                        T.C. Memo. 1997-232



                      UNITED STATES TAX COURT



                  RONNIE F. JUDY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12203-94.                       Filed May 20, 1997.



     Ronnie F. Judy, pro se.

     Bonnie L. Cameron, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     BEGHE, Judge:   Respondent determined deficiencies in

petitioner's Federal income tax and penalties for taxable years

1989 and 1990 as follows:1


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years at
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                                   - 2 -




                                                        Penalty
       Year           Deficiency            Sec. 6662
       1989             $6,313                $1,263
       1990             17,439                 3,488

       After concessions by both parties, the issues for decision

are:    (1) Whether petitioner failed to report income for 1989 and

1990 in the amounts of $7,439 and $36,663, respectively; and (2)

whether petitioner is liable for negligence penalties under

section 6662(a).    We hold for respondent on both issues.

                          FINDINGS OF FACT

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

The stipulations of fact and attached exhibits are incorporated

by this reference.    At the time the petition was filed,

petitioner’s legal residence was in Reevesville, South Carolina.

During the years at issue petitioner operated a farm.      The

primary sources of petitioner’s income were sales of cattle,

soybeans and grain.    Petitioner maintained a single bank account

at the First Federal Savings & Loan of Walterboro for both

personal and business use.    He did not deposit all farm receipts

into this bank account.    He endorsed to third-party creditors

some of the checks he received.      Petitioner concedes that he

failed to maintain adequate books and records to account for his

farming activities during the years at issue.      He further

concedes that his Federal income tax returns for these years did
                                - 3 -


not reflect income he received from sales of crops and livestock

as follows:

      Source                            1989           1990

  Orangeburg Stockyard             $14,237           $14,898
  Weathers Farm Supply               2,146              -0-
  Four Holes Farm                    -0-               6,800
    Total                           16,383            21,698

     Petitioner’s tax returns for the years at issue were

assigned to C. Kevin Cox (Cox), a special agent in the Criminal

Investigation Division of the Internal Revenue Service (IRS).

Cox interviewed petitioner in October 1992.

     In response to Cox’s questions about the source of funds for

specific expenditures, petitioner gave the following explanation:

He had borrowed what he needed from his father, Blease Judy

(Mr. Judy).    Mr. Judy’s sister--petitioner’s aunt--Lillie Mae

Ellis, had died in 1985, leaving Mr. Judy $183,000.      Mr. Judy had

withdrawn the entire inheritance from various bank accounts in

1985, and secreted the cash in an ammunition box that he kept

under his bed in the house he shared with petitioner’s family.

Mr. Judy had given petitioner permission to withdraw funds from

the ammunition box for expenses with the understanding that

petitioner would pay them back.    On numerous occasions,

petitioner had helped himself from the contents of the ammunition

box, but was dilatory in repaying.      At some point Mr. Judy had

discovered to his dismay how much of his inheritance had been
                                 - 4 -


thus depleted and moved the ammunition box to a new location

unknown to petitioner.

     For reasons not disclosed in the record, the criminal

investigation was discontinued later that year and the case

referred to the Examination Division of the IRS.    The audit of

petitioner’s 1989 and 1990 returns was conducted by Revenue Agent

Elizabeth Duffy (Duffy).    Petitioner did not show Duffy any

records.    In the absence of records, Duffy reconstructed

petitioner’s income using the source and application of funds

method.    Under this method, she determined the total amount of

petitioner’s expenditures plus bank deposits in 1989 and 1990 and

the total amount of funds available to him from identified

sources in each year.    In computing petitioner’s available

resources, Duffy included the $16,383 and $21,698 of receipts

traceable to farm sales but not reported on petitioner’s returns.

To the extent that petitioner’s expenditures plus deposits

exceeded funds available from identified sources, she presumed

that petitioner had additional unreported income from farming.

Petitioner’s uncorroborated account of his withdrawals of his

father’s inheritance from the ammunition box did not persuade her

otherwise.    The adjustments set forth in the notice of deficiency

followed Duffy’s computations.

