                        T.C. Memo. 2006-271



                      UNITED STATES TAX COURT



                  BENNETT GEIGER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3289-05.               Filed December 26, 2006.



     Frank R. Keasler, Jr., for petitioner.

     W. Benjamin McClendon, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:   Respondent determined a deficiency in

petitioner’s 2000 Federal Income tax of $159,008 and an accuracy-

related penalty of $31,802 pursuant to section 6662(a).1     The



     1
      Unless otherwise noted, all section references are to the
Internal Revenue Code, as amended, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
                                 - 2 -

issues we must decide are:   (1) Whether petitioner qualifies for

a theft loss deduction pursuant to section 165(c) in excess of

$5,586; (2) if petitioner is entitled to the deduction, whether

it is properly claimed for taxable year 2000; and (3) whether

petitioner is liable for the accuracy-related penalty pursuant to

section 6662(a).

                         FINDINGS OF FACT

     Some of the facts and certain exhibits have been stipulated.

The parties’ stipulations of facts are incorporated herein by

reference and are found as facts.    Petitioner resided in

Jacksonville, Florida at the time the petition was filed.

     Petitioner is the sole shareholder in Big Ben Tree Service,

Inc. (BBTS), an S corporation.    BBTS filed its Federal income tax

return for taxable year 2000 on June 25, 2001, on which it

claimed a theft of property held more than 1 year and valued at

$1,645,986.

     BBTS issued to petitioner a Schedule K-1, Shareholder’s

Share of Income, Credits, Deductions, etc., attached to its

taxable year 2000 Federal income tax return, containing a loss

amount of $1,645,986 from previous years for inclusion on

petitioner’s return.   BBTS also deducted a loss item of $155,227

for the current year from Form 4797, Sales of Business Property,

on its taxable year 2000 return.    In attachments to their 2000

tax returns, both BBTS and petitioner alleged theft losses of:
                               - 3 -

$63,704 in 1991, $93,292 in 1992, zero in 1993, $97,908 in 1994,

$167,085 in 1995, $259,292 in 1996, $275,506 in 1997, $355,273 in

1998, and $333,926 in 1999.   All the alleged theft losses were

first discovered and therefore deducted in 2000.

     Petitioner timely filed his Federal income tax return for

taxable year 2000.   On that return, he reported a loss of

$1,645,986, income of negative $1,317,719, and a tax liability of

zero.

     Petitioner filed a Form 1045, Application for Tentative

Refund (refund request), dated May 17, 2001, which was received

by the Internal Revenue Service (IRS) on May 21, 2001.   On the

refund request, petitioner claimed an embezzlement loss of

$1,801,213.   Respondent refunded petitioner $120,933 for taxable

year 1999, $99,816 for taxable year 1998, and $150,243 for

taxable year 1997.

     After examination of his return by the IRS, petitioner

conceded that the amount of the theft loss for taxable year 2000

should be reduced by $1,096,713 to $704,500.   As a result of that

reduction, petitioner remitted to the IRS the refunds previously

received, plus interest, for taxable years 1997, 1998, and 1999.

     On November 15, 2004, respondent issued a notice of

deficiency, determining that petitioner failed to substantiate a

theft loss deduction for taxable year 2000 of $1,645,986.    In the

notice, respondent also determined that petitioner failed to
                               - 4 -

substantiate $149,641 of theft loss for taxable year 2000 and,

accordingly, allowed a theft loss of $5,586.   Additionally,

respondent determined that petitioner was liable for an accuracy-

related penalty pursuant to section 6662.

     Petitioner cannot identify specific checks whose amounts add

up to the $704,500 allegedly embezzled from BBTS.   Additionally,

petitioner cannot identify checks whose amounts add up to the

$1,096,713 originally claimed as part of the embezzlement, which

was later identified as previously deducted business expenses.

Petitioner did list, in an exhibit attached to petitioner’s

answers to respondent’s interrogatories, checks totaling

$1,232,602.69 as allegedly embezzled.

     Petitioner provided respondent with copies of some, but not

all, of the listed checks.   Petitioner did not provide source

documents to the examining agent during the course of the audit.

Petitioner did not maintain the source documents underlying the

general ledgers of BBTS.

     At trial, petitioner further reduced the claimed theft loss

by $139,789 to $564,711.   Petitioner also conceded that all

checks in the amount of $1,500 were not embezzled, but did not

further change the total amount of theft claimed.

