balance	6,822	2,916	3,508	27,815	41,061
12/31/84

Based upon the stipulations of the parties, we find that the correct amounts are set out below:

	First		Second
	Brentwood	Southwest	Brentwood	St. John's
	Account	Account	Account	Account	Total
Balance 1/1/84	$ 10,821.00	$ 1,298.00	$ 11,719.00	$ 60,403	$ 84,241.00
Total deposits	829,855.83	23,691.00	602,462.63	--	1,456,009.46
made in 1984
Transfers	593,112.91	9,200.00	73,508.00	--	675,820.91
between
accounts
Checks written	45,989.37	307.00	--	--	46,296.37
in 1983
outstanding
on 1/1/84
Checks written	7,153.63	--	--	--	7,153.63
in 1984
outstanding
on 12/31/84
Balance	6,822.00	2,976.35	3,508.00	27,815	41,121.35
12/31/84

Parenthetically, we note that during 1984 petitioner maintained a third account at the Brentwood Bank. The balance of the account was $ 80,000 on January 1, 1984, and on December 31, 1984, and no deposits were made to the account during the year. This account is not included in the above discussion because it does not affect respondent's reconstruction of petitioner's income under the bank deposits method. Nevertheless, we note that the beginning and ending balances set out above are $ 80,000 less than the amounts used by the agent.

Respondent's agent found that during 1982 and 1984 petitioner spent $ 83,135 and $ 57,771, respectively, for personal living expenses. The agent also found that during 1982 and 1984, petitioner spent $ 12,561 and $ 22,002, respectively, to purchase capital assets.

In the notice of deficiency, respondent determined that petitioner's net deposit of business receipts during 1982 amounted to $ 384,029. Based upon the stipulations of the parties, we find that the correct amount is $ 386,013.01. Set out below is respondent's computation as contained in the notice of deficiency, and the same computation using the amounts that were stipulated by the parties:

	Notice of
1982	Deficiency	Revised
Total Deposits:
First Brentwood account	$ 394,029	$ 393,608.35
Southwest account	43,018	44,004.66
	437,047	437,613.01
Less:
Loan proceeds	30,000	30,000.00
Transfers between accounts	23,018	21,600.00
Net deposit of	384,029	386,013.01
business receipts

In the notice of deficiency, respondent also determined that petitioner's net deposit of business receipts during 1984 amounted to $ 771,445. Based upon the stipulations of the parties, we find that the correct amount is $ 780,188.55. Set out below is respondent's computation as contained in the notice of deficiency, and the same computation using the amounts that were stipulated by the parties:

	Notice of
1984	Deficiency	Revised
Total Deposits:
First Brentwood account	$ 714,509	$ 829,855.83
Second Brentwood account	858,563	602,462.63
Southwest account	23,691	23,691.00
St. John's account	--	--
	1,596,763	1,456,009.46
Less:
Loan proceeds	--	--
Transfers between accounts	825,318	675,820.91
Net deposit of	771,445	780,188.55
business receipts

In the notice of deficiency, respondent determined that the total funds available in petitioner's bank accounts during 1982 was $ 423,821. Based upon the stipulations of the parties at trial, we find that the correct amount is $ 444,653.56. Set out below is respondent's computation as contained in the notice of deficiency, and the same computation using the amounts that were stipulated by the parties:

	Notice of
1982	Deficiency	Revised
Opening balances	$  2,259	$  20,756.47
Plus: total deposits	437,047	437,613.01
Less: closing balances	15,485	10,729.46
Plus: checks outstanding--	--	1,123.60
current year
Less: checks outstanding--	--	4,110.06
prior year
Total	423,821	444,653.56

In the notice of deficiency, respondent also determined that the total funds available in petitioner's bank accounts during 1984 were $ 1,600,831. Based upon the stipulations of the parties at trial, we find that the correct amount is $ 1,459,986.37. Set out below is respondent's computation as contained in the notice of deficiency, and the same computation using the amounts that were stipulated by the parties:

	Notice of
1984	Deficiency	Revised
Opening balances	$  164,241	$  84,241.00
Plus: total deposits	1,596,763	1,456,009.46
Less: closing balances	121,061	41,121.35
Plus: checks outstanding--	7,184	7,153.63
current year
Less: checks outstanding--	46,296	46,296.37
prior year
Total	1,600,831	1,459,986.37

