                         T.C. Memo. 1998-178



                       UNITED STATES TAX COURT



                  MERCEDES ARCIA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                    ELIO ARCIA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


    Docket Nos. 15692-96, 15693-96.             Filed May 13, 1998.



    William R. Tunkey, for petitioner in docket No. 15692-96.

    Philip T. Weinstein, for petitioner in docket No. 15693-96.

    Reginald R. Corlew, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


    JACOBS, Judge:    Respondent determined a $35,377 deficiency in

petitioners'   1991   Federal   income   tax,    an   $18,014.38   section
                                  - 2 -


6651(a)(1) addition to tax, and a $7,075 section 6662(a) accuracy-

related penalty.

     All section references are to the Internal Revenue Code as in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

     These    cases   were   consolidated   for   trial,     briefing,   and

opinion.

     The issues for decision are: (1) Whether petitioners had

$106,000 of unreported income in 1991; and (2) if so, then (a)

whether petitioner Mercedes Arcia (Mrs. Arcia) qualifies as an

innocent     spouse   pursuant   to   section     6013(e);    (b)   whether

petitioners are liable for the section 6651(a)(1) addition to tax

for 1991; and (c) whether petitioners are liable for the section

6662(a) accuracy-related penalty for 1991.

                             FINDINGS OF FACT

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

stipulation of facts and the attached exhibits are incorporated

herein by this reference.

     Elio and Mercedes Arcia, husband and wife, resided in Miami,

Florida, at the time they filed their respective petitions in these

cases.

Eduardo Macias and His Friends

     Eduardo Macias, born in Cuba but living in the United States

at all relevant times, served time in a U.S. prison between 1983
                                - 3 -


and 1989 for smuggling marijuana.    Thereafter, he served 11 months

for a parole violation.      During the year in issue, Mr. Macias

became an informant for the Narcotics Division of the Miami Police

Department.

     Prior to his imprisonment, Mr. Macias left a large quantity of

money buried in plastic pipes in his backyard.   He dug up the money

in 1989 following his release from prison. In April 1991, Mr.

Macias wanted to hide this money from his ex-wife. Accordingly, he

asked a friend, Wilberto M. Morera (a self-employed construction

and repair worker) to hold $115,000 for safekeeping.     Mr. Morera

agreed to hide Mr. Macias' money for approximately 3 months;    Mr.

Morera kept the money in his attic.      Sometime in July 1991, Mr.

Macias retrieved his money, and gave Mr. Morera $3,000 (out of the

$115,000) as a gift for hiding the money.

     On August 19, 1991, Mr. Macias visited another friend, Pedro

Chavez.   Mr. Chavez, born in Chile, was a U.S. permanent resident.

He originally worked in the restaurant business (as executive chef

for the Hard Rock Cafe International), and subsequently worked as

a consultant in Chile, developing software for the food-service

industry.     Mr. Macias asked Mr. Chavez to hide $110,0001 for him;

Mr. Chavez agreed to this request because he believed he owed Mr.

Macias a favor.     Mr. Macias delivered the money, and Mr. Chavez

     1
          The record is silent as to what happened to the $2,000
difference between the amount remaining ($112,000) in July and
the amount given to Mr. Chavez ($110,000) in August.
                                   - 4 -


made an entry in his diary indicating the receipt of the money and

the exact denominations ($90,000 in $20 bills, $16,000 in $100

bills, and $4,000 in $10 bills).       Mr. Chavez kept the money in a

closet in his apartment.        A week later, Mr. Chavez informed Mr.

Macias that he was nervous about hiding the money and asked Mr.

Macias to retrieve it.     When Mr. Macias retrieved the money, Mr.

Chavez suggested that Mr. Macias hide the money with a mutual

friend, Elio Arcia (petitioner).

     Taking    Mr.   Chavez's    advice,   Mr.   Macias   went   to   visit

petitioner, a childhood friend from Cuba.          Petitioner agreed to

hold Mr. Macias' $106,0002 for safekeeping, concealing the money in

a cooler in the garage of petitioners' home at 115 S.W. 20th Road,

Miami, Florida 33129.    This money was commingled with petitioner's

money. Petitioner did not inform anyone about his hiding Mr.

