                  T.C. Memo. 2000-121



                UNITED STATES TAX COURT



       THERON R. LIVINGSTON, SR., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent


         MICHELE D. LIVINGSTON, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent


Docket Nos. 8691-97, 15040-97.            Filed April 6, 2000.


     H pleaded guilty to criminal tax evasion for taxable
year 1990, admitting to a specified amount of unreported
income as determined through R’s reconstruction of H’s 1990
income by the net worth method in the criminal proceeding.
Subsequently, for purposes of establishing H’s civil tax
liability for taxable years 1989 and 1990, R determined H’s
unreported income by relying directly on the criminal net
worth summary. R’s 1989 net worth computation assumed that
H had a zero opening net worth and was based on inconsistent
inclusions of H’s and W’s incomes, assets, and expenditures.
     For taxable year 1990, H and W filed a joint Federal
income tax return. In her original petition, W sought
innocent spouse relief under former sec. 6013(e), I.R.C.
After the trial in this case, former sec. 6013(e), I.R.C.
                               - 2 -


     was repealed and replaced by sec. 6015, I.R.C.
     Subsequently, W filed administrative elections for relief
     pursuant to sec. 6015(b) and (c), I.R.C. R made a full
     concession of W’s liability under sec. 6015(c), I.R.C., but
     made no determination under sec. 6015(b), I.R.C. W seeks
     judicial determination of her entitlement to relief under
     sec. 6015(b), I.R.C.

     1. Held: for taxable year 1989, respondent’s determination
     of H’s unreported income through use of the net worth method
     is not sustained.

     2. Held: for taxable year 1990, respondent’s determination
     of H’s unreported income through use of the net worth method
     is modified.

     3. Held: for taxable year 1990, respondent having fully
     conceded W’s tax liability pursuant to her election under
     sec. 6015(c), I.R.C., the question of her entitlement to
     relief under sec. 6015(b), I.R.C. is moot.



     Ramsey R. Taylor and G. Norris Watson, for petitioner in

docket No. 8691-97.

     Howard B. Teller, for petitioner in docket No. 15040-97.

     Richard A. Stone, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:   In these consolidated cases, respondent

determined deficiencies, additions to tax, and an accuracy-

related penalty in petitioners’ Federal income taxes as follows:
                                - 3 -


                                Additions To Tax and Penalty
Year        Deficiency    Sec. 6651(a)(1)    Sec. 6654    Sec. 6663

Theron Livingston, Sr.
1989        $3,424              $856           $232           —

Theron and Michele Livingston
1990       $24,676               ---            —         $18,507

       After concessions,1 the issues for decision are:

(1) Whether Theron Livingston, Sr. (petitioner husband), had

$14,690 of unreported income in taxable year 1989 as determined

by respondent’s income reconstruction using the net worth method;

(2) whether petitioners had $77,372 of unreported income in

taxable year 1990 as determined by respondent’s income

reconstruction using the net worth method; and (3) whether

respondent’s full concession as to the 1990 tax liability of

Michele Livingston (petitioner wife) pursuant to section 6015(c)

renders moot the question of petitioner wife’s entitlement to

relief pursuant to section 6015(b).2




       1
       Petitioner husband concedes that for taxable year 1989
additions to tax apply pursuant to secs. 6651(a)(1) and 6654 to
any underpayment for such year as determined by the Court. Also,
for taxable year 1990, petitioner husband concedes the imposition
of the fraud penalty pursuant to sec. 6663 on any underpayment as
determined by the Court.
       2
       Unless otherwise noted, 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.
                               - 4 -


                         FINDINGS OF FACT

     The parties have stipulated some of the facts, which are

incorporated in our findings by this reference.   When the

petition was filed, petitioner husband was incarcerated in

Federal prison in Montgomery, Pennsylvania, and petitioner wife

resided in Severn, Maryland.

     Petitioners were married on May 20, 1989, and remained

married at all times relevant to these cases.   Petitioner wife

has a daughter, Itesha, and petitioners have a son, Theron, Jr.