     Leslie Clark (Ms. Clark) and Ann Ellis (Ms. Ellis) are two

former employees of BBTS who petitioner alleges embezzled funds

from BBTS.   Ms. Clark worked for BBTS while married to petitioner
                                 - 5 -

from 1980 until 1990.   Ms. Clark was again employed at BBTS from

1995 until the summer of 1999.    During the latter period of

employment, Ms. Clark and petitioner were engaged in an

extramarital relationship, including while petitioner was married

to Carrie White (Ms. White) and Ms. Clark was married to Ted

Clark.

     Ms. Ellis began working for BBTS in 1988, left employment in

1990, and returned to BBTS in 1991 and continued to work there

until January 2001, when her employment was terminated.     Ms.

Ellis was responsible for bookkeeping and accounting.     Ms. Ellis

had signatory authority over BBTS’s corporate checking account.

She also signed payroll checks on behalf of BBTS during the

period of the alleged embezzlement.      Ms. Ellis paid petitioner’s

personal bills, such as telephone, power, etc., from BBTS and

charged the amounts as shareholder distributions.

     Ms. Ellis and Ms. Clark provided petitioner with operating

cash from BBTS’s corporate accounts at least weekly, except for

the periods when petitioner was on vacation or engaged in

vocational training.    The cash was provided to petitioner by Ms.

Ellis’s writing a check to petitioner and endorsing it.     Then,

she or Ms. Clark would cash the check and either deliver the cash

to petitioner or leave it in his office desk.     Petitioner used

the cash for expenses (cash expenses) incurred in the field,

including but not limited to, maintenance and repairs to trucks
                                - 6 -

and equipment, fuel, and dump fees.2    Each week, the cash

expenses regularly totaled between $5,000 and $6,000.3

     Petitioner received all the cash he used for personal

spending money in the same manner as the cash he received for

cash expenses; i.e., by having Ms. Ellis cash a check from BBTS

and deliver the money to him.   Petitioner did not use ATM cards

and could not withdraw currency directly from his personal

accounts.

     During the IRS’s examination of petitioner’s return, Ms.

Clark and Ms. Ellis each signed an affidavit on July 8, 2002

(affidavit).   The affidavits each stated that the respective

affiant did not embezzle any money from BBTS or petitioner.

     Ms. White began working for BBTS in August 1999.    Petitioner

and Ms. White were married during November 2000.    Ms. White, on

petitioner’s behalf, investigated BBTS’s alleged theft loss.    Ms.

White does not have any bookkeeping training or experience either

in general or with the specific accounting software BBTS used.

Ms. White prepared an analysis of the alleged theft loss at BBTS.

Although Ms. White could not distinguish an embezzled check from

a nonembezzled one, the original analysis she prepared claimed


     2
      Dump fees are fees paid by petitioner to dispose of the
wood removed from a customer’s property, as petitioner was not
allowed to leave the debris from a customer’s job for regular
garbage collection.
     3
      For example, BBTS deducted $111,600 in dumping fees alone
in 1997, $133,330 in 1998, $204,588 in 1999, and $43,934 in 2000.
                                - 7 -

every check written to petitioner was embezzled, resulting in the

$1,801,213 total originally claimed in the refund request.

     On January 24, 2001, Ms. White filed a police report with

the Jacksonville Sheriff’s Office.      The police report did not

mention a sizable embezzlement loss.4     The police report is the

only report petitioner filed with law enforcement officials with

respect to the claimed theft loss.

     Although petitioner and Ms. White have divorced since the

discovery of the alleged embezzlement, petitioner occasionally

sends Ms. White money.    Petitioner gave Ms. White $1,000 for her

travel expenses from Pensacola to Jacksonville to testify at the

trial in the instant case.    Petitioner also gave Ms. White $500 2

weeks prior to the $1,000 gift.

     During 2001, petitioner filed a civil action against Ms.

Clark and Ms. Ellis seeking damages for the amount of the theft

loss.    Petitioner entered into a settlement agreement with Ms.

Ellis and Ms. Clark on January 9, 2003, that required them to pay

petitioner $12,000 each.    Ms. Ellis discharged her liability

under the settlement in a chapter 7 bankruptcy.      On February 14,

2006, petitioner filed against Ms. Clark a motion for final




     4
      The police report claims the theft of personal property,
mostly tools and office equipment. Ms. White testified at trial
that “Some of those things have since been found.” The only
mention of checks is in the “Additional Information” section
after the enumeration of stolen items.
                               - 8 -

judgment in the Circuit Court for the Fourth Judicial Circuit of

the State of Florida seeking $2,067,926.87 in damages.5

     During the period of the alleged embezzlement, Ms. Clark

continued to use her credit card for personal purchases and

accumulated an unpaid balance of $10,000.    Ms. Clark did not

provide an explanation of how that credit card debt was

consistent with her admission to the embezzlement of several

thousand dollars per week from BBTS.