     Before trial respondent revised the revenue agent’s

computations on the basis of additional information obtained from
                                   - 5 -


petitioner concerning his expenditures.      As a result of these

revisions, the amounts in controversy are lower than those

reflected in respondent’s original adjustments.2       The revised

computations set forth below are not disputed:

Application of Funds                           1989          1990

Increase in bank account balance             $4,928         - 0 -
Business equipment purchased per return       4,583          $900
Real estate purchased                                      61,000
Loan repaid to Dewey Cowart                  11,000        31,000
Personal living expenses                      4,200         5,100
Taxes and insurance withholdings              2,967         1,168
Expenses of estate of which petitioner
  was executor                                1,422         1,422

  Total funds applied                        29,100       100,590

Sources of Funds

Adj. gross income per return                   (138)          624
Depreciation per return                       5,416         3,942
Loan received from Dewey Cowart                -0-         31,000
Decrease in bank account balance               -0-          4,913
Gifts from Mr. Judy                            -0-          1,750

  Total available funds reported              5,278        42,229

Unreported farm income specifically
  identified                                 16,383        21,698

  Total funds available from
  identified sources                         21,661        63,927

Residual amounts in controversy               7,439        36,663

     This case was tried on November 6, 1995, in Columbia, South

Carolina.   One of the witnesses whom respondent subpoenaed was


     2
       The revisions relate to two     items: Respondent conceded
that a $20,500 expenditure for the     purchase of a tractor trailer
occurred in 1988 rather than 1989,     and that petitioner’s payments
for child care in 1990 were $2,700     less than the revenue agent
had supposed.
                                - 6 -


Mr. Judy.    Mr. Judy accompanied petitioner to the trial and sat

in petitioner’s car outside the courthouse; petitioner

represented to the Court that for health reasons his father would

be unable to testify.    During a recess, respondent’s counsel went

down to the parking lot to meet Mr. Judy, and, upon her return,

did not request the Court to compel Mr. Judy to testify.    The

Court agreed to hold the record open until December 18 to give

the parties the opportunity to take Mr. Judy’s deposition.

Respondent made arrangements for a deposition in Columbia within

this time period, but, when advised of the scheduled deposition,

petitioner stated that his father would be too ill to attend.      By

Order dated December 20, 1995, we expressed our concern over this

“very unsatisfactory state of affairs”, and admonished petitioner

that

       Without a medical doctor’s affidavit concerning
       Mr. Blease Judy’s inability to testify, the Court is
       skeptical about such inability. The Court would be
       inclined, in the absence of Mr. Blease Judy’s
       testimony, to invoke against petitioner the rule * * *
       [of] Wichita Terminal Elevator Co. v. Commissioner, 6
       T.C. 1158, 1165 (1945), affd. on other grounds 162 F.2d
       513 (10th Cir. 1947) * * *.

We instructed petitioner either to make arrangements for the

deposition of Mr. Judy by January 25, 1996, or provide the Court

with “a medical doctor’s affidavit explaining in detail why

Mr. Blease Judy is unable to testify within that timeframe and

when or whether the doctor expects that Mr. Blease Judy will be

able to provide testimony in this case.”    In reply, petitioner
                                - 7 -


reported that the condition of Mr. Judy’s health precluded a

deposition.    Petitioner’s report was accompanied by a one-

sentence note written on a doctor’s prescription pad and signed

by J. Richard Allison III, M.D., which read:    “Pt. [patient]

should be up on feet for short distance and short period of time

only.”    In early February we discussed this matter with the

parties in a telephone conference call.    When we suggested a

bedside deposition of Mr. Judy as an accommodation, and asked

petitioner if he would be willing to bear the additional

transportation costs that respondent would incur in coming to his

home, petitioner was noncommittal, stating that he could probably

make such arrangements but “it would take a while.”    Mr. Judy was

not deposed.    By Order dated March 29, 1996, the record was

closed.

                               OPINION

1.   Unreported Income

     Every taxpayer is required to maintain sufficient records to

enable the Commissioner to establish the amount of his taxable

income.    Sec. 6001; sec. 1.6001-1(a) and (b), Income Tax Regs.