In the notice of deficiency, respondent computed the funds which petitioner had available in his bank accounts during 1982 after subtracting the nondeductible expenditures made during the year from those accounts. We refer to this amount as the net funds available in 1982. Set out below is respondent's computation as contained in the notice of deficiency, and a revised computation based upon the stipulations of the parties:

	Notice of
1982	Deficiency	Revised
Total funds available	$ 423,821	$ 444,653.56
Less: nondeductible
expenditures:
personal living expenses	83,135	83,135.00
capital expenditures	12,561	12,561.00
transfers between accounts	--	21,600.00
Net funds available for 1982	328,125	327,357.56

Similarly, in the notice of deficiency, respondent computed the funds which petitioner had available in his bank accounts during 1984 after subtracting the nondeductible expenditures made during the year from those accounts. We refer to this amount as the net funds available in 1984. Set out below is respondent's computation as contained in the notice of deficiency, and a revised computation based upon the stipulations of the parties:

	Notice of
1984	Deficiency	Revised
Total funds available	$ 1,600,831	$ 1,459,986.37
Less: nondeductible
expenditures:
personal living expenses	57,771	57,771.00
capital expenditures	22,002	22,002.00
transfers between accounts	813,318	675,820.91
divorce settlement
Net funds available for 1984	707,740	704,392.46

The parties agree that based upon the deductions claimed on the Schedules C filed by petitioner for 1982 and 1984, petitioner deducted cash expenditures in the following amounts:

	1982	1984
Total deductions	$ 380,379.14	$ 773,200
on Schedule C
Less: depreciation	5,013.65	9,677
Cash expenditures	375,365.49	763,523
reflected on Schedule C

The cash expenditures reflected on petitioner's Schedules C, as computed above, exceed the net funds available in petitioner's bank accounts. The computation of that excess for each of the years in issue as set forth in the notice of deficiency is as follows:

	1982	1984
Schedule C expenses	$ 375,365	$ 763,523
paid in cash
Net funds available for
business expenditures	328,125	707,740
Business expenses paid	47,240	55,783
with undeposited funds

Respondent determined that the above excess for each year consists of business expenses paid by petitioner with funds that had not been deposited into one of petitioner's bank accounts. Accordingly, respondent added the above amounts to the net deposit of business receipts to arrive at petitioner's gross business receipts. The gross business receipts, as thus computed, are more than the gross business receipts reported on petitioner's Schedules C. That computation is as follows:

	1982	1984
	1982	1984
Business expenditures paid by cash	$ 47,240	$ 55,783
Net deposits from business receipts	384,029	771,445
Gross business receipts	431,269	827,228
Less: gross receipts	380,731	760,249
reported on return
Amount unreported	50,538	66,979

Based upon the above, respondent determined that petitioner had understated the gross income realized from his public adjuster business, as reported on Schedule C, by $ 50,538 in 1982 and $ 66,979 in 1984.

OPINION

Unreported Income

In auditing petitioner's income tax returns for 1982 and 1984, respondent found an "absence of adequate records" from which to compute petitioner's taxable income, and respondent invoked the authority delegated under section 446(b) to reconstruct petitioner's income using the bank deposits plus cash expenditures method, described above. Based upon such reconstruction, respondent determined that petitioner had underreported his business income by $ 50,538 in 1982, and $ 66,979 in 1984. Petitioner bears the burden of proving that respondent's determination is wrong. Rule 142, Tax Court Rules of Practice and Procedure; e.g., 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).

Petitioner does not challenge respondent's finding of inadequate records or otherwise seriously question respondent's authority to reconstruct his income "under such method as, in the opinion of the Secretary, does clearly reflect income." Sec. 446(b). In fact, petitioner has stipulated all of the pertinent information regarding his bank accounts in 1982 and 1984. The principal dispute between the parties involves petitioner's contentions that respondent's reconstruction overstates the amount of nondeductible expenditures made by petitioner during each of the years in issue and fails to take into account nontaxable sources of income. We shall address petitioner's arguments for each year below.

