                         T.C. Memo. 2011-40



                       UNITED STATES TAX COURT



           JIN LONG PAN AND BAO QIONG CHEN, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23497-07.             Filed February 14, 2011.



     Robert Nizewitz (specially recognized) and Stephen K. Seung,

for petitioner Jin Long Pan.

     Diana P. Hinton, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined deficiencies in

petitioners’ Federal income tax and accuracy-related penalties as

follows:
                              - 2 -

                                                   Penalty
          Year           Deficiency              Sec. 6662(a)

          2004            $127,347                 $25,469
          2005              86,526                  17,305

     The issues for decision are:    (1) Whether petitioners had

unreported income for 2004 and 2005; and (2) whether petitioners

are liable for accuracy-related penalties under section 6662(a)1

for 2004 and 2005.2

                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulations of facts and the attached exhibits are

incorporated herein by this reference.    Petitioners resided in

New York when they filed their petition.




     1
        Unless otherwise indicated, 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.
     2
        Respondent determined that petitioners are liable for
self-employment tax on the unreported income for 2004 and 2005.
Jin Long Pan (petitioner) introduced no evidence at trial, nor
did he argue on brief, that he is not liable for self-employment
tax. As a result, petitioner is deemed to have conceded this
issue. See Rules 142(a), 149(b); Burris v. Commissioner, T.C.
Memo. 2001-49.

     Respondent’s determinations with respect to petitioners’
claimed earned income credits under sec. 32 and personal
exemption deductions under sec. 151 are automatic adjustments
that will be resolved by our decision of the primary issue (i.e.,
whether petitioners had unreported income), and computations
shall be made under Rule 155.
                              - 3 -

     Petitioner and his wife3 filed joint Federal income tax

returns for 2004 and 2005 on which they reported gross income of

$16,450 and $18,230, respectively.    Petitioner stated “cook” as

his occupation on both returns and “housewife” as his wife’s

occupation on the 2004 return and “labor” on the 2005 return.

Foxwoods Resort Casino

     During the years at issue petitioner traveled frequently to

Foxwoods Resort Casino (Foxwoods) in Connecticut to gamble.

Petitioners’ 2004 and 2005 returns became the subject of

examination after respondent received numerous currency

transaction reports (CTRs) from Foxwoods showing that petitioner

had purchased more than $800,000 in casino chips in 2004 and 2005

combined.4




     3
        On Mar. 11, 2010, the Court granted respondent’s motion
to dismiss for lack of prosecution and to strike petitioner’s
wife, Bao Qiong Chen, from this case. The Court will enter a
decision as to petitioner Bao Qiong Chen consistent with the
decision to be entered as to petitioner Jin Long Pan.
     4
        Casinos are required to file CTRs with the Internal
Revenue Service (IRS) when a patron purchases (or redeems) more
than $10,000 in chips with cash within a 24-hour period. See 31
C.F.R. sec. 103.22(b)(2) (2010). When a patron exceeds the CTR
reporting threshold, he is required to show identification to a
casino employee. Chris Dowds, who works in Foxwoods’ accounting
department, was generally unfamiliar with what forms of
identification are acceptable on the casino floor for CTR
reporting but stated that it may be possible for a patron to show
a “Dream Card”, discussed infra, for identification purposes. A
patron’s Dream Card account contains most of the information that
is required to be reported on a CTR (e.g., name, address, and
driver’s license number).
                                   - 4 -

     In addition to keeping track of its patrons’ buy-ins and

redemptions for CTRs, Foxwoods keeps detailed computer records of

its patrons’ gambling activities for purposes of its rewards

program.     Patrons can sign up for and receive a free rewards card

(Dream Card) to use each time they gamble at Foxwoods.          Patrons

accumulate points on their Dream Cards based on how much they

play at the casino and can redeem their points for free food,

beverages, and tickets to shows.      Each Dream Card holder is

assigned an identification number that is used to track that

patron’s activity at the casino.