If such records are lacking, the Commissioner may reconstruct the

taxpayer’s income by any indirect method that is reasonable under

the circumstances.    Cebollero v. Commissioner, 967 F.2d 986, 989

(4th Cir. 1992), affg. T.C. Memo. 1990-618; Petzoldt v.

Commissioner, 92 T.C. 661, 687 (1989); Schellenbarg v.
                               - 8 -


Commissioner, 31 T.C. 1269, 1277 (1959), affd. in part and revd.

and remanded in part on another issue 283 F.2d 871 (6th Cir.

1960).   Use of the source and application of funds method for

reconstructing income is well accepted.   Taglianetti v. United

States, 398 F.2d 558, 562 (1st Cir. 1968); Cheesman v.

Commissioner, T.C. Memo. 1990-350; Jones v. Commissioner, T.C.

Memo. 1983-110.   Under this method, any amount by which the

taxpayer’s applications of funds during the taxable year exceed

the funds available to him from known sources is attributed to

unreported taxable income.   As long as respondent’s use of this

method to reconstruct the taxpayer’s income is reasonable under

the circumstances, respondent’s determination is entitled to a

presumption of correctness, and the taxpayer bears the burden of

proving a nontaxable source of the excess funds applied.     Rule

142(a); Jones v. Commissioner, supra; cf. Cebollero v.

Commissioner, supra at 989-992; Estate of Mason v. Commissioner,

64 T.C. 651, 657-658 (1975), affd. 566 F.2d 2 (6th Cir. 1977).

Concessions by respondent regarding certain items in the

computation of the adjustments in the statutory notice ordinarily

do not shift the burden of proof to respondent.   Mills v.

Commissioner, 399 F.2d 744, 749 (4th Cir. 1968), affg. T.C. Memo.

1967-67; Marcello v. Commissioner, 380 F.2d 494, 497 (5th Cir.

1967), affg. in part and revg. and remanding on other issues T.C.

Memo. 1964-302; Estate of Mason v. Commissioner, supra at 659.
                               - 9 -


     Using the source and application of funds method, respondent

determined that petitioner had unreported income from farming in

addition to the receipts that respondent was able to trace to

specific farm sales and that petitioner has conceded.   Petitioner

claims that he borrowed the amounts in controversy by making

permitted withdrawals from a cash hoard of $183,000 established

by his father from the proceeds of an inheritance and kept in an

ammunition box under his father’s bed.   Petitioner’s account does

not persuade us, and, accordingly, we sustain respondent’s

revised determination.

     At trial, petitioner presented no evidence to corroborate

his own testimony.   He did attach several documents to his

posttrial brief, including the following:

     (1)   A statement purporting to be the affidavit of Mr. Judy,

dated July 9, 1995, which confirms many of the material facts

alleged by petitioner.

     (2)   A handwritten letter to a Mr. Paul Cumming, signed in

Mr. Judy’s name and dated February 1, 1995, which confirms some

of the same allegations;

     (3)   A handwritten list of numbers adding up to $104,159.31

and bearing the title “Withdrawals from Estate”;

     (4)   Copies of pages from four passbooks on which a few of

the numbers in the aforesaid list appear in the withdrawals

column;
                                - 10 -


     (5)    A certified bank check in the amount of $24,806.83

payable to Mr. Judy.

     None of these documents was shared with respondent before

trial, introduced in evidence at trial, or brought to the

attention of the Court before the record was closed.      Attachments

to briefs do not constitute evidence and may not be considered.

Rule 143(b); Kwong v. Commissioner, 65 T.C. 959, 967 n.11 (1976);

Perkins v. Commissioner, 40 T.C. 330, 340 (1963).       None of the

documents is on its face sufficiently trustworthy and probative

on the point for which it is offered that excluding it would

significantly detract from the truth-seeking function of these

proceedings.    The first two documents are notarized by

petitioner’s wife.     The authenticity of Mr. Judy’s signature on

the documents has not been established.      The dates on the

documents indicate that they were executed several months before

trial.     Yet, at trial, when petitioner requested that his father

be excused from testifying, he asked whether, as an alternative,

Mr. Judy might be allowed to execute an affidavit while sitting

in the car outside the courthouse.       That was a strange suggestion

if petitioner had in fact already arranged for Mr. Judy to

prepare two such affidavits.    The copies of bank records provide

too little identifying information to be useful.      The account

owners and depositories are not identified.      There is no

indication of any relationship to the Lillie Mae Ellis estate.
                               - 11 -


The only withdrawal of funds that can be connected to Mr. Judy is

in the amount of $24,806.83.