     During the years in issue, petitioner husband was self-

employed in a disc jockey business.    Petitioner wife was employed

by Merrill Lynch in Severn Park, Maryland, performing various

clerical duties.

     On or about June 30, 1989, petitioners purchased a 1983

Nissan Maxima in the name of petitioner wife.   Of the $4,240

total purchase price, they paid $2,240 cash and financed the

balance.   On or about October 5, 1989, petitioners traded in the

1983 Maxima for a 1984 BMW in the name of petitioner wife.    Of

the $6,860 total purchase price, they paid $3,000 cash, received

$1,200 net credit for the trade-in, and financed the balance.

     On February 28, 1990, petitioners and Itesha were involved

in an automobile accident.   Petitioners settled three personal
                               - 5 -


injury cases in connection with the accident.       Their net

settlement proceeds were as follows:

          Theron Livingston, Sr.           $3,333
          Michelle Livingston               3,523
          Itesha Livingston                   667

            Total                          7,523

     On or about August 10, 1990, petitioners used these

settlement proceeds to purchase a 1988 Alfa Romeo Milano in the

name of petitioner wife.   Of the $10,547 total purchase price,

they paid $7,547 cash and financed the balance.

      For taxable year 1989, petitioner husband filed no Federal

income tax return, and petitioner wife filed a Federal income tax

return with a filing status of married filing separately,

reporting wages of $12,290.   For taxable year 1990, petitioners

filed a joint Federal income tax return.    The Schedule C, Profit

or Loss From Business, included as part of the 1990 joint return

reported $10,300 gross receipts and $632 net income from

petitioner husband’s disc jockey business.    Petitioners’ 1990

joint return also reported petitioner wife’s wages of $12,356.

     On June 11, 1994, petitioner husband signed a plea agreement

in which he agreed to plead guilty to income tax evasion pursuant

to section 7201 for taxable year 1990 and to a May 1993 offense

for distribution of cocaine base.   Petitioner husband was

sentenced to 60 months of incarceration on the tax evasion count,
                                         - 6 -


to run concurrently with a 70-month sentence on the drug-related

count.

          In the plea agreement, petitioner husband agreed that “the

amount of additional income attributable to * * * [petitioner

husband] in 1990 is $63,610 and the additional amount of tax owed

to the United States is $20,659”.

      The statement of facts in the criminal proceeding contained

a summary of the net worth analysis (hereinafter referred to as

the criminal net worth computation), as follows:

      Particulars                    12/31/89           12/31/90         12/31/91
                                     1                  2
Total assets                          $7,445             $82,791         $86,643
Less: Total liabilities                2,600               6,100           6,100
Net worth                              4,845              76,691          80,543
Less: Prior years                       -0-                4,845          76,691
 net worth
Increase in net worth                  4,845                  71,846       3,852
                                     3                      4
Plus: Expenditures                    16,511                 18,591       35,337
                                      5                     6
Less: Deductions                       6,000                  27,412      19,858
Corrected taxable                     15,356                  63,025      19,331
 income
Reported taxable income                 -0-                      (585)     1,091
Understatement                        15,356                    63,610    18,240
      1
          This amount comprises a $608 checking account balance and the 1984 BMW.
      2
         This amount comprises a $423 checking account, the 1984 BMW and the 1988
Alfa Romeo Milano, and “investments” of $65,000 in a music shop, Steady Beat
Records.
       3
         This amount comprises personal living expenses of $13,477, including
expenditures made jointly by petitioner husband and petitioner wife, as well as an
item characterized as “non-deductible personal loss 1983 Maxima” in the amount of
$3,034.
      4
         This amount comprises of personal living expenses, income taxes paid, and
Social Security taxes paid.
      5
          This amount represents personal exemptions.
       6
         This amount comprises $12,356 of wages for petitioner wife, $6,856 for
petitioners’ settlement of their injury claims from the automobile accident, and
$8,200 for personal exemptions.
                               - 7 -


      After petitioner husband’s plea agreement, Gim Baker

(Baker), a revenue agent for the Internal Revenue Service (IRS),

was assigned to examine petitioner husband’s 1989 Federal income

tax liability and petitioners’ 1990 joint Federal income tax

return.    Baker issued letters to both petitioners, requesting

them to provide documentation such as income records and expense

records.   In response, petitioner husband sent Baker a letter

stating that it was impossible for him to collect the necessary

documents while he was incarcerated and requesting that the civil

examination be postponed until his projected release in 2000.

