                   T.C. Summary Opinion 2004-5



                     UNITED STATES TAX COURT



     JIMIE R. AND SANDRA HERLITSCHEK OVERBY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16627-02S.               Filed January 21, 2004.


     Jimie R. and Sandra Herlitschek Overby, pro se.

     James Brian Urie, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.    The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
                                - 2 -

     Respondent determined a deficiency in petitioners’ Federal

income tax in the amount of $10,167 and an accuracy-related

penalty under section 6662(a) of $1,728.40 for taxable year 1995.

After petitioners’ concession,1 the issues for decision are:      (1)

Whether petitioners received unreported income of $22,082.25 for

1995, as suggested by unexplained bank deposits made by them

during that year; and (2) whether petitioners are liable for an

accuracy-related penalty under section 6662(a) for 1995.

Background

     Some of the facts have been stipulated, and they are so

found.    The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    At the time of filing

their petition, petitioners resided in Green Lane, Pennsylvania.

     During the year in issue, petitioner Jimie R. Overby

(hereinafter petitioner) operated a general contracting business,

while petitioner Sandra Herlitschek Overby operated a consulting

business.    Petitioners deposited the gross receipts from these

two businesses into bank accounts opened at Quakertown National

Bank.    The bank accounts consisted of a checking account and a

savings account.

     During the year in issue, petitioners made bank deposits

totaling $103,072.44.    Of this total amount, $50,657 is


     1
        Petitioners concede that they are not entitled to the
claimed Schedule C, Profit or Loss From Business, deductions in
the amount of $10,811 for the 1995 taxable year.
                               - 3 -

attributable to petitioners’ wages; $132 is attributable to

interest earned; $4,444.97 is attributable to transfers between

petitioners’ savings account and checking account; and $15,760.22

is attributable to employee reimbursements that petitioners

received and deposited into their two bank accounts in 1995.

     Petitioners timely filed a Form 1040, U.S. Individual Income

Tax Return, for the 1995 taxable year (1995 return).   Petitioners

reported items of income and expenses for both businesses on one

Schedule C, Profit or Loss From Business.   In so doing, they

reported $9,996 in gross receipts on Schedule C of their 1995

return.

     Upon examination of petitioners’ 1995 return, respondent’s

revenue agent performed a bank deposits analysis and determined

that petitioners had unreported income based upon unexplained

bank deposits.   A summary of the revenue agent’s bank deposit

analysis for 1995 reflects the following:

     Deposits to bank accounts                $103,072.44
       Less deposits from known sources         70,994.19
     Net deposits                               32,078.25
       Less gross receipts per return            9,996.00
          Total unexplained deposits            22,082.25

     During the initial interview with the revenue agent,

petitioner indicated that petitioners did not keep any cash at

home.   During a subsequent interview with the revenue agent,
                                - 4 -

petitioner explained that the unexplained bank deposits were due

to gifts made in 1995 by his mother-in-law in the total amount of

$20,000.

      Not satisfied with petitioner’s explanation, respondent

issued petitioners a notice of deficiency dated August 9, 2002,

determining a deficiency in Federal income tax of $10,167 and an

accuracy-related penalty under section 6662(a) of $1,728.40 for

the 1995 taxable year.   Respondent contends that petitioners

received unreported income of $22,082.25 for 1995, as suggested

by unexplained bank deposits made by them during that year.

Discussion

1.   Unreported Income

      Gross income includes all income from whatever source

derived.   See sec. 61(a).   Section 6001 requires all taxpayers to

maintain adequate books and records of income.   In the absence of

adequate records, the Commissioner is authorized to reconstruct a

taxpayer’s income by any reasonable method that clearly reflects

the taxpayer’s income.   See sec. 446(b); see also Agnellino v.

Commissioner, 302 F.2d 797, 798-799 (3d Cir. 1962), affg. in part

and vacating in part T.C. Memo. 1961-22.    One of these methods,

the bank deposits and cash expenditure method, has long been

sanctioned by the courts.    See Bacon v. Commissioner, T.C. Memo.

2000-257, affd. without published opinion 275 F.3d 33 (3d Cir.