At the outset, it is necessary to address three other issues raised by petitioner. First, petitioner renews his objection to the admission of the Statement of Income and Expenses of Joseph P. Caulfield filed in the Circuit Court for the County of St. Charles, Missouri, in a proceeding styled "Re the Marriage of Joseph P. Caulfield, Petitioner and Glenda Ruth Caulfield, Respondent," number CV183-1213DR. Petitioner argues, without citing any authority, that the document cannot be admitted into the record of these cases:

for lack of a proper foundation. the [sic] document purports to be a copy "certified" by a Deputy Clerk from the Circuit Clerk in St. Louis County, Missouri. Petitioner submits that to be used in this proceeding the docket and signature of the certifying clerk had to be "authenticated" by the Circuit Clerk for said Court. This "authorization" is accomplished by the Circuit Clerk indicating that she is the Circuit Clerk and that the Deputy Clerk prepared the document at her direction and that it is a true copy of same.

We disagree. The subject document bears the official seal of the Circuit Court of St. Charles County, Missouri, and a stamp which states as follows:

CERTIFICATE OF TRUE COPY

I, Susan E. Brown, Clerk of Circuit Court, within and for the County of St. Charles, State of Missouri, do certify that the foregoing is a true copy of an original document remaining on file and record in my office. Witness my hand and SEAL of said court this 2 DAY OF MARCH, 1990,

SUSAN E. BROWN, SUSAN E. BROWN, CLERK

BY LESLIE EISENSTEIN, DEPUTY

The certification purports to have been signed by a deputy clerk of the circuit court.

The above certificate complies with rule 902(4) of the Federal Rules of Evidence under which extrinsic evidence of authenticity is not a condition precedent to admissibility. Rule 902(4) of the Federal Rules of Evidence provides as follows:

Extrinsic evidence of authenticity as a condition precedent to admissibility is not required with respect to the following:

(1) Domestic public documents under seal. A document bearing a seal purporting to be that of the United States, or of any state, district, Commonwealth, territory, or insular possession thereof, or the Panama Canal Zone, or the Trust Territory of the Pacific Islands, or of a political subdivision, department, officer or agency thereof, and a signature purporting to be an attestation or execution.

* * *

(4) Certified Copies of Public Records. A copy of an official record or report or entry therein, or of a document authorized by law to be recorded or filed and actually recorded or filed in a public office, including data compilations in any form, certified as correct by the custodian or other person authorized to make the certification, by certificate complying with paragraph (1), (2) or (3) of this rule * * *.

The subject certification bears the official seal of the circuit court and the signature of a deputy clerk of that court. This is all that rule 902(4) requires. We find nothing in rule 902(4) to require an additional certification as to the authority of the deputy clerk. Cf. United States v. Beason, 690 F.2d 439">690 F.2d 439, 444 (5th Cir. 1982).

The second preliminary point is petitioner's argument that he was denied an opportunity for administrative consideration of these cases. His entire argument on this point is as follows:

Furthermore, the Respondent, in this case, violated IRS procedures and guidelines. No notice was given to Petitioner of "income tax examination changes". the [sic] statutory Notice of Deficiency * * * was the first written notice of any change in Petitioner's tax liability for 1982. As a result, Petitioner was deprived of any opportunity to pursue administrative relief afforded by the Respondent's own guidelines.

Our first difficulty with the above argument is that petitioner did not introduce into the record of these cases any evidence to prove the factual contentions that the notice of deficiency was the first notice given to him of any change in his 1982 tax, and that he did not receive administrative consideration of his cases. Moreover, petitioner does not explain what relief, if any, he is entitled to receive as a result of having been deprived of administrative consideration of his cases, or the legal basis for such relief. In other cases in which the taxpayer was not afforded an administrative hearing prior to the issuance of the notice of deficiency, we have upheld the validity of the notice. See Boyer v. Commissioner, 69 T.C. 521">69 T.C. 521, 543-544 (1977); Rimple v. Commissioner, T.C. Memo. 1985-245. Similarly, we see no basis to give petitioner relief in these cases.