     Ms. Clark maintained, until she met with respondent’s

counsel on March 14, 2006, that she did not embezzle any money

from BBTS or petitioner.   In February 2006, petitioner threatened

Ms. Clark, who had recently applied for a real estate license,

that, if at the trial of the instant case she did not admit to

embezzling from BBTS, he would take out an ad in the

newspaper calling her a liar and thief.6    Ms. Clark did not admit

to the alleged embezzlement on her application for a real estate

license.   Ms. Clark, before testifying at trial, received legal

advice from petitioner’s attorney regarding the statutes of


     5
      We note that this roughly coincides with the timing of
petitioner’s threat to Ms. Clark, see infra, and may have been an
attempt to influence her testimony in the instant case. Ms.
Clark had not made a payment under the agreement since May 18,
2004, yet petitioner waited almost 2 years to file for a
judgment. Additionally, Ms. Ellis received a threatening phone
call 2 weeks before trial, although the identity of the caller is
not in evidence.
     6
      Petitioner intended to intimidate Ms. Clark with the threat
of losing her license or future business.
                               - 9 -

limitations for criminal prosecution, as well as assessment of

taxes and penalties against her for substantial understatement.

     Notwithstanding her prior denials, Ms. Clark testified at

trial that she and Ms. Ellis embezzled money from BBTS.     Ms.

Clark’s testimony, however, did not provide even a general amount

of money that she allegedly embezzled, nor could she reconstruct

an amount by linking any specific items purchased with allegedly

embezzled funds.

     Ms. Clark claimed that Ms. Ellis invited her to join an

ongoing embezzlement scheme shortly after Ms. Clark resumed

working at BBTS.   Ms. Ellis was aware that Ms. Clark was

petitioner’s former wife and that Ms. Clark and petitioner were

engaged in a personal relationship at the time.

     Ms. Clark’s then husband, Ted Clark, supposedly knew of Ms.

Clark’s embezzlement.   Ted Clark did not testify at the trial.

                              OPINION

     As a general rule, the Commissioner’s determinations are

presumed correct, and the taxpayer bears the burden of proving

otherwise.   Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115

(1933).   Section 7491(a)(1) provides that the burden of proof

will shift to the Commissioner when the taxpayer has introduced

credible evidence with respect to any factual issue relevant to

ascertaining the liability of the taxpayer for any tax.     However,

the burden of proof does not shift to the Commissioner unless the
                              - 10 -

taxpayer complied with all substantiation requirements,

maintained all required records, and cooperated with reasonable

requests by the Service “for witnesses, information, documents,

meetings, and interviews”.   Sec. 7491(a)(2); Higbee v.

Commissioner, 116 T.C. 438, 440-441 (2001).   Section 7491(c)

provides that the Commissioner shall have the burden of

production with respect to any penalty.   See also Higbee v.

Commissioner, supra at 446-447.

     A taxpayer who provides only self-serving testimony and

inconclusive documentation is not considered to have provided

credible evidence.   See Blodgett v. Commissioner, 394 F.3d 1030

(8th Cir. 2005) affg., T.C. Memo. 2003-212; Higbee v.

Commissioner, supra at 445-446.

     Credible evidence is evidence that, “after critical

analysis, the Court would find sufficient upon which to base a

decision on the issue if no contrary evidence were submitted”.

Higbee v. Commissioner, supra at 442 (citing H. Conf. Rept. 105-

599, at 240-241 (1998), 1998-3 C.B. 747, 994-995).   Evidence is

not credible if the Court is not convinced that it is worthy of

belief.   Id.

     On the basis of the record before us, we conclude that

petitioner did not introduce credible evidence with respect to

the factual issues presented under section 165.   Petitioner

provided only incomplete and inconclusive documentation, along
                                - 11 -

with self-serving and incredible testimony.    Because petitioner

did not introduce credible evidence with respect to those factual

issues, the burden of proof does not shift to respondent under

section 7491(a)(1).7    Accordingly, we need not decide whether

petitioner has complied with the applicable requirements of

section 7491(a)(2).     The burden of proof rests with petitioner to

prove that he qualifies for a theft loss deduction in excess of

the amount respondent allowed in the notice of deficiency.

     Section 165(a) allows a deduction for “any loss sustained

during the taxable year and not compensated for by insurance or

otherwise.”   Concerning theft losses, section 165(a) is

applicable for the year “in which the taxpayer discovers such

loss.”   Sec. 165(e).   For purposes of section 165(e), theft

includes embezzlement.    Sec. 1.165-8(d), Income Tax Regs.