     Petitioner attempts to avoid the consequences of failing to

corroborate his testimony.    He argues that at trial he was

prepared properly to introduce in evidence bank documents

establishing Mr. Judy’s cash withdrawals, “but was not advised to

by the Court or the Respondent at that time”.    “The Court was

aware of these records in my possession during the November 6,

1995 Hearing, but were never asked for.”    What actually occurred

at trial was that when petitioner adverted to certain bank

records in his possession we asked him whether he had shown them

to respondent.    He replied that he had not.   We instructed him to

show his documents to respondent so that they could be included

in a supplemental stipulation; under these conditions, we said,

we would consider accepting them as evidence.    Petitioner then

qualified his offer, stating that he was unable to obtain most of

the records because the banks “weren’t required to keep records

that far back”.    Petitioner did not follow the Court’s

suggestion.   Nor was petitioner unaware of the regular procedures

for the introduction of documentary evidence.    He received

service of the Court’s Standing Pretrial Order; he participated

in the preparation of a stipulation relating to joint exhibits;

he had already successfully introduced two exhibits into evidence

before the colloquy described above took place.
                             - 12 -


     It is particularly significant that petitioner did not

corroborate his account of the amounts in controversy by

testimony from the person in the best position to do so.

Petitioner deals with this gap in the record as follows:

          If there had been any way possible for the
     Petitioner’s father to have testified, the contents of
     said “ammo-box” would not have been in question. * * *

          My father’s testimony would prove favorable.
     However, due to his bad health, he wasn’t able to
     appear for a deposition (a doctor’s statement has been
     provided to the Court) and the Respondent told me she
     “didn’t have the means of transportation” to our home
     to interview my father.

     If it is peculiarly within the power of one party to produce

a witness whose testimony would elucidate a transaction in

controversy, the fact that he does not do so may create a

presumption that the testimony would have been unfavorable.

Graves v. United States, 150 U.S. 118, 121 (1893); Wynn v. United

States, 397 F.2d 621, 625-626 (D.C. Cir. 1967); Pollack v.

Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d 409 (5th

Cir. 1968); Wichita Terminal Elevator Co. v. Commissioner, 6 T.C.

1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947); 2

McCormick on Evidence, sec. 264, at 184-189 (4th ed. 1992).   The

power of a party to produce a witness may depend upon various

factors, including the physical availability of the witness, his

amenability to subpoena by the party, the existence of any

special relationship between them, and the nature of the

testimony that the witness might be expected to give.   McClanahan
                              - 13 -


v. United States, 230 F.2d 919, 925-926 (5th Cir. 1956); Gaw v.

Commissioner, T.C. Memo. 1995-531; 2 Wigmore on Evidence, sec.

286(a), at 199-200 (Chadbourn rev. ed. 1979).

     According to petitioner’s account, Mr. Judy’s inheritance

was the source of the amounts in controversy, and only petitioner

and Mr. Judy knew that the inheritance money was secreted in an

ammunition box under Mr. Judy’s bed.   Mr. Judy’s testimony would

surely have had an important, if not decisive, influence upon the

resolution of the factual questions on which this case turns.

Petitioner has not convinced us of Mr. Judy’s inability to

testify.   The one-sentence note from Dr. Allison that petitioner

submitted to the Court falls far short of providing the specific

and detailed evaluation of this issue which the Court demanded

and cannot fairly be interpreted to rule out the possibility of a

deposition.   Under the circumstances, Mr. Judy’s availability for

a deposition seems to have been largely within petitioner’s

control.   A close relationship exists between them:   They are

related by blood; they live together; and throughout the

negotiations between the parties and the Court on this matter

petitioner has consistently purported to speak for Mr. Judy.