Finally, petitioner complains about the fact that there are differences between the amounts of bank deposits found in the subject notice of deficiency and the amounts stipulated by the parties at trial. While we note the differences, we disagree with petitioner's argument that they prove "that the bank deposit method is totally inaccurate and improper method of attempting to calculate Petitioner's liability." To the contrary, it is clear that, in reconstructing a taxpayer's income, the Commissioner is not required to achieve "mathematical exactitude". E.g., Petzoldt v. Commissioner, 92 T.C. 661">92 T.C. 661, 693-694 (1989); Harper v. Commissioner, 54 T.C. 1121">54 T.C. 1121, 1129 (1970). Furthermore, as discussed below, the unreported income determined by respondent for each of the years in issue is less than the amounts that would have been determined using the deposits stipulated by the parties. This suggests that respondent took a conservative approach in determining the amount of income omitted from petitioner's returns. We find no fault in respondent's approach in these cases.

1982 Taxable Year

Respondent found that the expenditures made by petitioner during 1982 exceeded the funds which were available in his bank accounts by $ 47,240. Respondent added that excess to the net deposits that had been made during the year, $ 384,029, and, thereby, determined that petitioner's gross receipts from his business amounted to $ 431,269, $ 50,538 more than the amount reported on Schedule C of his 1982 return, $ 380,731. The following is a summary of respondent's reconstruction of petitioner's income for 1982 as determined in the notice of deficiency and as revised in accordance with the stipulations of the parties:

1982 Summary	Notice of Deficiency		Revised
Funds available		$ 423,821		$ 444,653.56
in banks
Deductible	$ 375,365		$ 375,365.14
expenditures
Non-deductible
expenditures:
Personal	83,135		83,135.00
living expenses
Capital items	12,561		12,561.00
Transfers	--		21,600.00
between accounts
		471,061		492,661.14
Excess		47,240		48,007.58
expenditures
over funds
Net deposits		384,029		386,013.01
of business
receipts
Gross		431,269		434,020.59
receipts--
as determined
Gross receipts--		380,731		380,731.00
reported
Gross receipts--		50,538		53,289.59
unreported

Petitioner's first contention is that respondent overstates the amount of nondeductible expenditures and, thereby, erroneously increases the unreported income computed under the bank deposits method. Set out below is a schedule which shows the nondeductible expenditures determined by respondent in the notice of deficiency and the position of each of the parties regarding the nondeductible expenditures made by petitioner during 1982:

1982 Nondeductible Expenditures	Notice	Petitioner's Position
Personal living expenses:
Per check spread	$ 43,135	--
Loan repayment on 5/21/82	20,000	$ 20,000
Loan repayment on 4/08/82	20,000	20,000
Checks on Southwest acct. (Ex. 15)	--	12,811
Loan repayment on 3/30/82	--	--
Loan repayment on 3/30/82	--	--
Food allowance, $ 50 per week	--	2,600
Clothing allowance	--	1,170
Loans to others	--	272
Typewriter, calculator, etc.	--	443
Stock purchases	--	6,959
Personal portion of Sch. C expenses	--	7,332
Unexplained expenditures, Southwest acct.	--	--
Subtotal	83,135	71,587
Capital expenditures:
Camaro automobile	11,318	--
Other capital items	1,242	1,242
Subtotal	12,560	1,242
Total	95,695	72,829

1982 Nondeductible Expenditures	Respondent's Position
Personal living expenses:
Per check spread	--
Loan repayment on 5/21/82	$ 20,000.00
Loan repayment on 4/08/82	20,000.00
Checks on Southwest acct. (Ex. 15)	12,811.00
Loan repayment on 3/30/82	4,000.00
Loan repayment on 3/30/82	10,000.00
Food allowance, $ 50 per week	--
Clothing allowance	--
Loans to others	3,072.00
Typewriter, calculator, etc.	--
Stock purchases	15,087.32
Personal portion of Sch. C expenses	8,984.59
Unexplained expenditures, Southwest acct.	20,766.71
Subtotal	114,721.62
Capital expenditures:
Camaro automobile	11,318.00
Other capital items	1,242.00
Subtotal	12,560.00
Total	127,281.62

It is readily apparent from the above that petitioner concedes having spent $ 71,587 for personal living expenses and $ 1,242 to purchase certain capital assets. Thus, petitioner concedes having spent a total of $ 72,829 for personal living expenses and capital items; i.e., $ 22,866 less than the amount determined in the notice of deficiency, $ 95,695. It is also readily apparent from the above schedule that respondent contends that petitioner spent, at least, $ 114,721.62 for personal living expenses, and $ 12,560 for capital items. Thus, respondent contends that petitioner spent a total of $ 127,281.62; i.e., $ 31,586.62 more than the amount determined in the notice of deficiency.