Petitioner wife–-whose liability related only to taxable year

1990--refused to provide the requested information until the IRS

showed her what information it had in its possession.

     In conducting the civil investigation, Baker relied on the

criminal net worth computation rather than performing an

independent income reconstruction for either year in issue.

Except for her unsuccessful attempt to procure information from

petitioners, Baker conducted no investigation regarding

petitioners’ finances and did not verify the numbers contained in

the criminal net worth summary.   Instead, she copied the criminal

net worth summary that was attached to petitioner husband’s plea

agreement, using identical numbers to calculate the increases in

net worth for each of the taxable years 1989 and 1990 but making

certain modifications.   For instance, in drafting the notice of
                               - 8 -


deficiency for 1989, Baker reduced from $16,511 to $9,845 the

amount of personal expenditures contained in the 1989 criminal

net worth computation3 and disallowed the $6,000 personal

exemption that had been allowed in the criminal net worth

computation.   The net result of these two changes was a decrease

in the amount of petitioner husband’s unreported income.    In

drafting the notice of deficiency for 1990, Baker increased by

$12,421 the offset allowed for income reported on the return, but

omitted the $27,412 of “deductions”–-comprising $12,356 for

petitioner wife’s wages, $6,856 for petitioners’ settlement of

their injury claims from the automobile accident, and $8,200 for

personal exemptions–-that had been allowed in the criminal net

worth computation, resulting in an increase in the amount of

petitioner husband’s unreported income.4


     3
       The record does not reveal the basis upon which Baker
determined this lesser amount of personal expenditures.
     4
       The net worth analyses included in the 1989 and 1990
statutory notices of deficiency were as follows:

         Particulars                          12/31/89

Understatement of income       $14,690

Total assets                                   $7,445
Less: Total liabilities                        (2,600)
Net worth                                       4,845
Less: Prior years net worth                    ( -0-)
Increases in net worth                          4,845
Plus: Expenditures                              9,845
Understatement of income                       14,690
(Increase in net worth                         ======
  plus expenditures)

                                                    (continued...)
                                 - 9 -


                                OPINION

     Taxpayers are required to keep adequate books or records

from which their correct tax liability can be determined.    See

sec. 6001.    In the absence of adequate books and records, the

Commissioner may reconstruct a taxpayer’s taxable income by any

reasonable method.     See Holland v. United States, 348 U.S. 121,

131 (1954).   The courts have long recognized the net worth method

as a reasonable method.    See id.; Manzoli v. Commissioner, 904

F.2d 101 (1st Cir. 1990), affg. T.C. Memo. 1989-94 and T.C. Memo.

1988-299; United States v. Sorrentino, 726 F.2d 876 (1st Cir.

1984); Estate of Mazzoni v. Commissioner, 451 F.2d 197 (3d Cir.

1971), affg. T.C. Memo. 1970-144 and T.C. Memo. 1970-37.

     Under the net worth method, taxable income is computed by

reference to the change in the taxpayer’s net worth during a



     4
      (...continued)
        Particulars                             12/31/90

Understatement of income        $77,372

Total assets                                   $82,791
Less: Total liabilities                        ( 6,100)
Net worth                                       76,691
Less: Prior years net worth                    ( 4,845)
Increases in net worth                          71,846
Plus: Expenditures                              18,591
Less: Income reported on                       (13,006)
       return
Understatement of income                        77,372
 (Increase in net worth plus                    ======
 expenditures less income
 reported on return)
                              - 10 -


year, increased for nondeductible expenses such as living

expenses, and decreased for items attributable to nontaxable

sources such as gifts and loans.    The resulting figure may be

considered to represent taxable income, provided:     (1) The

Commissioner establishes the taxpayer’s opening net worth with

reasonable certainty; and (2) the Commissioner either shows a

likely source of unreported income or negates possible nontaxable

sources.   See United States v. Massei, 355 U.S. 595, 595-596

(1958); Holland v. United States, supra at 132-138; Brooks v.