Macias' money.

The October 25, 1991, Search and Seizure

     On October 25, 1991, City of Miami police officers conducted

a search and seizure at petitioners' residence.           This search was

later determined to have been illegal (see infra). During the

search, the police officers found $201,034 concealed in a cooler in

petitioners' garage. The money was bound by rubber bands in stacks

of mixed denominations.     In addition to this money, the officers


     2
            Again, the record is silent as to why Mr. Macias' funds
dwindled.
                                 - 5 -


found: (1) $500 in a bedroom; (2) $1,901 on petitioner; and (3)

$8,450 in a beige box in a bedroom.        In total, the officers found

and seized $211,886 in cash at petitioners' residence.          The police

officers also seized: (1) A 1990 Nissan 240SX automobile; (2) a

Smith & Wesson .38-caliber 5-shot, 2" barrel gun; (3) a Kurz 380-

caliber semiautomatic gun; (4) a North America Arms .22-caliber

long, 5-shot, 1" barrel gun; (5) a North America Arms .22-caliber

long 3/4" barrel gun; (6) an Iver Johnson .30-caliber semiautomatic

rifle; (7) two scales; and (8) a Glory money counter.

     During   the   search,   petitioner   told   one    of   the   officers

conducting the search, Detective Julio Morejon, that a portion of

the money in the cooler belonged to a "friend".         Petitioner did not

disclose the "friend's" name.

     Mrs. Arcia first learned about the money in the cooler on

October 25, 1991, during the search and seizure.

City Forfeiture Action

    On January 31, 1992, the City of Miami commenced a forfeiture

action against all the currency and other personal property and

assets seized from petitioners' home in the Circuit Court of the

Eleventh Judicial Circuit in and for Dade County, Florida (the

Circuit Court).     The City named petitioners (and their son Elio

Arcia, Jr.) as claimants. On April 24, 1992, the Circuit Court

filed a Rule to Show Cause.    On June 15, 1992, petitioners filed an

Answer to Rule to Show Cause, agreeing that they were the claimants
                                - 6 -


to the property seized on October 25, 1991 (including the $211,886

seized   from   petitioners'   residence).   In   making   this   claim,

petitioner intended to retrieve not only his own money, but that of

Mr. Macias.

     On July 15, 1992, the Circuit Court granted petitioners'

evidentiary motion to suppress those items seized from their home

on the grounds that the search was illegal.

     On September 17, 1992, petitioners filed a Motion to Dismiss

Claim of Forfeiture and to Remit Claimants' Property Forthwith,

claiming that the City of Miami did not timely file its complaint.

On the same day, petitioners filed a Motion for Preservation of

Assets, requesting that the City of Miami place the $211,886 in an

interest-bearing certificate of deposit held in trust for the

benefit of the prevailing party.

     On November 18, 1992, the City of Miami Police Department and

petitioner3 entered a Settlement Agreement and Joint Stipulation

(the agreement). In the agreement, petitioner agreed to forfeit to

the City of Miami $105,933 of the seized currency, as well as the

weapons, scales, and money counters, and the City of Miami agreed

to transfer to petitioner $105,933 of the seized currency, as well

as the 1990 Nissan 240SX.      The City of Miami further agreed to

forgo legal proceedings for forfeiture of petitioners' home.         On


     3
          It is unclear from the record why Mrs. Arcia was not a
signatory to the agreement.
                                      - 7 -


April   14,   1993,   the   Circuit    Court   filed   an   Agreed   Order   of

Dismissal.

Federal Forfeiture Action

     On July 29, 1992, the United States filed a Verified Complaint

for Forfeiture in Rem in the U.S. District Court for the Southern

District of Florida (the U.S. District Court) for the forfeiture of

petitioners' Miami 115 S.W. 20th Road property.                The complaint

alleged that the real property constituted proceeds traceable to

the exchange of controlled substances (in violation of Controlled

Substances Act, Pub.L. 91-513, sec. 101, 84 Stat. 1242 (1970), 21

U.S.C. secs. 801-971).       On October 5, 1992, petitioners filed a

Notice of Claim, claiming an interest in the seized real property,

and an Answer to Complaint for Forfeiture in Rem and Demand for

Jury Trial.