We note that respondent has not sought to increase the deficiency for 1982 based upon the contention, summarized above, that a greater amount of nondeductible expenditures was proven at trial than was taken into account in the notice of deficiency. Accordingly, it is not necessary for us to resolve all of the factual differences between the parties regarding each of the nondeductible expenditures summarized in the above schedule. If we find that petitioner spent at least $ 95,695, the amount determined in the notice of deficiency, for personal living expenses and capital assets in 1982, then we must sustain respondent on this point.

In addition to the amount conceded by petitioner in his post-trial brief, $ 72,829, we find, as further discussed below, that petitioner made loan repayments of $ 4,000 and $ 10,000, and spent $ 11,318 to purchase a Camaro automobile. Thus, we find that petitioner spent at least $ 98,147 for personal living expenses and capital assets. Accordingly, petitioner has failed to prove that respondent overstated the nondeductible expenditures made by petitioner during 1982.

The loan repayments of $ 4,000 and $ 10,000 that are set forth in the above schedule are listed in petitioner's 1982 cash disbursements journal of checks written from petitioner's first Brentwood account, as follows:

Date	Check No.	Description	Amount
3/30	864	Tower Grove Bank	$  4,051.60
		loan $ 4,000
		interest $ 51.60
3/30	865	Badin Bank	10,245.10
		loan $ 10,000
		interest $ 245.10

Petitioner admits that the loan repayments are among the personal expenses for 1982 established by the evidence presented at trial. Nevertheless, he contends that they cannot be taken into account in respondent's bank deposits analysis because respondent failed to include them among the personal living expenses determined in the notice of deficiency. According to petitioner, "no timely assessment of this alleged additional deficiency was made and same is therefore, barred by the Statute of Limitations."

In making this argument, petitioner fails to appreciate the fact that, as mentioned above, respondent is not asking the Court to redetermine a greater deficiency than that determined in the notice of deficiency. Petitioner also fails to appreciate the fact that once a notice of deficiency is issued, the running of the period of limitations on assessment is suspended during the period the Secretary is prohibited from assessing tax and, if a petition for redetermination is filed in this Court, the period is suspended until the decision of the Court becomes final, and for 60 days thereafter. Sec. 6503(a)(1). At this time, the period of limitations under section 6501(a) for assessing and collecting petitioner's 1982 income taxes is suspended. Therefore, even if respondent were seeking a greater deficiency, the period of limitations on assessment under section 6501(a) would not be a bar.

Petitioner raises no other objection to taking the subject loan repayments into account. In fact, petitioner concedes that the subject loan repayments of $ 4,000 and $ 10,000 are among the personal expenses established by the evidence presented at trial.

The issue here is whether petitioner has proven his contention that respondent's bank deposits plus cash expenditures analysis overstates the amount of his nondeductible expenditures in the form of personal living expenses and capital expenditures. Petitioner has advanced no reason why, in considering that issue, we cannot take into account the personal living expenses established at trial, including the subject loan repayment of $ 4,000 and $ 10,000.

In the case of the Camaro automobile, petitioner denies that he spent $ 11,318 to purchase a Camaro automobile at the end of 1982. He asserts that he acquired the automobile under a "36-month installment contract". However, petitioner's testimony on this point is vague and self-serving, and petitioner failed to produce the installment contract he claims to have entered into. In this situation, we infer that the contract governing his acquisition of the Camaro automobile would not be favorable to his position in these cases. Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158">6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947).

Petitioner's second contention is that respondent's recomputation of petitioner's income fails to take into account the fact that he had nontaxable funds of $ 46,646. Petitioner asserts that $ 30,000 of such amount came from loan proceeds, $ 10,000 of which was deposited into the first Brentwood account, and $ 20,000 of which was deposited into the Southwest account. Petitioner asserts that the remaining $ 16,646 consists of the combined opening balances of petitioner's bank accounts on January 1, 1982, $ 20,756.47, less the checks which had been written on those funds in 1981, but were still outstanding on January 1, 1982, $ 4,110.06.