Commissioner, 82 T.C. 413, 431-432 (1984), affd. without

published opinion 772 F.2d 910 (9th Cir. 1985).

     The use of the net worth method requires “the exercise of

great care and restraint” to prevent a taxpayer from being

“ensnared in a system” which is hard for the taxpayer to refute.

Holland v. United States, supra at 129.     The taxpayer’s opening

net worth is of critical importance.    “The importance of accuracy

in this figure is immediately apparent, as the correctness of the

result depends entirely upon the inclusion in this sum of all

assets on hand at the outset.”     Id. at 134.   “If the opening

statement is not substantially reliable, the whole intricate

house of cards falls.”   Estate of Phillips v. Commissioner, 246

F.2d 209, 213 (5th Cir. 1957).   Respondent must establish the

opening net worth with reasonable certainty.     See London v.

Commissioner, T.C. Memo. 1998-346; Campfield v. Commissioner,
                                - 11 -


T.C. Memo. 1996-383, affd. without published opinion 133 F.3d 906

(2d Cir. 1997).

Respondent’s 1989 Income Reconstruction for Petitioner Husband

     Respondent’s net worth computations in this civil proceeding

were derived directly from the criminal net worth computation.

In each case, respondent assigned petitioner husband a 1989

opening net worth of zero.     The record does not reveal

respondent’s factual basis, if any, for this determination.5

Given that petitioner husband was self-employed in a disc jockey

business in 1989, however, an opening net worth of zero is

suspect.

         Respondent’s 1989 net worth computation purports to relate

solely to petitioner husband’s unreported income, yet is based on

inconsistent inclusions of petitioner husband’s and petitioner

wife’s incomes, assets, and expenditures.    For example, the 1989

net worth computation counts among petitioner husband’s assets

two automobiles that petitioners bought together in the name of

petitioner wife.     Similarly, the 1989 net worth computation takes

     5
       As far as is revealed by the record, petitioner husband
was under criminal investigation for tax evasion only for taxable
year 1990. If so, the only relevance of the 1989 criminal net
worth computation would be to establish petitioner husband’s 1989
ending net worth, which was used as his opening net worth in the
1990 criminal net worth computation. Because the 1989 opening
net worth would be of little or no consequence to the 1990
criminal net worth computation, it is inferable that respondent
merely assumed a zero opening net worth for 1989, without any
investigation. Such an inference is not contradicted by any
evidence in the record.
                               - 12 -


into account various expenditures made jointly by petitioner

husband and petitioner wife.   The 1989 net worth computation

effectively treats these asset purchases and other joint

expenditures as being financed by petitioner husband’s unreported

income.   The 1989 net worth computation does not, however,

account for assets and income attributable to petitioner wife.

In particular, it fails to account for petitioner wife’s after-

tax income of $10,239, which exceeds the $9,845 of expenditures

reflected in respondent’s net worth computation as included in

the 1989 notice of deficiency.6

     In addition, petitioner wife credibly testified that

petitioners received approximately $3,000 to $4,000 in wedding


     6
       In an attempt to overcome the failure of the 1989 criminal
net worth summary to account for assets and income of petitioner
wife, respondent argued for the first time at trial that the 1989
notice of deficiency understated petitioners’ 1989 personal
expenditures. On brief, respondent asserts for the first time
that petitioners’ 1989 expenditures exceeded $20,000. Respondent
contends that this sum includes an indeterminate amount of
expenditures (relating either to petitioners jointly or else to
petitioner wife) for which respondent admits there is no
documentation in the record, instead basing his contentions on
various assumptions. Respondent has never sought an increased
deficiency for 1989 based on any such increased amount of
expenditures and has never sought to amend his pleading in this
case. We will not consider this issue that was raised for the
first time at trial. See Vetco, Inc. v. Commissioner, 95 T.C.
579, 589 (1990). In any event, even if we were to consider this
issue, the newly asserted amount of joint personal expenditures
would not cure the fundamental defects and internal
inconsistencies of the 1989 net worth computation, as described
in the text above.
                               - 13 -