The Audit

     IRS Revenue Agent Daniel Lorber (Mr. Lorber) audited

petitioners’ 2004 and 2005 returns.        During his examination he

reviewed the following CTRs related to petitioner’s cash

transactions at Foxwoods:
                                                    Complimentary
      Date             Purchases      Redemptions     Expenses

     4/3/04            $15,000            -0-            $300
     4/3/041            15,000            -0-             300
     4/17/04            15,000            -0-             -0-
     6/10/04            13,200            -0-             -0-
     8/21/04            21,500            -0-             -0-
     8/31/04            19,000            -0-             450
     9/1/04             11,000            -0-             -0-
     9/3/04             20,500            -0-             -0-
     9/4/04             19,950            -0-             -0-
     9/21/04            15,200            -0-             -0-
     10/5/04            17,980            -0-             -0-
     10/6/04            10,500            -0-             -0-
     10/15/04            8,000         $15,500            -0-
     10/27/04           12,000            -0-             450
     10/30/04            7,000          12,400            450
     11/3/04             7,000          14,000            -0-
                            - 5 -

11/6/04          24,000          10,515        450
11/10/04         29,675          15,000        450
11/11/04             50          18,025        -0-
11/13/04         28,000            -0-         -0-
11/14/04           -0-           21,025        450
11/15/04          9,000          12,200        450
11/17/04         14,000          21,000        450
11/20/04         20,000            -0-         450
11/24/04         11,000            -0-         -0-
11/26/04         10,100            -0-         -0-
11/29/04         13,000            -0-         -0-
11/30/04         17,500            -0-         -0-
12/7/04          32,500            -0-         -0-
12/8/04          27,100            -0-         -0-
12/11/04         15,060            -0-         -0-
12/12/04         29,500            -0-         -0-
12/13/04         27,700            -0-         -0-
  2004 Totals   536,015         139,665       4,650

                                            Complimentary
 Date           Purchases     Redemptions     Expenses
                               2
1/1/05          $13,000         $10,000         -0-
1/7/05           35,700            -0-          -0-
1/8/05             -0-           14,000         -0-
1/13/05          12,000          12,450        $450
1/20/05          12,000            -0-          -0-
1/21/05          20,600            -0-          450
1/25/05            -0-           11,025         500
1/26/05          14,000            -0-          -0-
1/27/05          17,000            -0-          500
4/29/05          31,000            -0-          -0-
5/8/05           12,160            -0-          -0-
6/7/05           13,400            -0-          -0-
8/12/05          12,700            -0-          -0-
8/16/05          12,500            -0-          -0-
9/19/05          24,200            -0-          -0-
9/23/05          14,200            -0-          -0-
10/29/05         36,000            -0-          -0-
12/16/05         15,000            -0-          450
12/21/05          6,700          12,155         -0-
12/24/05         12,500            -0-          -0-
                                - 6 -

     12/30/05         13,300              -0-        -0-
     12/31/05         19,800              -0-        -0-
       2005 Totals   347,760            59,630      2,350
     1
        Respondent received a duplicate CTR for 4/3/04 and
mistakenly included it in his calculations.
     2
        According to the CTR for 1/1/05, petitioner received
$10,000 in complimentary expenses. This is inconsistent with
Foxwoods’ records of petitioner’s gambling activity (patron data
log), discussed infra. We find that the $10,000 should have been
reported as a redemption.

     Mr. Lorber and petitioner’s counsel, Stephen Seung (Mr.

Seung), agreed to meet in January 2007 to discuss the audit.    Mr.

Lorber requested that petitioner provide for review at the

meeting documentation of any cash petitioner received from

nontaxable sources, such as loan documents or promissory notes.

Petitioner provided no documents in response to this request.