As to the first point, petitioner is wrong in contending that respondent's determination does not take into account loan proceeds of $ 30,000. The "bank deposit method worksheet" for 1982 which is attached to the subject notice of deficiency shows, at "NOTE G", that petitioner's bank deposits were reduced by "loan proceeds deposited" in the amount of $ 30,000.

As to petitioner's second point, we agree that respondent's reconstruction, as set forth in the notice of deficiency, does not take into account the correct opening balances of petitioner's bank accounts less checks outstanding. The "bank deposit method worksheet" for 1982, which is attached to the notice of deficiency, shows opening balances of $ 2,259 and no checks outstanding, whereas the parties have stipulated that the aggregate balance in petitioner's accounts was $ 20,756.47, and the aggregate checks outstanding on January 1, 1982, was $ 4,110.06. We also agree that this error would tend to overstate the amount of unreported income. Nevertheless, when respondent's reconstruction of petitioner's income is revised to take into account all of the amounts stipulated by the parties, including the correct opening balance of petitioner's accounts and checks outstanding on January 1, 1982, the amount of omitted income computed thereunder is $ 53,289.59, that is, more than the amount determined in the notice of deficiency. That revised computation is summarized above. Thus, while we agree with petitioner that respondent's reconstruction is wrong on this point, petitioner has failed to prove that the error caused the omitted income determined by respondent to be overstated.

The third contention made by petitioner is that respondent's reconstruction fails to take into account "substantial non-taxable dollars to petitioner" from "an automobile accident and medical malpractice suit". Petitioner, of course, bears the burden of proving that he realized such nontaxable income. E.g., Parks v. Commissioner, 94 T.C. 654">94 T.C. 654, 658-659 (1990); Tokarski v. Commissioner, 87 T.C. 74">87 T.C. 74, 75-76 (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).

Petitioner introduced no documents to substantiate that assertion. He relies entirely upon the following question and answer during his direct testimony at trial:

Q Mr. Caulfield, with regard to that category, do you know of or do you believe that you had any other funds available to you during the tax year 1982, either from nontaxable sources or from business income?

A Mr. Suddarth, that's really impossible to say. I have researched and looked through my records. I was involved in an automobile accident; I had a medical malpractice suit, Your Honor. Some time in the eighties, both of those litigations settled. But to the best of my knowledge and the best of my records that I've been able to reassemble, this is an accurate picture of my financial position for the year 1982.

The above testimony does not set forth the date or the amount of the recoveries which petitioner claims to have received. Accordingly, we find that petitioner has failed to establish that he realized additional nontaxable income during 1982, and we reject petitioner's contention that respondent erred by failing to take any such recoveries into account.

Taxable Year 1984

Respondent found that the expenditures made by petitioner during 1984 exceeded the funds which were available in petitioner's bank accounts by $ 55,783. Respondent added that excess to the net deposits that had been made during the year, $ 771,445, and determined that petitioner's gross business receipts amounted to $ 827,228, $ 66,979 more than the amount he reported, $ 760,249. The following is a summary of respondent's reconstruction of petitioner's income for 1984, as determined in the notice of deficiency, and as revised in accordance with the stipulations of the parties:

1984 Summary	Notice of Deficiency		Revised
Funds available		$ 1,600,831		$ 1,459,986.37
in banks
Deductible	$ 763,523		$ 763,523.00
expenditures
Non-deductible
expenditures:
Personal living	57,771		57,771.00
expenses
Capital items	22,002		22,002.00
Transfers between	813,318		675,820.91
accounts
		1,656,614		1,519,116.91
Excess expenditures		55,783		59,130.54
over funds
Net deposits		771,445		780,188.55
Gross receipts --		827,228		839,319.09
as determined
Gross receipts --		760,249		760,249.00
reported
Gross receipts --		66,979		79,070.09
unreported

Petitioner's first contention is that respondent overstated petitioner's personal living expenses for 1984, a component of nondeductible expenditures, and thereby overstated the amount of unreported income for the year. Set out below is a schedule which shows the personal living expenses determined by respondent in the notice of deficiency and the position of each of the parties regarding the personal living expenses paid by petitioner during 1984:

1984 Nondeductible Expenditures	Notice	Petitioner's Position
Personal living expenses:
Personal expenses	$ 47,170	--
Divorce settlement	10,601	$ 10,601
Checks on Southwest acct. (Ex. 17)	--	14,965
Food allowance	--	2,080
Clothes allowance	--	1,040
1984 depreciation schedule	--	4,197
Home alarm	--	1,990
Washer and dryer	--	1,148
Continental Ins.	--	1,227
Riding lawn mower	--	667
Misc. personal expenses	--	490
Personal portion of Sch. C expenses	--	2,873
Personal property	--	242
IRA	--	2,000
Travel, entertainment and boat	--	1,881
Springfield Associates	--	6,900
Unexplained expenditures, Southwest acct.	--	--
Weekly payments of $ 250, 49 weeks	--	--
Payment to Sears, 9/13	--	--
Checks to cash, 1/16 and 8/29	--	--
Total	57,771	52,301

1984 Nondeductible Expenditures	Respondent's Position
Personal living expenses:
Personal expenses	--
Divorce settlement	10,601.00
Checks on Southwest acct. (Ex. 17)	14,965.00
Food allowance	--
Clothes allowance	--
1984 depreciation schedule	--
Home alarm	1,990.00
Washer and dryer	1,148.00
Continental Ins.	1,673.45
Riding lawn mower	667.00
Misc. personal expenses	394.00
Personal portion of Sch. C expenses	2,890.00
Personal property	--
IRA	2,000.00
Travel, entertainment and boat	1,881.00
Springfield Associates	6,900.00
Unexplained expenditures, Southwest acct.	7,047.77
Weekly payments of $ 250, 49 weeks	12,250.00
Payment to Sears, 9/13	551.82
Checks to cash, 1/16 and 8/29	3,060.00
Total	68,019.04

It is readily apparent from the above that respondent determined in the notice of deficiency that petitioner had spent $ 57,771 for personal living expenses and petitioner concedes that he spent $ 52,301 for personal living expenses, $ 5,470 less than the amount set out in the notice of deficiency.

It is also apparent from the above schedule that respondent contends that petitioner actually spent, at least, $ 68,019.04 for personal expenses during 1984. However, respondent does not seek to increase the 1984 deficiency based upon the additional expenditures. Therefore, as was true for 1982, we need not resolve the disagreements between the parties concerning each of the additional expenditures asserted by respondent. We will sustain respondent's determination if the sum of the amounts conceded by petitioner, $ 52,301, plus other expenditures equals or exceeds the amount determined in the notice of deficiency, $ 57,771.

We note that one additional expenditure asserted by respondent, as shown in the above schedule, is labeled unexplained expenditures from petitioner's Southwest account in the amount of $ 7,047.77. This amount consists of the total expenditures from the Southwest account during 1984, $ 22,012.65 (beginning balance $ 1,298, plus deposits of $ 23,691, less ending balance of $ 2,976.35), less the expenditures from the account that petitioner concedes are personal expenses, $ 14,964.88.

At trial, petitioner introduced a schedule of checks written from the Southwest account totaling $ 14,964.88 which he testified were personal expenditures. On cross-examination, respondent's attorney asked petitioner whether the remaining expenditures from the Southwest account, $ 7,047.77, were personal expenditures. The question by respondent's attorney and petitioner's reply are as follows:

Q Well, I'll try to ask the question a little more precisely this time. You have identified approximately $ 15,000 in personal expenditures from your Southwest Bank account. There were deposits including $ 9,200 in transfers -- there were total deposits of approximately $ 22,000. Would that remaining sum of approximately $ 7000 -- was that used for business or personal expenses?

A I don't know. The money was intermingled and used for both.

Respondent's post-trial brief sets forth the following proposed finding of fact:

48. During the taxable year 1984 petitioner expended $ 22,012.65 from his Southwest Federal Bank Account for personal purposes.

In his reply brief, petitioner entered no objection to the above proposed finding of fact. Accordingly, we find that all of the funds expended from petitioner's Southwest account during 1984, including the so-called unexplained expenditures from the Southwest account in the amount of $ 7,047.77, were personal expenditures.