gifts in 1989.   This testimony is corroborated by bank records

reflecting petitioners’ numerous small deposits of cash and

checks shortly after their wedding.     Petitioner wife also

testified that at the time of her marriage in 1989, she had at

least $400 in two bank accounts.   She testified that her

grandmother used funds placed under her guardianship after the

death of petitioner wife’s mother to help pay for Itesha’s

private Christian schooling.   The record also indicates numerous

other instances of gifts or loans to petitioners from family and

friends.

     In sum, the 1989 net worth computation is premised on an

apples-and-oranges comparison of petitioner husband’s opening net

worth (unreliably assumed to be zero) and petitioners’ joint

ending net worth, counting petitioners’ joint assets and

expenditures to petitioner husband’s disadvantage, while failing

to count petitioner wife’s 1989 income–-upon which she has

already paid Federal income tax–-or separate assets, which were

available to fund petitioners’ joint expenditures.

     Taxpayers may not avoid the imposition of legally due taxes

by concealing facts, but neither may the Commissioner base his

determination on a “‘strong underlying element of guesswork.’”

Jacobs v. Commissioner, T.C. Memo. 1974-73 (quoting Polizzi v.

Commissioner, 265 F.2d 498, 502 (6th Cir. 1959)).     Taking into

consideration the warnings in Holland v. United States, 348 U.S.
                               - 14 -


at 121, we believe that the 1989 net worth computation is so

unreliable as to negate any presumption of correctness.    As in

Jacobs v. Commissioner, supra, with regard to taxable year 1989,

respondent has failed to “show the correct amount of petitioner’s

reconstructed taxable income or [to] provide any basis for

estimating it.”    See also Gallo v. Commissioner, T.C. Memo. 1983-

367.    Accordingly, this issue is decided for petitioner husband.

Respondent’s 1990 Income Reconstruction for Petitioners

       For taxable year 1990, by his criminal plea petitioner

husband explicitly admitted that he had unreported income of

$63,610, as determined by respondent’s 1990 criminal net worth

calculation, which was predicated on an opening net worth of

$4,845.    Petitioner did not appear at trial to refute his prior

admission.    Cf. Toushin v. Commissioner, T.C. Memo. 1999-171.

       Petitioner husband’s admission is strong evidence of the

validity of the 1990 criminal net worth computation, and

consequently of the 1990 civil net worth computation, which was

derived directly therefrom.    Petitioner husband’s admission in

the criminal proceeding does not collaterally estop him, however,

from challenging the specific deficiency amount in this

proceeding, because “the determination of an exact liability was

not essential to the judgment, a prerequisite to the application

of the doctrine of collateral estoppel.”    Moore v. United States,

360 F.2d 353, 356 (4th Cir. 1965) (internal quotation marks
                              - 15 -


omitted); see Wapnick v. Commissioner, T.C. Memo. 1997-133;

Larson v. Commissioner, T.C. Memo. 1993-188.

     Petitioners have challenged respondent’s determination for

taxable year 1990 with credible evidence.   Respondent’s civil net

worth analysis followed the criminal net worth analysis in

imputing to petitioner husband a $65,000 “investment” in Steady

Beat Records.   Petitioner husband’s mother testified credibly

that she was the sole owner of Steady Beat Records, and that she,

rather than petitioner husband, made the $65,000 investment.

This testimony is corroborated by documentation that in 1990 she

applied for the Maryland business license for Steady Beat Records

and signed the lease agreement for its leased premises.   In

addition, a friend of the mother’s testified credibly that she

had lent the mother money for the investment.

