                            T.C. Summary Opinion 2014-36



                           UNITED STATES TAX COURT



                    JANA RENEA HENSON, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 3205-11S.                           Filed April 16, 2014.



      Jana Renea Henson, pro se.

      Beth A. Nunnink, for respondent.



                                SUMMARY OPINION


      THORNTON, Chief Judge: This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the petition was

filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by


      1
          All other section references are to the Internal Revenue Code (Code) in
                                                                         (continued...)
                                         -2-

any other court, and this opinion shall not be treated as precedent for any other

case.

        Respondent determined deficiencies in petitioner’s 2007 and 2008 Federal

income tax of $24,712 and $2,019, respectively. Respondent further determined

penalties pursuant to section 6662(a) of $4,942 and $404 for tax years 2007 and

2008, respectively.

        After the parties’ concessions, which are discussed more fully below, the

issues for decision are: (1) whether petitioner underreported gross receipts from

her cellular telephone business; (2) whether petitioner is entitled to deductions for

returns and allowances greater than respondent has allowed; (3) whether petitioner

had alimony income in 2007; and (4) whether petitioner is liable for the accuracy-

related penalty pursuant to section 6662(a) for her 2007 tax year.

                                     Background

        The parties have stipulated some facts, which we find accordingly. When

she petitioned the Court, petitioner resided in Kentucky.




        1
        (...continued)
effect for the years in issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. Monetary amounts have been rounded to the nearest
dollar.
                                       -3-

Petitioner’s Divorce

      Petitioner and Michael Henson married on September 12, 1987, and

separated on April 30, 2004.

      On July 27, 2006, petitioner and Mr. Henson entered into a “Settlement

Agreement and Judgment” (settlement agreement) to conclude their divorce

proceedings. In the settlement agreement Mr. Henson agreed to pay petitioner

$200,000 of “equalization of property” payments in three separate installments:

$100,000 within 60 days of the date of the execution of the divorce settlement

agreement; $50,000 by December 31, 2006; and $50,000 by June 30, 2007.

      Also in the settlement agreement Mr. Henson agreed to pay petitioner

$420,000 of maintenance payments, to be paid in installments of $5,000 per month

for 60 months, beginning July 1, 2006, and then $2,500 per month for the next 48

months. The maintenance payments would terminate upon petitioner’s death or

cohabitation or remarriage. The settlement agreement did not address the tax

treatment of the maintenance payments for either petitioner or Mr. Henson.

      In January 2007 petitioner received from Mr. Henson the $50,000

equalization of property payment that was due by December 31, 2006, and
                                          -4-

deposited it into her bank account ending in 4077.2 From January through October

of 2007 Mr. Henson made a $5,000-per-month maintenance payment to petitioner

--for a total of $50,000--but failed to make any payment in November or

December 2007. In early 2008 petitioner filed suit in a Tennessee State court

against Mr. Henson for his failure to make the required maintenance payments in

November and December 2007 pursuant to the settlement agreement.

Petitioner’s Cellular Telephone Business

      In 2006 petitioner invested funds that she received from the settlement

agreement in Disney Mobile Kidz Talk Too (petitioner’s business), a business

which generated income through sales of cellular telephones, cellular accessories,

and cellular telephone contracts. A former friend of petitioner’s ran and operated

petitioner’s cellular telephone business, and petitioner was not involved in the

day-to-day operations of this business.

      As part of its business agreement with cellular telephone companies,

petitioner’s business would often receive advances or commissions for signing up

new customers. She deposited these advances or commissions variously into three

bank accounts with account numbers ending in 6087, 4077, and 5929, over which


      2
      The record does not show whether petitioner received the additional
$50,000 equalization of property payment due to her by June 30, 2007.
                                        -5-

she had control. If the new customers failed to fulfill and complete their contracts,

petitioner’s business was required to repay the cellular telephone companies

portions of the advances or commissions.