There is ample reason to expect Mr. Judy to have cooperated with

petitioner.   Petitioner’s suggestion that respondent is to blame

for the failure to take Mr. Judy’s deposition is without merit.

Although respondent originally subpoenaed Mr. Judy to testify at
                                - 14 -


trial, and when this failed, attempted to arrange for his

deposition, ultimately it was petitioner who bore responsibility

for procuring his testimony, because petitioner bore the risk of

nonpersuasion on the issue that his testimony could have

elucidated.   Cf. Stoumen v. Commissioner, 208 F.2d 903, 907 (3d

Cir. 1953), affg. a Memorandum Opinion of this Court.    Under

these circumstances, petitioner’s failure to obtain Mr. Judy’s

testimony certainly permits the inference that it would have been

prejudicial to petitioner.

     Yet, we need not rely upon such an inference in order to

find in favor of respondent; the evidence and arguments presented

to the Court are sufficient.3    Although respondent presented no

evidence directly contradicting petitioner’s testimony, it does

not follow that petitioner has carried his burden of proof.      See

Demkowicz v. Commissioner, 551 F.2d 929, 931-932 (3d Cir. 1977),

revg. T.C. Memo. 1975-278; Geiger v. Commissioner, 440 F.2d 688,

689-690 (9th Cir. 1971), affg. T.C. Memo. 1969-159; Banks v.

Commissioner, 322 F.2d 530, 537 (8th Cir. 1963), affg. in part

and remanding in part T.C. Memo. 1961-237.    The credibility of

petitioner’s account of the amounts in controversy is weakened by

the stipulated fact that he failed to report sales income for


     3
       “The moral force of a judgment of decision will be at a
maximum when * * * The judge decides the case solely on the basis
of the evidence and arguments presented to him”. Fuller, The
Problem of Jurisprudence 706 (Temp. ed. 1949).
                              - 15 -


each of the years at issue in at least the amounts of $16,383 and

$21,698, respectively.   It is further weakened by the stipulated

fact that he failed to maintain adequate records of his farming

operations.

     Even on its own terms, petitioner’s account is not

satisfactory.   There are unanswered questions and inconsistencies

that undercut its persuasiveness.   First, petitioner did not

offer to explain why Mr. Judy would have preferred to withdraw

the $183,000 he allegedly inherited from his sister and keep it

hidden under his bed rather than leaving it in bank accounts

where it could have earned interest.   Such behavior is sufficient

to raise doubts.   Cf. Cefalu v. Commissioner, 276 F.2d 122, 127

(5th Cir. 1960), affg. T.C. Memo. 1958-37.

     Second, the record discloses that petitioner obtained loans

from unrelated parties during the period that he claims to have

had access to interest-free funding out of his father’s cash

hoard.   For example, in November 1990 he borrowed $31,000 from

Dewey Cowart to finance the purchase of real estate.   Petitioner

testified that he repaid this loan by the end of that year using

funds from his father’s cash hoard.    It is not clear why he felt

he needed a short-term “bridge loan” from Dewey Cowart if he

could have borrowed from the cash hoard in the first place.

Several unreported income cases have noted the apparent

inconsistency between borrowing from third parties and claiming
                                - 16 -


to have a cash hoard at one’s disposal.    Id. at 127; Peters v.

Commissioner, T.C. Memo. 1981-83; Stutts v. Commissioner, T.C.

Memo. 1975-298.

     Third, petitioner’s explanation of the circumstances under

which he began using the cash hoard conflicts with other

statements he made both before and during the trial.    Petitioner

told the Court that he sustained heavy crop losses from Hurricane

Hugo in September 1989.    “It destroyed our corn and soybean crop,

and that is the year I started borrowing money out [of] the

Ellis’ estate to pay bills.”    But Cox testified that petitioner

told him that he had borrowed funds from the Ellis inheritance to

finance specific purchases of equipment in 1987 and land in 1988.