     As evidence that petitioner husband owned Steady Beat

Records, respondent offered the testimony of George Harvell,

petitioner husband’s sometime acquaintance, who testified

unconvincingly that petitioner husband had admitted to him these

and other matters.   We did not find George Harvell to be a

credible witness.7   Accordingly, we conclude and hold that




     7
       In 1990, Harvell pleaded guilty to income tax evasion
pursuant to sec. 7201. In exchange for his testimony against
several people, including petitioner husband, the Government
refrained from charging Harvell with cocaine distribution.
                               - 16 -


petitioner husband’s 1990 understatement should be reduced by

$65,000.

     We also conclude that respondent’s determination of

petitioners’ 1990 understatement should be reduced by the $7,523

in settlement proceeds that petitioners and Itesha received from

their automobile accident.8

Petitioner Wife’s Innocent Spouse Claim

     In her original petition, petitioner wife sought innocent

spouse relief under former section 6013(e).    On May 21, 1998, a

trial was held in this case.   On July 22, 1998, section 6015 was

enacted, replacing former section 6013(e), which was repealed

generally as of the same date.    See Internal Revenue Service

Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.

3201(a), (e)(1), 112 Stat. 734.    On August 3 and 18, 1998,

petitioner wife filed administrative elections pursuant to

section 6015(b) and (c), respectively.    On January 13, 1999,

respondent notified petitioner wife that she is entitled to

relief pursuant to section 6015(c) and mailed her a proposed


     8
       The 1990 criminal net worth analysis did in fact reflect
an offset of $6,856 for petitioners’ settlement of their own (but
not Itesha’s) injury claims from the automobile accident.
Respondent has offered no satisfactory explanation why he
departed from this approach in failing to include any offset in
the civil net worth analysis. Furthermore, in light of the fact
that the entire $7,523 of settlement proceeds appears to have
been included in petitioners’ assets in both the criminal and
civil net worth computations, it is appropriate to include an
offset for the entire amount.
                                - 17 -


decision representing a concession that she has no liability for

any amount of the deficiency or penalty in dispute.    Respondent

made no determination whether petitioner wife qualifies for

relief under section 6015(b).    With leave of the Court,

petitioner wife amended her petition, requesting the Court to

require respondent to make a determination under former section

6013(e) and/or section 6015(b).9

     The controversy before the Court concerns petitioner wife’s

liability for the deficiency respondent determined for taxable

year 1990.   Respondent’s concession under section 6015(c)

relieves petitioner wife of all liability for taxable year 1990

and resolves the controversy between her and respondent that is

before us.   Cf. LTV Corp. v. Commissioner, 64 T.C. 589, 593

(1975).   A decision regarding petitioner wife’s eligibility for

relief under section 6015(b) would amount to an advisory opinion

and would contravene the “sound principle of judicial

administration that courts will not gratuitously decide complex




     9
       On brief, petitioner wife does not press the issue of her
entitlement to relief under former sec. 6013(e), and we deem her
to have conceded it. In any event, since the disputed tax
liability arose before July 22, 1998, but remained unpaid as of
that date, former sec. 6013(e) is no longer effective with
respect to the instant case, which is governed instead by the
provisions of sec. 6015. See Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3201(e)(1), 112 Stat. 734.
                               - 18 -


issues that cannot affect the disposition of the case before

them.”   Id. at 595.

     Petitioner wife suggests on brief that a decision as to her

eligibility for relief under section 6015(b) could enhance her

future efforts to petition this Court for an award of attorney’s

fees.    It would be inappropriate to protract this proceeding to

enhance an award of fees.   See sec. 7430(b)(3).   Moreover, any

consideration as to whether petitioner wife is entitled to

litigation and administrative costs, including attorney’s fees,

is inappropriate at this stage of these proceedings.    Should

petitioners desire to pursue this matter, they must comply with

Rules 230 and 231.

     Remaining contentions not addressed herein we deem

irrelevant, without merit, or unnecessary to reach.

     To reflect the foregoing and concessions by the parties,



                                     Decisions will be entered

                                under Rule 155.