      Petitioner’s business ultimately proved unsuccessful, and in 2008 she filed

for bankruptcy.

Petitioner’s Bank Deposits

      During 2007 and 2008 petitioner deposited income she received from her

business into three bank accounts. In 2007 she deposited $22,466, $108,609, and

$216,737 into her 6087, 4077, and 5929 bank accounts, respectively.3 In 2008 she

deposited $28,758 and $26,701 into her 4077 and 5929 bank accounts,

respectively.

Petitioner’s Tax Returns

      Petitioner timely filed her 2007 and 2008 Federal income tax returns. On

Schedules C, Profit or Loss From Business (Sole Proprietorship), attached to those

returns, she reported gross receipts of $50,254 for 2007 and $7,286 for 2008. She

reported no deductions for returns and allowances. On her 2007 return petitioner

also reported as taxable income $50,000 of alimony received.

      3
        Respondent’s notice of deficiency, discussed infra, determined that
petitioner had $108,086 of total deposits into her 4077 account in 2007. Petitioner
has stipulated, however, that she deposited $108,609 into this account in 2007.
                                        -6-

Respondent’s Determinations

      Respondent selected petitioner’s 2007 and 2008 income tax returns for

examination. Because petitioner was unable to provide records with respect to her

business, respondent’s examining agent used petitioner’s 6087, 4077, and 5929

bank account statements to reconstruct her income. Respondent’s agent

determined petitioner’s gross receipts for the years in issue by adding up deposits

to these accounts and then subtracting the deposits that he was able to identify as

nontaxable, such as loan proceeds, equalization of property payments, and

transfers from petitioner’s other bank accounts.4 The following tables summarize

respondent’s determinations:

                                2007 Taxable Year

                           Total              Taxable           Nontaxable
      Account No.         deposits            deposits           deposits

          6087            $22,466              $2,466            $20,000
          4077            108,085              48,422             59,663
          5929            216,737             181,682             35,055
           Total          347,288             232,570            114,718




      4
       In arriving at his determination that petitioner had failed to report $132,316
in taxable income on her 2007 return, respondent’s examining agent did not
include the $50,000 in maintenance payments petitioner had self-reported on her
return or the $50,000 in equalization of property payments petitioner received in
January 2007 that were deposited into her bank account ending in 4077.
                                         -7-

                                 2008 Taxable Year

                            Total              Taxable          Nontaxable
        Account No.        deposits            deposits          deposits

           6087              ---                 ---                 ---
           4077            $28,758             $23,480             $5,278
           5929             26,701              17,170              9,531
            Total           55,459              40,650             14,809

        In the notice of deficiency respondent determined that petitioner had

unreported taxable receipts of $132,316 for 2007 and $18,307 for 2008. The

notice of deficiency shows that for 2007 respondent calculated the $132,316 of

taxable receipts on the basis of $232,570 of deposits minus $50,000 in alimony

that petitioner reported on her 2007 return and minus $50,254 of gross receipts

that petitioner reported on her Schedule C. The notice of deficiency does not

show how respondent determined the $18,307 of unreported taxable receipts for

2008.

        The amounts of deposits remaining in dispute after the parties’ stipulations

and concessions are summarized below:
                                        -8-

                                2007 Taxable Year

                 Total            Agreed          Agreed           Remaining
Account No.     deposits          taxable        nontaxable        in dispute

  6087          $22,466            $2,466        $20,000                ---
  4077          108,609            48,667         59,655              $287
  5929          216,737           108,830         38,302             69,605
   Total        347,812           159,963        117,957             69,892

                                2008 Taxable Year

                 Total            Agreed          Agreed           Remaining
Account No.     deposits          taxable        nontaxable        in dispute

  6087            ---               ---             ---                ---
  4077          $28,758           $15,260         $11,098            $2,400
  5929           26,701            10,121          13,331             3,249
   Total         55,459            25,381          24,429             5,649