     During their meeting Mr. Lorber asked Mr. Seung how

petitioner got the money to make the purchases.   Mr. Seung

explained that petitioner had purchased some of the chips with

recycled money (i.e., he used prior casino winnings to make the

purchases) and that some of the CTRs were erroneously attributed

to petitioner.   With respect to the latter claim, Mr. Seung

contended that petitioner sometimes lent his Dream Card to his

friends in order to accumulate additional points while he was

traveling out of the country.   Mr. Seung told Mr. Lorber that he

would provide him with petitioner’s passport to prove that

petitioner could not have made some of the purchases, but Mr.

Seung did not do so during examination.
                               - 7 -

     Mr. Lorber sent several information document requests (IDRs)

to petitioner requesting the names of any individuals who

borrowed petitioner’s Dream Card, bank statements, and

documentation that petitioner had received money from nontaxable

sources.   Petitioner never provided any of the requested

documentation.

Reconstruction of Petitioner’s Income

     Mr. Lorber determined that petitioner had unreported income

for 2004 and 2005 by reconstructing petitioner’s income using the

cash expenditures method.   In doing so, he assumed that

petitioner had income for each of 2004 and 2005 at least equal to

that year’s “net-cash expenditures” at Foxwoods.5   Using the CTRs

as his guide, Mr. Lorber determined petitioner’s net cash

expenditures for each year by aggregating that year’s casino chip

purchases and reducing the total by that year’s casino chip

redemptions and complimentary expenses.6   He then reduced each

year’s net cash expenditures by petitioner’s known financial

resources (net wages, salaries, gross receipts, and interest) and

Federal income tax refunds to determine petitioner’s unreported



     5
        Respondent determined that petitioner’s gambling activity
resulted in net losses for 2004 and 2005. This has no impact on
respondent’s computations because gambling losses are deductible
only to the extent of gambling winnings. See sec. 165(d).
     6
        Mr. Lorber reduced the chip purchases by redemptions
under the presumption that petitioner would use the cash received
from the redemptions to purchase chips at a later date.
                               - 8 -

income.   The following chart summarizes Mr. Lorber’s

calculations:

                            2004                2005

CTRs
Purchases                 $536,015            $347,760
Redemptions + “Comps”     -144,315             -61,980
Net cash expenditures      391,700             285,780

Net Income
Net wages/salary            15,117               8,377
Gross receipts                -0-                9,008
Interest income                 50                  22
                            15,167              17,407

Tax Refunds
Prior year refund              968                -0-
Federal refund               2,806               3,998
                             3,774               3,998

Unreported income1         372,759             264,375
     1
        Unreported income = net cash expenditures - net income -
tax refunds.

Respondent issued petitioners a notice of deficiency based on Mr.

Lorber’s calculations.7




     7
        After respondent issued the notice of deficiency Foxwoods
provided respondent with a log of petitioner’s daily gambling
activities as recorded by the casino floor employees. The log
includes information about petitioner’s daily buy-ins, estimated
wins/losses, average bet, amount of time spent gambling each day,
and reward and use of complimentary expenses, among other
information. According to the log, petitioner had buy-ins of
$764,205 and $580,210 in 2004 and 2005, respectively. The
substantial discrepancy between the totals from the CTRs
($536,015 and $347,760) and the log is attributable to the fact
that the casino files CTRs only for transactions over $10,000,
whereas the log monitored all of petitioner’s purchases.
Respondent, however, did not seek an increased deficiency on the
basis of this information.
                                - 9 -

     Before trial petitioner presented his passport to

respondent, establishing to respondent’s satisfaction that

petitioner was out of the country and could not have made the

transactions reported in 11 of the CTRs (10 in 2004 and 1 in

2005).    Accordingly, respondent has stipulated that petitioner

did not make purchases on those 11 dates,8 on which purchases

totaled $198,460 and $13,400 in 2004 and 2005, respectively.

     In his pretrial memorandum petitioner claimed that his

casino chip purchases were financed by a loan he obtained from

the “Fukkianese community” and that he would testify to this

effect.    However, petitioner failed to show up for trial.

Petitioner’s counsel Robert Nizewitz tried the case in

petitioner’s absence.

