                        T.C. Memo. 2003-269



                      UNITED STATES TAX COURT



    WILLIAM B. MCDERMOTT AND DONNA MCDERMOTT, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18050-99.              Filed September 16, 2003.



     William B. McDermott and Donna McDermott, pro sese.

     Stephen S. Ash, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Petitioners petitioned the Court to

redetermine a $215,493 deficiency in their 1995 Federal income

tax and a $43,099 accuracy-related penalty under section 6662(a).

Following respondent’s concession as to 17 of the 23 bank

deposits determined by him in the notice of deficiency to be

income, and our granting of petitioners’ motion to dismiss much
                                    -2-

of this case for lack of jurisdiction,1 we decide whether

petitioners underreported their gross income by $15,496; i.e.,

the total amount of the remaining 6 deposits.       We hold they did

not.2       Section references are to the applicable versions of the

Internal Revenue Code, Rule references are to the Tax Court Rules

of Practice and Procedure, and dollar amounts are rounded.

                             FINDINGS OF FACT

        Some facts were stipulated.    The parties’ stipulation of

facts and the exhibits submitted therewith are incorporated

herein by this reference.       Petitioners are husband and wife, and

they resided in Phoenix, Arizona, when their petition was filed.

They have at least two children (Melissa and Joshua).

        Petitioners filed a joint 1995 Federal income tax return on

or about September 9, 1996.       They reported on that return that

their gross income consisted of $30,000 of business income and

$54 of dividend income, and they reported and paid $5,915 in

Federal income tax with respect thereto.        They reported on their


        1
       Specifically, petitioners had moved to dismiss the portion
of this case that concerned partnership items which respondent
conceded were included erroneously in the notice of deficiency.
See Maxwell v. Commissioner, 87 T.C. 783 (1986) (partnership
items must be readjusted in a unified partnership level
proceeding brought under the Tax Equity and Fiscal Responsibility
Act of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat. 648, and
cannot be considered in a proceeding brought under sec. 6213(a)
to redetermine a deficiency).
        2
       On the basis of this holding, we also hold that
petitioners are not liable for the accuracy-related penalty
determined by respondent as it relates to the bank deposits.
                                    -3-

1995 return that the business income consisted of $12,000

received by William McDermott (Mr. McDermott) and $18,000

received by Donna McDermott (Ms. McDermott).    During 1995, Mr.

McDermott was an independent contractor who bought and sold

educational textbooks as the manager of Omega Resources LLC

(Omega).    He generally works for Omega throughout the United

States, and it reimburses him for his out-of-pocket traveling

expenses.    Ms. McDermott also worked for Omega during that year

as an independent contractor.    She has an undergraduate degree in

teaching and a master’s degree in the healing arts (the study of

alternative medicine), and she worked for Omega counseling

individuals on their personal problems.

     During 1995, petitioners had a regular checking account at

First Interstate Bank (FIB), two valuechecking accounts at Bank

One, and a securities account at Prudential Securities.    When

respondent audited petitioners’ 1995 return, respondent performed

a bank account analysis on these four accounts and determined in

the notice of deficiency that the following 23 deposits into the

FIB and Bank One accounts were includable in petitioners’ 1995

gross income:

                  Date of Deposit           Amount

                     Jan.   18              $1,375
                     Apr.    7                 150
                     May    10                  93
                     May    10                 475
                     May    10                 151
                     May    10                 156
                                    -4-

                    July    3                  3,165
                    July    3                  1,000
                    July   25                    831
                    Aug.    2                  2,500
                    Aug.   18                  1,000
                    Aug.   28                  1,248
                    Oct.    5                    102
                    Nov.    6                    114
                    Nov.   16                    457
                    Nov.   17                    289
                    Nov.   22                    210
                    Nov.   29                    251
                    Dec.    1                  3,000
                    Dec.   14                  3,000
                    Dec.   18                  3,000
                    Dec.   18                    454
                    Dec.   29                    763
                                              23,784

Petitioners had not included any of these deposits in their 1995

gross income.