                                    Discussion

A. Burden of Proof

      The burden of proof is generally upon the taxpayer, except as may be

otherwise provided by statute or determined by the Court. See Rule 142(a).5 The

Court of Appeals for the Sixth Circuit, to which an appeal of this case would

ordinarily lie if this case were appealable, has held that the Commissioner’s

determination of unreported income must be based on a “minimal evidentiary


      5
       Petitioner has not claimed and the record does not indicate that sec. 7491(a)
applies to shift the burden of proof to respondent with respect to any factual issue.
                                        -9-

foundation” linking the taxpayer to the tax-generating activity or the receipt of

funds in order for the presumption of correctness to attach. United States v.

Walton, 909 F.2d 915, 919 (6th Cir. 1990); see also Richardson v. Commissioner,

T.C. Memo. 2006-69, aff’d, 509 F.3d 736 (6th Cir. 2007). Once the

Commissioner meets his initial burden of production, taxpayers bear the “burden

of producing credible evidence that they did not earn the taxable income attributed

to them or of presenting an argument that the IRS deficiency calculations were not

grounded on a minimal evidentiary foundation.” Walton, 909 F.2d at 919; see also

Olmos v. Commissioner, T.C. Memo. 2007-82.

      The parties’ stipulations establish the requisite evidentiary foundation with

respect to the unreported income.

B. Schedule C Gross Receipts

      Section 61(a) provides that gross income includes “all income from

whatever source derived”, including gross income derived from business.

Generally, cash basis taxpayers are required to recognize the amount of an item of

gross income in the taxable year in which they receive it. Sec. 451(a). Taxpayers

are required to maintain books and records that are sufficient to enable the

Commissioner to determine their gross income and their correct tax liability. Sec.

1.6001-1(a), Income Tax Regs.
                                       - 10 -

      If a taxpayer fails to keep adequate records, the Commissioner may

reconstruct the taxpayer’s income by any reasonable method that clearly reflects

income. Sec. 446(b); see Holland v. United States, 348 U.S. 121, 130-132 (1954).

One acceptable method is the bank deposits method. Clayton v. Commissioner,

102 T.C. 632, 645 (1994); DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), aff’d,

959 F.2d 16 (2d Cir. 1992); Bevan v. Commissioner, T.C. Memo. 1971-312, aff’d,

472 F.2d 1381 (6th Cir. 1973). This method assumes that if a taxpayer is engaged

in an income-producing activity and makes deposits to bank accounts, then those

deposits, less amounts identified as nontaxable items, constitute taxable income.

See Clayton v. Commissioner, 102 T.C. at 645-646. Where the Commissioner has

used the bank deposits method to determine deficiencies, the taxpayer generally

bears the burden of showing that the bank deposits were derived from nontaxable

sources. See DiLeo v. Commissioner, 96 T.C. at 871; Bevan v. Commissioner,

T.C. Memo. 1971-312.

      After the parties’ concessions and stipulations, there remain in dispute only

$69,892 of deposits in 2007 and $5,649 of deposits in 2008 (collectively referred

to hereinafter as disputed deposits). Petitioner does not deny making the disputed

deposits. Rather, she contends that certain of them were from nontaxable sources.
                                       - 11 -

      Petitioner contends that certain of the disputed deposits represent

nontaxable loan proceeds. Petitioner failed, however, to produce any

documentation or other evidence to substantiate this claim.6 When questioned at

trial about certain deposits she claimed were loan proceeds, she was unable to

offer any specific details about them. Petitioner has failed to establish what

amount, if any, of the disputed deposits represents loan proceeds.

      Petitioner also contends that certain of the disputed deposits represent

advance payments or commissions and are only “partially taxable” because her

business would sometimes have to repay some of these amounts. Petitioner has

failed to establish that these advance payments or commissions are nontaxable.