The personal living expenses conceded by petitioner in his post-trial brief, $ 52,301, plus the additional personal living expenses paid from petitioner's Southwest account, $ 7,047.77, total more than the personal living expenditures determined in the notice of deficiency. Therefore, we find that petitioner has failed to prove that respondent's reconstruction of petitioner's 1984 income overstates the amount of personal living expenses.

Petitioner raises a second objection to respondent's reconstruction of his 1984 income. He contends that the reconstruction fails to take into account nontaxable income in the sum of $ 74,615. Petitioner's discussion of this point is not entirely clear, but it appears that he computes such amount as shown in the second column below:

Aggregate opening balance	$ 95,133	$ 84,241.00
in bank accounts
Less: prior year's checks	32,489	46,296.37
Difference	62,644	37,944.63
Rounded to	60,000
Plus: deposits to	24,315	23,691.00
Southwest account
Less: transfers to	9,700	9,200.00
Southwest account
	74,615	52,435.63

The third column of the above schedule is the same computation using the amounts stipulated by the parties.

We have a number of difficulties with petitioner's contention that the above is a computation of nontaxable income which respondent's recomputation fails to take into consideration. First, we find no basis in the record of these cases for the contention, implicit in the above computation, that the net deposits to petitioner's Southwest account during 1984 consisted entirely of nontaxable income. Furthermore, contrary to petitioner's contention, all of the other amounts used in petitioner's computation are properly taken into account in respondent's reconstruction of petitioner's income for 1984 under the bank deposits plus cash expenditures method described above.

Self-Employment Taxes

Respondent determined that petitioner is liable for self-employment taxes under section 1401 for 1982 and 1984. Section 1401 imposes self-employment taxes on the "self-employment income" of every individual. Section 1402(b) defines "self-employment income" as the "net earnings from self-employment" derived by an individual during the taxable year with certain exceptions that are not relevant in these cases. The term "net earnings from self-employment" is generally defined in section 1402(a) as the gross income derived by an individual from any "trade or business" carried on by such individual, less the deductions attributable to such trade or business.

Petitioner bears the burden of proving that he is not liable for the taxes imposed by section 1401 as determined by respondent. Rule 142(a). Petitioner introduced no evidence on this issue at trial, and he made no argument concerning self-employment taxes in his post-trial briefs. Accordingly, we sustain respondent's determination that petitioner is liable for self-employment taxes.

Negligence Additions Under Section 6653(a)

Respondent determined that petitioner is liable for additions to tax for negligence pursuant to section 6653(a)(1) and (2). Section 6653(a)(1) imposes an addition to tax equal to 5 percent of the underpayment, if any part of the underpayment for the year is due to a taxpayer's negligent or intentional disregard of respondent's rules or regulations. Section 6653(a)(2) imposes an addition to tax equal to 50 percent of the interest payable under section 6601 with respect to any portion of the underpayment which is attributable to the negligence or intentional disregard of the rules or regulations.

Petitioner bears the burden of proving that no part of the underpayment was due to his negligence or intentional disregard of respondent's rules and/or regulations. Rule 142(a); Axelrod v. Commissioner, 56 T.C. 248">56 T.C. 248, 258-259 (1971). Petitioner introduced no evidence on this issue at trial, but argues in his answering brief that there was no underpayment for 1982 and 1984 and, therefore, no addition to tax under section 6653. As discussed above, we sustain respondent's determination of an underpayment for 1982 and 1984. Accordingly, we also sustain respondent's determination of the additions to tax under section 6653(a)(1) and (2).

Addition to Tax Under Section 6661

Respondent determined that petitioner is liable for the addition to tax pursuant to section 6661(a) for 1984. Section 6661(a) imposes an addition to tax equal to 25 percent of any underpayment attributable to a "substantial understatement" of income tax for the taxable year. In the case of a noncorporate taxpayer, an understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return, or $ 5,000. Sec. 6661(b)(1).

Petitioner bears the burden of proof on this issue. Rule 142(a). Petitioner presented no evidence on this issue at trial but argues in his answering brief "that since no understatement [sic] exist the penalty is inapplicable." As discussed above, we sustain respondent's determination of underpayments for 1982 and 1984 attributable to substantial understatements of income tax. Accordingly, we also sustain respondent's determination of the addition to tax under section 6661.

For the foregoing reasons,

Decisions will be entered for respondent.