     To carry his burden, petitioner must establish that the

alleged theft loss occurred and that the requirements of section

165 have been met.     See Allen v. Commissioner, 16 T.C. 163, 166-

167 (1951).   Petitioner must establish, inter alia, the existence

of a theft within the meaning of section 165 and the amount of

the claimed theft loss.    See Elliott v. Commissioner, 40 T.C.

304, 311 (1963).   Whether certain actions constitute theft for



     7
      We note that, although the burden of proof did not shift,
respondent did produce a full source and applications analysis of
petitioner’s business and personal income. The analysis shows no
missing funds.
                             - 12 -

purposes of section 165 depends on the law defining the crime of

theft in the jurisdiction where the alleged theft occurred.

Monteleone v. Commissioner, 34 T.C. 688, 692 (1960).

     Fla. Stat. Ann. sec. 812.014 (West 2000) provides:

          (1) A person commits theft if he or she knowingly
     obtains or uses, or endeavors to obtain or to use, the
     property of another with intent to, either temporarily
     or permanently:

          (a) Deprive the other person of a right to the
     property or a benefit from the property.

          (b) Appropriate the property to his or her own
     use or to the use of any person not entitled to the
     use of the property.

     In the instant case, petitioner has failed to prove that a

theft occurred under Florida law.   Despite producing, as multiple

exhibits at trial and on brief, several lists of checks from

BBTS,8 including those in response to respondent’s

interrogatories, petitioner has not provided the Court with any

credible documentation that supports a theft in the total amount

of $1,801,213, $704,500, or $564,711.9




     8
      We note that several of these lists include information
about checks that are not a part of the record and are not in
evidence.
     9
      For example, petitioner’s reply brief includes three lists
of checks. The list entitled “TOTAL Theft Loss” includes 427
checks with a total amount of $909,449.66. There is a “TOTAL
DOUBLE DATED CHECKS” list for each of the years 1996-2000, which
lists cumulatively include 275 checks totaling $593,940.76. The
list entitled “Missing Check Total Amount” includes 348 checks
totaling $762,810.34.
                              - 13 -

     Petitioner argues that reasonable inferences support the

conclusion that there was an embezzlement case and that such

inferences are sufficient to support a decision in his favor.

Petitioner cites Moore v. Commissioner, T.C. Memo. 1983-671, for

the proposition that a court may rely on reasonable inferences in

an embezzlement case.   In fact, the actual holding in that case

is that the Court will not make or rely upon assumptions without

some basis in the evidence.   The taxpayer in Moore, like

petitioner, failed to produce sufficient evidence to raise his

claim of embezzlement from a bare assumption to a reasonable

inference.   Moore also fails to support petitioner’s position in

that the existence and amount of money missing in Moore were not

in issue, only the characterization of the money as stolen from

the taxpayer versus misappropriated from a partnership.     On the

basis of the record, we conclude that petitioner has not provided

sufficient credible evidence to support a reasonable inference of

embezzlement.

     Petitioner further argues that, after inferring that some

money was embezzled, the Court can now estimate the amount of

loss.   Petitioner cites Mann v. Commissioner, T.C. Memo 1981-684,

for the proposition that the Court may estimate an embezzlement

loss, applying the rule of Cohan v. Commissioner, 39 F.2d 540

(2d Cir. 1930).   Although Mann did involve both an embezzlement

and an estimation, there was no estimation of an embezzlement.
                                - 14 -

In Mann, a secretary embezzled money from the taxpayer by forging

checks.   The embezzlement portion of the opinion does not deal

with the amount of embezzlement by the secretary at all, only the

proper year of deductibility.    The taxpayer in Mann also was the

victim of theft by a business partner.   The taxpayer had given a

business partner $10,200 to open a store.    The partner did open a

store, but shortly thereafter closed it and absconded with the

remaining capital.   Using the Cohan rule, the Court estimated

that $5,000 of the $10,200 had been embezzled and allowed

ordinary loss treatment for that amount.    The Court ruled that

the rest of the loss was a capital loss resulting from the

failure of the store.   The Court clearly stated:   “Neither the

fact that petitioner sustained a loss nor the amount of such loss

is in dispute.”   Id.   In the light of the lack of credible

evidence to support the conclusion that there was an embezzlement

in any amount, we decline to apply Mann and Cohan in the instant

case.