2001).
                                  - 5 -

       Bank deposits are prima facie evidence of income.    Clayton

v. Commissioner, 102 T.C. 632, 645 (1994).      When the Commissioner

uses the bank deposits method of analysis to reconstruct a

taxpayer’s income, this method assumes that all money deposited

in a taxpayer’s bank account during a given period constitutes

income to the taxpayer.    The Commissioner must take into account

any nontaxable source or deductible expense of which he has

knowledge.     Id. at 645-646.   The taxpayer nonetheless has the

burden of showing that the determination is incorrect.2     Id. at

645.

       Petitioners contend that unexplained bank deposits of

$22,082.25 do not constitute income in that such amount was

attributable to a cash hoard of lifetime earnings that they

periodically “pulled from the ground and deposited * * * in the

bank.”     Petitioner testified that he did not particularly like or

trust banks, citing his parents’ experience “during the

Depression days”, when “they lost money in the bank”.

Petitioner further testified:     “I was a little leery of the IRS,

so when I was asked some questions about did you have money at



       2
        Sec. 7491, regarding the shifting of the burden of proof,
is generally effective for court proceedings arising in
connection with examinations commencing after July 22, 1998, the
date of enactment of the Internal Revenue Service Restructuring
and Reform Act of 1998, Pub. L. 105-206, sec. 3001(a), 112 Stat.
726. The examination of petitioners’ 1995 return commenced in
1997. Accordingly, sec. 7491 does not apply in the present case.
                               - 6 -

home or whatever, I said: ‘No’.”   Petitioner finally testified

that he maintained a “Dome book”3 of bills and receipts during

the year, but did not produce it at the time of trial.

     We find petitioner’s testimony and petitioners’ explanations

regarding the unexplained bank deposits to be self-serving and

not credible.   We are not bound to accept such testimony or

explanations.   See Shea v. Commissioner, 112 T.C. 183, 189

(1999).   Indeed, we note that, despite their purported dislike

and distrust of banks, petitioners deposited over $65,000 of

wages and employee reimbursements into their bank accounts at

Quakertown National Bank.   We are satisfied that respondent gave

petitioners proper credit for nonincome sources of deposits.

Accordingly, we sustain respondent’s determination.

2.   Section 6662(a)

      Respondent determined that petitioners are liable for the

accuracy-related penalty under section 6662(a) for 1995.    The

accuracy-related penalty is equal to 20 percent of any portion of

an underpayment of tax required to be shown on the return that is

attributable to the taxpayer’s negligence or disregard of rules

or regulations.   See sec. 6662(a) and (b)(1).   “Negligence”

consists of any failure to make a reasonable attempt to comply


      3
       The origin of the term “Dome book” appears to be a book
entitled “Legal Deductions Allowable If You Are Engaged In A
Trade, Business or Profession” published by the Dome Publishing
Company in Providence, R.I. See United States v. Resnick, 483
F.2d 354, 356 n.3 (5th Cir. 1973).
                                - 7 -

with the provisions of the Internal Revenue Code.    Sec. 6662(c).

“Disregard” consists of any careless, reckless, or intentional

disregard.   Id.

     An exception applies to the accuracy-related penalty when

the taxpayer demonstrates (1) there was reasonable cause for the

underpayment, and (2) he or she acted in good faith with respect

to such underpayment.   See sec. 6664(c).   Whether the taxpayer

acted with reasonable cause and in good faith is determined by

the relevant facts and circumstances.   The most important factor

is the extent of the taxpayer’s effort to assess the proper tax

liability.   See Stubblefield v. Commissioner, T.C. Memo. 1996-

537; sec. 1.6664-4(b)(1), Income Tax Regs.    Section 1.6664-

4(b)(1), Income Tax Regs., specifically provides in part:

“Circumstances that may indicate reasonable cause and good faith

include an honest misunderstanding of fact or law that is

reasonable in light of the experience, knowledge and education of

the taxpayer.”

     It is the taxpayer’s responsibility to establish he or she

is not liable for the accuracy-related penalty imposed by section

6662(a).   See Rule 142(a).   Petitioners failed to explain

adequately why they did not report all of their income for 1995.

On the basis of the entire record, we conclude that petitioners

have not established that the underpayment of tax was due to
                                 - 8 -

reasonable cause and that they acted in good faith.        Accordingly,

we hold petitioners are liable for the accuracy-related penalty.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.