     During this proceeding, respondent conceded error as to 17

of the deposits determined to be includable in petitioners’ 1995

gross income.   Respondent now asserts that only the following six

deposits are so includable:      The July 3 deposit of $3,165, the

July 25 deposit of $831, the August 2 deposit of $2,500, the

December 1 deposit of $3,000, the December 14 deposit of $3,000,

and the December 18 deposit of $3,000.      The $3,165 was a deposit

made in cash or by check.       The $831 was a deposit made in cash.

The $2,500 and the first $3,000 were deposits made by wire

transfer from the Lorain, Ohio, bank account of Ms. McDermott’s

mother.   The second $3,000 was a deposit made by check.     The

third $3,000 was a deposit made by check, the drawer of which was

a bank located in the Bahamas.
                                 -5-

     Mr. McDermott has a brother who lives in Canada.      Every

year, the brother visits petitioners for the Christmas holidays.

The brother generally gives petitioners money around that time to

buy Christmas presents for their family.

     Mr. McDermott’s father was a native of Canada, and he lived

there in 1995.3    During that year, he suffered from diabetes and

had heart problems which required significant care.      His wife

died in October 1995, and he stayed with petitioners for a long

time over Christmas.    He gave $6,000 to petitioners before his

stay to buy Christmas presents for the extended family and to buy

household and medical items (e.g., medical supplies, a chair, and

a bed, covering, and linens) related to his stay.    At least part

of that money came from an offshore bank account that Mr.

McDermott’s father maintained in the Bahamas.

     Before marrying Mr. McDermott, Ms. McDermott was a widow

with two children.    Beginning with the birth of the first child,

Ms. McDermott’s mother has given money to Ms. McDermott to help

her raise her children.    Her mother also gives money to her

around Christmastime to buy presents for the family.      During

1995, Ms. McDermott’s mother wired $2,500 and $3,000 from her

bank account in Lorain, Ohio, to petitioners’ bank account.        Of

those amounts, $3,000 was a Christmas gift, and $2,500 was to be




     3
         Mr. McDermott’s father died on June 24, 1998.
                                 -6-

applied towards petitioners’ daughter’s college tuition for the

fall semester.

                               OPINION

     Respondent argues that his use of the bank deposits method

is a “prima facie case” that requires that petitioners prove that

the six deposits are not unreported income.   Respondent asserts

that the revenue agent who conducted the audit “determined based

on his experience that petitioners’ income in 1995 was diverted

to an offshore bank account and that the funds were moved to the

McDermott’s [sic] parents’ account in Canada and then came back

as alleged gifts.”   Respondent asserts that the funds given to

petitioners by Ms. McDermott’s mother also were determined to be

unreported income because of the involvement of Mr. McDermott’s

father with offshore accounts.

     Petitioners argue that each of the six deposits has a

nontaxable source.   Petitioners assert that the $3,165 deposit

was a payment to Mr. McDermott from Omega (consisting of $165 for

a petty cash expense, $1,000 as partial reimbursement for

out-of-pocket expenses, and $2,000 as an advance contract payment

that Mr. McDermott included in the $12,000 that he recognized as

income for 1995).    They assert that the first $3,000 deposit was

wired to them from Ms. McDermott’s mother as a Christmas gift.

They assert that the other two $3,000 deposits were given to them

by Mr. McDermott’s father to pay for his extended stay at their
                                -7-

home over the Christmas holiday and to buy Christmas presents for

them and members of the extended family.    They assert that the

$2,500 was wired to them from Ms. McDermott’s mother to apply

towards their daughter’s college tuition for the fall semester.

They assert that the $831 deposit came from a nontaxable source.

     We need not decide which party bears the burden of proof in

this case in that we can and do decide this case on the basis of

the record.4   Petitioners generally support their assertions as

to the tax status of the deposits by their respective testimony

and the introduction of certain documentary evidence.    On the

basis of the record at hand, we are persuaded that none of the

six deposits are includable in petitioners’ 1995 gross income.

We have considered all of the parties’ arguments and reject those

arguments not discussed herein as meritless.


                                           Decision will be entered

                                      under Rule 155.




     4
       Sec. 7491 does not apply to this case because the
examination of petitioners’ tax return commenced before July 22,
1998, the effective date of that section. Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
sec. 3001(a), 112 Stat. 726.