      Pursuant to section 61(a) gross income includes “all income from whatever

source derived” and includes all “accessions to wealth, clearly realized, and over

which * * * [a taxpayer has] complete dominion.” Commissioner v. Glenshaw

Glass Co., 348 U.S. 426, 431 (1955). Whether a taxpayer enjoys “complete

dominion” over an “accession to wealth” depends upon “whether the taxpayer has

      6
       Petitioner testified that her original records had been “displaced” because
she moved three times and that she was unable to procure replacement records
from her creditors because of their adverse interests, having been parties to her
bankruptcy proceeding. Petitioner’s alleged loss of records does not relieve her of
the burden of proving the deposits derived from sources that were nontaxable. See
Irving v. Commissioner, T.C. Memo. 2006-169; Kelly v. Commissioner, T.C.
Memo. 1987-352, aff’d without published opinion, 858 F.2d 743 (11th Cir. 1988).
                                       - 12 -

some guarantee that * * * [the taxpayer] will be allowed to keep the money.”

Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203, 210 (1990).

      The funds in question were deposited into petitioner’s various bank

accounts and were available for her use at any time without restriction. Apart

from petitioner’s vague testimony, there is no evidence of the amounts of funds

that were returned to the cellular telephone companies and no basis upon which

we might reliably estimate the amounts. Petitioner has provided the Court with no

evidence that would show the terms of any arrangements between petitioner’s

business and these cellular telephone companies.

      We sustain respondent’s determination that the disputed deposits are taxable

income to petitioner. See Rutkin v. United States, 343 U.S. 130, 137 (1952); Price

v. Commissioner, T.C. Memo. 2004-103 (“Unless the nontaxable nature of

deposits is established, gross income includes deposits to bank accounts where the

taxpayer has dominion and control of the funds.”); Woods v. Commissioner, T.C.

Memo. 1989-611, aff’d without published opinion, 929 F.2d 702 (6th Cir. 1991).

C. Schedule C Returns and Allowances

      Petitioner argues that she is entitled to deduct allowances on her 2007 and

2008 Schedules C even though she claimed no such deductions on her 2007 and

2008 returns. Respondent has conceded that petitioner is entitled to deduct
                                        - 13 -

$24,288 and $6,223 of returns and allowances on her Schedules C for 2007 and

2008, respectively. Petitioner introduced no evidence to substantiate her claim for

deductions for returns and allowances greater than respondent has allowed.

Petitioner is not entitled to deductions for returns and allowances greater than

respondent has allowed. See Olagunju v. Commissioner, T.C. Memo. 2012-119;

Sherrer v. Commissioner, T.C. Memo. 2011-198.

D. Alimony Received

      At trial petitioner asserted that the $50,000 of alimony she reported on her

2007 tax return should be nontaxable. Petitioner argues that her divorce decree

“even states that it’s not alimony, it’s just separating marital property, and * * *

[my husband’s and my] money.”

      Generally, property settlements incident to divorce are nontaxable. Sec.

1041; Estate of Goldman v. Commissioner, 112 T.C. 317, 322 (1999), aff’d

without published opinion sub. nom. Schutter v. Commissioner, 242 F.3d 390

(10th Cir. 2000). On the other hand, amounts received as alimony or separate

maintenance payments are taxable to the recipient. Secs. 61(a)(8), 71(a), 215(a).

The phrase “alimony or separate maintenance payment” is defined in section

71(b)(1) as any cash payment satisfying these four requirements:
                                       - 14 -

            (A) such payment is received by (or on behalf of) a spouse
      under a divorce or separation instrument,

            (B) the divorce or separation instrument does not designate
      such payment as a payment which is not includible in gross income
      under this section and not allowable as a deduction under section 215,

            (C) in the case of an individual legally separated from his
      spouse under a decree of divorce or of separate maintenance, the
      payee spouse and the payor spouse are not members of the same
      household at the time such payment is made, and

            (D) there is no liability to make any such payment for any
      period after the death of the payee spouse and there is no liability to
      make any payment (in cash or property) as a substitute for such
      payments after the death of the payee spouse.