Petitioner never specifically denied Cox’s account of this

interview.    Moreover, on the morning of the trial he produced

documentation showing, to the satisfaction of respondent’s

counsel, that he had purchased a tractor trailer in 1988 rather

than in 1989, as respondent had assumed in the source and

application of funds computation set forth in the notice of

deficiency.   He later testified that the money he used to

purchase the tractor trailer came from his father’s cash hoard.

     Finally, petitioner has failed to give either the IRS or the

Court a plausible estimate of the total amount he allegedly

borrowed from the cash hoard.    Cox testified that during the

investigation petitioner “never would give us a specific amount
                              - 17 -


of * * * money that he had taken out of the box.     It was just

every time we came up with a specific expenditure item that * * *

[petitioner] had, he stated that the money came out of the

ammunition box.”   At trial, under cross-examination petitioner

testified that he removed a total of approximately $72,000 from

the ammunition box in 1990.   Yet this figure is double the amount

implied by the source and application of funds computations on

which petitioner and respondent agree.     On brief petitioner

reproduces the results of those computations as follows:

                               1990

          reported income4            $42,229
          unreported income            21,698
                                       63,927

          reported expenses           100,590

          Amount I borrowed
          from estate funds           -36,663

If, as petitioner maintains, he borrowed money from his father’s

inheritance with the understanding that he was obligated to repay

it, presumably he would have kept track of how much debt he was

incurring.

     Petitioner questions the plausibility of respondent’s

explanation for the amounts in controversy.     He asserts that,

owing to severe crop damage caused by Hurricane Hugo in 1989, his


     4
       “Reported income” is a mischaracterization. This amount
corresponds to the total available funds reported. See the
schedule set forth in our Findings of Fact.
                               - 18 -


farm could not have produced the additional income that

respondent supposes he realized, and that, if his farm was

producing as much income as respondent supposes, his standard of

living would be considerably higher than it is.    Petitioner’s

argument assumes facts not in evidence.    He did not attempt to

prove the extent of the hurricane damage he sustained.

Furthermore, the sources of petitioner’s farm income during the

years at issue were not limited to the crops harvested in those

years.    He earned substantial amounts of income from sales of

livestock, and Cox testified that petitioner told him that he

held grain in storage, in accordance with the common practice of

farmers to try to take advantage of improvements in prices over

time.    The inference petitioner wishes us to draw from his

standard of living is a nonsequitur.    The parties agree on the

total amount of petitioner’s expenditures during the years in

issue.    The question is not how much petitioner spent, but where

the money came from.    Respondent’s determination that the source

of petitioner’s expenditures was unreported farm income is just

as consistent with petitioner’s allegedly modest standard of

living as petitioner’s allegation that the source was loans from

his father’s cash hoard.
                                - 19 -


     Petitioner has not satisfied his burden of proof.      We

conclude that he had additional unreported income of $7,439 in

1989 and $36,663 in 1990.5

2.   Accuracy-Related Penalties

     Section 6662(a) and (b)(1) imposes a penalty equal to 20

percent of the portion of an underpayment of tax that is

attributable to negligence or disregard of rules or regulations.

“Negligence” includes any failure to make a reasonable attempt to

comply with the provisions of the internal revenue laws.      Sec.

6662(c).   The failure to maintain adequate records from which the

taxpayer’s income can be determined constitutes negligence.

Crocker v. Commissioner, 92 T.C. 899, 917 (1989); sec. 1.6662-

3(b), Income Tax Regs.   The penalty does not apply to any portion

of an underpayment for which the taxpayer had reasonable cause

and acted in good faith.     Sec. 6664(c).   Petitioner bears the

burden of proof.   Rule 142(a).

     Respondent determined that the entire underpayments for 1989

and 1990 were attributable to negligence.      Petitioner has offered

no argument to challenge this determination, and there is no

evidence in the record that would suggest a reasonable cause for

petitioner’s underreporting of income and inadequate



     5
       Petitioner’s brief contains additional contentions and
allegations. Although these are not discussed above, we have
considered them and found them to be without merit.
                               - 20 -


recordkeeping.   Accordingly, the penalty applies to the entire

amount of the underpayments.

     To reflect the foregoing,


                                            Decision will be entered

                                        under Rule 155.