                               OPINION

I. Burden of Proof and Burden of Production

     As a general rule, the taxpayer bears the burden of proving

the Commissioner’s deficiency determinations incorrect.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Section

7491(a)(1) and (2), however, provides an exception that shifts

the burden of proof to the Commissioner as to any factual issue

relevant to a taxpayer’s liability for tax if (1) the taxpayer



     8
        Respondent has stipulated that petitioner was not at the
casino on the following dates: Apr. 17, Nov. 24, Nov. 26, Nov.
29, Nov. 30, Dec. 7, and Dec. 8, 2004, Dec. 11 through 13, 2004,
and June 7, 2005.
                              - 10 -

introduces credible evidence with respect to such issue and (2)

the taxpayer satisfies certain other conditions, including

cooperation with the Government’s requests for witnesses,

information, and documents.   See also Rule 142(a)(2).   The burden

is on the taxpayer to show that he satisfied these prerequisites.

See Richardson v. Commissioner, T.C. Memo. 2005-143; H. Conf.

Rept. 105-599, at 240, 242 (1998), 1998-3 C.B. 747, 994, 996.

     Additionally, section 6201(d) provides that if a taxpayer

asserts a reasonable dispute with respect to the income reported

on an information return and fully cooperates with the Secretary

(including providing, within a reasonable time, access to and

inspection of all witnesses, information, and documents within

the control of the taxpayer as reasonably requested by the

Secretary), the Secretary shall have the burden of producing

reasonable and probative information in addition to such

information returns.

     Petitioner was unresponsive to Mr. Lorber’s repeated

requests for documentation throughout the examination.

Petitioner offered various explanations in response to Mr.

Lorber’s inquiries, but failed to produce any documentation to

corroborate these claims even after agreeing to do so.   Mr.
                                 - 11 -

Lorber also sent several IDRs to petitioner that petitioner

failed to respond to.9

     On the basis of the facts and circumstances, we hold that

petitioner has failed to fully cooperate with respondent’s

reasonable requests for information and documentation.

Accordingly, petitioner bears the burden of proof and respondent

does not have the burden of producing information in addition to

the CTRs.    See secs. 6201(d), 7491(a); Rule 142(a).

II. Unreported Income

     Gross income includes all income from whatever source

derived.    Sec. 61(a).   Taxpayers are required to maintain

adequate records of taxable income.       Sec. 6001.   When a taxpayer

fails to keep sufficient records to enable the Commissioner to

determine his correct tax liability, the Commissioner may compute

the taxpayer’s income by any method that clearly reflects income.

See secs. 446(b), 6001; Sutherland v. Commissioner, 32 T.C. 862

(1959).     The Commissioner’s reconstruction of a taxpayer’s income

need only be reasonable in light of all the surrounding facts and

circumstances.     Petzoldt v. Commissioner, 92 T.C. 661, 687

(1989).

     Respondent used the cash expenditures method to reconstruct

petitioner’s income.      The use of the cash expenditures method of


     9
        Although petitioner eventually showed respondent his
passport, petitioner did so after failing to provide his passport
to Mr. Lorber as he had agreed to do.
                                - 12 -

computing income is a well-established method of determining a

taxpayer’s unreported income.    United States v. Johnson, 319 U.S.

503 (1943); United States v. Citron, 783 F.2d 307, 310 (2d Cir.

1986); Taglianetti v. United States, 398 F.2d 558 (1st Cir.

1968), affd. 394 U.S. 316 (1969); United States v. Caserta, 199

F.2d 905 (3d Cir. 1952).

     The cash expenditures method assumes that the amount by

which a taxpayer’s cash expenditures during a taxable year exceed

his known sources of income for that period is taxable income,

unless the taxpayer can show that his expenditures were made from

some nontaxable source of funds.    DeVenney v. Commissioner, 85

T.C. 927, 930 (1985).   Accordingly, the relevant inquiry is

whether any expenditures in excess of reported income can be

attributed to assets available at the beginning of the relevant

period or to nontaxable receipts, such as loans, gifts, or

inheritances.   Petzoldt v. Commissioner, supra at 695.