      Petitioner received and reported on her 2007 return $50,000 in payments

from Mr. Henson. On the basis of the evidence in the record, we have found that

petitioner received $50,000 in maintenance payments in 2007. After all, her

lawsuit in State court was predicated on Mr. Henson’s failing to make only 2

monthly maintenance payments in 2007, from which we infer that he did in fact

make the other 10 monthly maintenance payments, totaling $50,000 as reported on

petitioner’s 2007 return.

      The settlement agreement does not designate the maintenance payments as

not includible in petitioner’s gross income and not allowable as a deduction to Mr.

Henson; petitioner and Mr. Henson were not members of the same household at
                                       - 15 -

the time the payments were made; and under the settlement agreement, Mr.

Henson does not have to make any additional maintenance payments to petitioner

after her death. On the record before us, we hold, consistent with petitioner’s

reporting position on her 2007 return, that the $50,000 she received from Mr.

Henson in 2007 was alimony and taxable pursuant to section 71.

E. Accuracy-Related Penalties

      Respondent contends that petitioner is liable for an accuracy-related penalty

for her 2007 tax year.7 Section 6662(a) and (b)(1) and (2) imposes a 20%

accuracy-related penalty on any portion of a tax underpayment that is attributable

to, among other things, negligence. “Negligence” includes any failure to make a

reasonable attempt to comply with the provisions of the Code and also includes

any failure to keep adequate books and records or to substantiate items properly.

Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

      Under section 7491(c), the Commissioner bears the burden of production

with respect to the section 6662(a) penalty. Generally, this means he must come

forward with sufficient evidence indicating that it is appropriate to impose the

penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Respondent has


      7
       Respondent concedes that petitioner is not liable for the sec. 6662
accuracy-related penalty for her 2008 tax year.
                                        - 16 -

met this burden of production because he has provided evidence that for

petitioner’s 2007 tax year she failed to comply with recordkeeping requirements

and failed to substantiate certain items on her tax return.

      The accuracy-related penalty does not apply with respect to any portion of

an underpayment if it is shown that the taxpayer had reasonable cause and acted in

good faith. Sec. 6664(c)(1). The burden of proof is on the taxpayer to establish

reasonable cause. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-

448; Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972).

      Petitioner testified that she relied on a certified public accountant (C.P.A.)

to complete her income tax returns. Reliance on a professional tax adviser’s

advice may demonstrate reasonable cause and good faith if, taking into account all

the facts and circumstances, the reliance was reasonable and the taxpayer acted in

good faith. Sec. 1.6664-4(b)(1), (c)(1), Income Tax Regs. Reliance on a tax

adviser may be reasonable and in good faith if the taxpayer establishes: (1) the

adviser was a competent professional with sufficient expertise to justify reliance;

(2) the taxpayer provided necessary and accurate information; and (3) the taxpayer

actually relied in good faith on the adviser’s judgment. Neonatology Assocs., P.A.

v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).
                                       - 17 -

      Petitioner conceded that she “never really looked” at her tax returns and that

the only involvement that she had in the tax return preparation process was to

“take stuff down” to her C.P.A. Moreover, petitioner testified that the figures her

C.P.A. used in preparing her returns were derived from QuickBooks printouts that

she provided to her C.P.A. Petitioner has failed to show that she provided her

C.P.A. necessary and accurate information or that she reasonably and in good faith

relied on her tax adviser. We sustain respondent’s determination to impose the

section 6662(a) accuracy-related penalty for negligence for petitioner’s 2007 tax

year. See Schneller v. Commissioner, 129 F.3d 1265 (6th Cir. 1997), aff’g

without published opinion T.C. Memo. 1996-62.

      To reflect the foregoing and the parties’ concessions,


                                                     Decision will be entered

                                                under Rule 155.
