                            T.C. Memo. 2011-190



                         UNITED STATES TAX COURT



         WILLIAM BRADLEY WOOD AND NANCY LYNN WOOD, Petitioners v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17822-09.                   Filed August 10, 2011.



     Frederick G. Irtz II, for petitioners.1

     Archana Ravindranath, for respondent.



                 MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   On April 30, 2009, respondent issued to Mr.

and Mrs. Wood (the Woods) a notice of deficiency for the taxable

years 2001, 2002, and 2003 determining income tax deficiencies of


     1
      Frederick G. Irtz II (Mr. Irtz) represented petitioners at
the trial of this case. On June 27, 2011, petitioners filed a
motion to withdraw Mr. Irtz as their counsel, which the Court
granted on July 11, 2011.
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$68,029, $78,941, and $6,661, respectively.    The deficiency

notice also determined accuracy-related penalties under section

6662(a)2 in the respective amounts of $13,605.80, $15,788.20, and

$1,332.20 for the years at issue.

     The Woods seek review of respondent’s determinations and

claim they are liable for only parts of the deficiencies and

penalties.    As discussed below, we sustain respondent’s

determinations of the deficiencies and the accuracy-related

penalties.

                          FINDINGS OF FACT

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

The Woods resided in Kentucky at the time they filed their

petition.

     Mr. Wood served as general manager of Helton Overhead Door

Sales Co. (Helton), a garage door sales company, from 1990 until

2003.    As general manager, he was authorized to sign checks on

behalf of Helton in order to pay vendors and creditors.     During

the taxable years at issue the Woods owned and operated Woodie’s

Market, Inc. (Woodie’s), an incorporated grocery store business

that is a separate taxpayer.    As president of Woodie’s, Mr. Wood

oversaw day-to-day affairs.    Mrs. Wood served as Woodie’s

treasurer.    Mr. Wood misappropriated funds from Helton beginning



     2
      All section references are to the Internal Revenue Code, as
amended.
                                 - 3 -

in 1994 and ending in 2003, when his actions were discovered by

one of the company’s owners, Harry Helton.    In 2005 Mr. Wood

pleaded guilty in the Fayette Circuit Court in the Commonwealth

of Kentucky to charges of unlawful taking of over $300 and was

sentenced to 3 years in the State penitentiary and ordered to pay

$200,000 to Raynor Door Authority, Inc., the assignee of Helton’s

business and assets.   During 2001, 2002, and 2003, Mr. Wood

misappropriated funds from Helton of $200,894.87, $234,480.21,

and $59,686.02, respectively.    Mr. Wood used the misappropriated

money to cover personal expenses, pay credit card bills, and

support Woodie’s.   The Woods were unable to produce at trial any

books or records of Woodie’s’ finances.    The Woods failed to

report any of the misappropriated funds on their joint income tax

returns for tax years 2001, 2002, and 2003.

     The Woods have conceded taxes and accuracy-related penalties

are owed on the funds used for personal expenses and credit card

bills.   However, the disposition of the money put directly into

the Woodie’s account remains in dispute.

                                OPINION

     Section 61(a) provides:    “Except as otherwise provided in

this subtitle, gross income means all income from whatever source

derived”.   This broad definition of “gross income” includes

income derived through illicit means including embezzlement,

regardless of how the money is used and although the embezzler
                                 - 4 -

may be required to repay the money in a later year.    See James v.

United States, 366 U.S. 213, 219-220 (1961).

     The parties dispute the proper treatment of the money Mr.

Wood misappropriated from Helton and used in the Woodie’s

business.   The Woods claim Mr. Wood acted as the president of

Woodie’s, not in an individual capacity, when he wrote checks

from Helton to Woodie’s and thus the money should be counted as

income to Woodie’s, not to the Woods.    Respondent argues that Mr.

Wood, as an employee of Helton, misappropriated funds and

determined whether to use them for personal expenses, credit card

bills, or to support Woodie’s.    Therefore, respondent asserts

that how the misappropriated funds were put to use is of no

consequence to this matter because Mr. Wood’s control over the

funds requires inclusion in the Woods’ income.    We agree with

respondent.   The Woods are confusing how the money was used with

how the money was acquired.   Mr. Wood misused his position at

Helton to misappropriate the funds and used the money in whatever

manner he chose.   Because he had dominion over the

misappropriated funds from Helton, all of the misappropriated

funds became part of the Woods’ gross income.

     The Woods also contend this is a novel issue because the

disputed funds were included in Woodie’s’ income.     This argument

misses the essential issue, and the Woods have not provided any

evidence to support this argument on the facts.    The Woods
                               - 5 -

further claim that if the misappropriated funds are not

income to Woodie’s, they are contributions to capital and should

not have been included in Woodie’s’ taxes.    Using the stolen

funds as a contribution to capital does not relieve the Woods of

their responsibility to report the funds as income, and Woodie’s

is not a party to this case.

     A similar situation arose in Bailey v. Commissioner, 52 T.C.

115 (1969), affd. 420 F.2d 777 (5th Cir. 1969), in which the

taxpayer misappropriated bank funds and had them deposited

directly into her brother’s account.    In Bailey, we ruled that

the “complete dominion and control over the embezzled funds”

exercised by the taxpayer was sufficient to cause the funds to be

income to the taxpayer.   Id. at 119.    Mr. Wood disposed of the

funds in a manner of his choosing.     He derived benefit from

allocating the money in this way, in essence realizing and

accepting ownership of the funds.    See Helvering v. Horst, 311

U.S. 112 (1940).   Mr. Wood was “force and fulcrum” behind the

misappropriations, and he received them as income.    See Estate of

Geiger v. Commissioner, 352 F.2d 221 (8th Cir. 1965), affg. T.C.

Memo. 1964-153.

     Concerning the accuracy-related penalties, the Woods do not

offer any reasonable cause or substantial authority for their

failure to report the misappropriated income, and the

understatements of income tax exceed both 10 percent of the
                                 - 6 -

amounts required to be shown on the returns and $5,000.

Therefore, the penalties under section 6662(b)(2) are sustained.

     Accordingly, we conclude the Woods are liable for the

determined deficiencies and accuracy-related penalties.

     To reflect the foregoing,


                                              Decision will be entered

                                         for respondent.