     Petitioner did not introduce any evidence at trial to

demonstrate that the cash purchases at Foxwoods were made with

cash from nontaxable sources.    Rather, he argues that because

respondent has conceded that 11 CTRs were erroneously attributed

to him, the remaining CTRs are unreliable and cannot be used as

the basis for reconstructing his income.    We disagree.

     Respondent’s concession demonstrates only that petitioner

lent his Dream Card to someone on 11 days when he was traveling
                                - 13 -

so that he could accumulate additional points.    Petitioner has

introduced no evidence to dispute the accuracy of the remaining

44 CTRs, and therefore we accept respondent’s determinations with

the following adjustments:

                              2004                2005

CTRs
Purchases1                $521,015            $347,760
Redemptions + “Comps”     -144,015             -61,980
Conceded CTRs             -198,460             -13,400
Net cash in                178,540             272,380

Net Income
Net wages/salary              15,117               8,377
Gross receipts                  -0-                9,008
Interest income                   50                  22
                              15,167              17,407

Tax Refunds
Prior year refund                968               -0-
Federal refund                 2,806              3,998
                               3,774              3,998

Unreported income            159,599             250,975
     1
        We corrected a computational error that resulted from
Foxwoods’ filing two CTRs for Apr. 3, 2004, reporting purchases
of $15,000 and a cashout of $300. Accordingly, we have reduced
the purchases total by $15,000 and the redemptions + “comps”
total by $300.

     Accordingly, we conclude that petitioner had unreported

income of $159,599 and $250,975 for 2004 and 2005, respectively.

III. Section 6662(a)

     Respondent determined that petitioner is liable for section

6662(a) accuracy-related penalties for 2004 and 2005.10    Pursuant


     10
          Respondent determined that petitioner’s underpayments
                                                     (continued...)
                              - 14 -

to section 6662(a) and (b)(1) and (2), a taxpayer may be liable

for a penalty of 20 percent of the portion of an underpayment of

tax attributable to (1) negligence or disregard of rules or

regulations or (2) a substantial understatement of income tax.

An “understatement” is the difference between the amount of tax

required to be shown on the return and the amount of tax actually

shown on the return.   Sec. 6662(d)(2)(A).    A “substantial

understatement” exists if the understatement exceeds the greater

of (1) 10 percent of the tax required to be shown on the return

for a taxable year, or (2) $5,000.     See sec. 6662(d)(1)(A).   The

burden of production is on respondent to produce evidence that it

is appropriate to impose the relevant penalty.     See sec. 7491(c);

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

     The record shows that petitioner substantially understated

his Federal income tax for 2004 and 2005.11    Accordingly, we find

that respondent has met his burden of production.    The accuracy-



     10
      (...continued)
for 2004 and 2005 are attributable to (1) negligence or disregard
of rules and regulations and (2) a substantial understatement of
income tax. Because we find that petitioner substantially
understated his Federal income tax for 2004 and 2005, we need not
decide whether petitioner’s underpayments are attributable to
negligence or disregard of rules or regulations. See sec.
6662(b).
     11
        Although the exact amount of the understatement cannot
be determined until after the Rule 155 computation, petitioner’s
failure to report income of $159,599 for 2004 and $250,975 for
2005 will result in substantial understatements of income tax.
See sec. 6662(d)(1)(A).
                               - 15 -

related penalty is not imposed with respect to any portion of the

underpayment as to which the taxpayer shows that he acted with

reasonable cause and in good faith.     Sec. 6664(c)(1); Higbee v.

Commissioner, supra at 448.    Petitioner offered no evidence that

he acted with reasonable cause and in good faith.

       Accordingly, we hold that petitioner is liable for section

6662(a) accuracy-related penalties for 2004 and 2005 which shall

be computed based on the underpayments of tax computed under Rule

155.

       In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.    To reflect

the foregoing,


                                           Decision will be entered

                                      under Rule 155.