     We find unconvincing petitioner’s contention that any time

more than one check was written to petitioner during any

particular day, there must have been embezzlement.    Given

petitioner’s extensive use of cash for business expenses and

commingling of personal funds and expenses with those of BBTS,

petitioner’s bare assertions regarding the number of checks in a

day is insufficient to prove theft.
                              - 15 -

     Moreover, Ms. Clark’s testimony lacks credibility.   For

years, Ms. Clark maintained that she did not embezzle from BBTS,

including in an affidavit and on her application for a real

estate license.   Furthermore, during February 2006, petitioner

threatened Ms. Clark with libel, after which she first admitted

to the embezzlement.   Additionally, Ms. Clark’s admission to the

embezzlement during the testimony at trial was made after

receiving legal advice from petitioner’s counsel that she could

no longer be prosecuted criminally or be liable for additional

taxes from the alleged embezzlement.   Also at trial, Ms. Clark

could not explain why she continued to carry a credit card

balance while allegedly embezzling from BBTS.    Likewise, she did

not provide convincing testimony regarding the amount of the

embezzlement or what she did with the money.    Finally, it is

implausible to us that Ms. Ellis would recruit Ms. Clark to

embezzle from BBTS, knowing Ms. Clark was formerly married to

petitioner and was in a relationship with him at the time.      On

the basis of the record, we hold that petitioner has failed to

prove that he is entitled to any embezzlement deduction beyond

the amount respondent allowed in the notice of deficiency.
                                - 16 -

     Because petitioner failed to prove that a theft loss in

excess of $5,586 occurred,10 we do not reach the question of

timing.

     Section 7491(c) provides that the Commissioner bears the

burden of production with respect to the liability of any

individual for any addition to tax or penalty.    Consequently,

respondent must produce sufficient evidence to demonstrate that

the accuracy-related penalty is appropriate.    See Higbee v.

Commissioner, 116 T.C. at 446.

     Section 6662(a) imposes a 20-percent accuracy-related

penalty with respect to the portion of any underpayment of tax

attributable to a substantial understatement of income tax.      An

“understatement” is the excess of the amount of tax required to

be shown on the return over the amount of tax that is actually

shown on the return.   Sec. 6662(d)(2)(A).   A “substantial

understatement” of income tax exists if the amount of the

understatement for the taxable year exceeds the greater of (1) 10

percent of the tax required to be shown on the return or (2)

$5,000.   Sec. 6662(d)(1)(A).

     On his return, petitioner indicated a tax liability of zero.

Respondent determined the appropriate tax was $159,008.    The



     10
      Although the evidence at trial suggests that no theft at
all occurred, on brief respondent has maintained the same
position as taken in the notice of deficiency and does not seek
to disallow the deduction allowed in the notice of deficiency.
                              - 17 -

difference between $159,008 and zero exceeds both 10 percent of

$159,008, or $1,590, and $5,000.   Accordingly, the understatement

was substantial.

     Section 6664(c)(1) provides that the accuracy-related

penalty shall not apply to any portion of an underpayment if it

is shown that there was reasonable cause for the taxpayer’s

position with respect to that portion and that the taxpayer acted

in good faith with respect to that portion.    The determination of

whether a taxpayer acted with reasonable cause and in good faith

within the meaning of section 6664(c)(1) is made on a case-by-

case basis, taking into account all of the pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.   The most

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability for the year.   Id.    “Circumstances that

may indicate reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

all of the facts and circumstances, including the experience,

knowledge, and education of the taxpayer.”     Id.

     Petitioner does not qualify for section 6664(c)(1) relief.

Under the circumstances, petitioner’s failure to consult an

accountant or other tax professional was unreasonable.    See Marr

v. Commissioner, T.C. Memo. 1995-250 (finding taxpayer negligent

for claiming theft loss without consulting tax professional).

Petitioner claimed a very large deduction that resulted in
                                - 18 -

claiming zero tax liability for the current year and refunds for

several prior years.   Petitioner did not consult an accountant to

prepare the loss but rather relied on his then wife, Ms. White,

who has no experience in bookkeeping.      Ms. White’s analysis

yielded a total of $1,801,213.    However, once consulted,

petitioner’s accountant quickly reduced that amount to $704,500.

Accordingly, petitioner does not qualify for the reasonable cause

exception in section 6664(c)(1), and we hold that petitioner is

liable for the penalty pursuant to section 6662 for a substantial

understatement of income tax.

     We have considered all of petitioner’s contentions, and, to

the extent they are not discussed herein, they are moot,

irrelevant, or without merit.

     To reflect the foregoing,


                                              Decision will be entered

                                         for respondent.