     On December 7, 1992, petitioners and the United States signed

a Stipulation of Dismissal and Settlement Agreement.             Petitioners

agreed therein that "they will forever release and hold harmless

[the Federal Government] from any and all claims of any kind * * *

arising from the government's seizure, detention, and maintenance

of the defendant['s] property".           On December 11, 1992, the U.S.

District Court filed a Final Order of Dismissal.

Mr. Macias' Affidavit and Subsequent Death

     On August 4, 1994, Mr. Macias signed a notarized affidavit

stating that in August 1991 he "entrusted" petitioner with $110,000

for "safekeeping".
                                    - 8 -


      On September 8, 1994, Mr. Macias met with Internal Revenue

Agent Stephen Swafford in order to confirm the statements made by

Mr. Macias in his affidavit.         During the interview, Mr. Macias

stated that he had earned the money while working as a fisherman in

the   Bahamas   during   the    1970's.     He   further   stated    that   he

originally buried the money in his backyard but subsequently

entrusted the money to Messrs. Mendez, Chavez, and petitioner for

safekeeping.     After the money was seized on October 25, 1991, Mr.

Macias was afraid to make a legal claim for its return because he

was on parole and was concerned that if he were to claim the money,

the money might be deemed to have come from an illegal source.

      At the time of Mr. Macias' meeting with Agent Swafford, Mr.

Macias made his living knocking coconuts off trees and selling them

on a Miami street corner.

      On October 19, 1994, Mr. Macias committed suicide.              In his

suicide note, Mr. Macias stated he was "grateful" to petitioner.

Petitioners' 1991 Federal Income Tax Return

      Petitioners filed their 1991 Federal income tax return on July

14, 1993.    They did not file for an automatic extension.           On their

1991 return, petitioners reported "other income" (line 22) of

$112,000, which included $106,000 as "the Taxpayer's portion of

certain     funds    which   were   seized".     Petitioners    claimed      a

constitutional      privilege   against   self-incrimination    as    to    the
                                          - 9 -


source of this income in a statement attached to their 1991 return.

Abatement Letters

        The Internal Revenue Service (IRS) assessed taxes, interest,

and late payment additions with regard to petitioners' 1991 tax

year.    In a February 1, 1995, "Transmission of Payment and Request

for Abatement of Penalties", petitioners requested abatement of the

$9,169.88 in late filing addition.                  On March 8, 1995, the IRS

notified petitioners that it had abated the late filing addition.

Notice of Deficiency

        In   the    notice    of    deficiency      respondent    determined      that

petitioners realized $212,000 of income, rather than $106,000 as

reported on their 1991 return.              Accordingly, respondent increased

petitioners' 1991 taxable income by $106,000.                     Respondent also

determined that petitioners were liable for a section 6651(a)(1)

addition to tax and a section 6662(a) accuracy-related penalty for

1991.

                                         OPINION

     The     primary     issue      is   factual:      whether    petitioners      had

$106,000 of unreported income in 1991 arising from currency found

in a cooler in petitioners' garage during the October 25, 1991,

search and         seizure.        Petitioners     claim   that   $106,000   of    the

$201,034 found in the cooler was not their money and therefore is

not includable in their 1991 income.                  Respondent, on the other

hand, contends that ownership of the funds is irrelevant; rather,
                                     - 10 -


the issue concerns dominion and control.          Respondent      posits that

because petitioners had dominion and control over all of the

forfeited funds, which were originally earned through an apparent

illegal     activity,    the     proceeds   represent   taxable    income    to

petitioners.

     The mere receipt and possession of money does not by itself

constitute gross income.          See, e.g., Liddy v. Commissioner, T.C.

Memo. 1985-107, affd. 808 F.2d 312 (4th Cir. 1986).            Gross income,

as used in section 61(a), means the accrual of some gain, profit,

or benefit to the taxpayer.           In this regard, the Supreme Court

explained    that    a   "gain   `constitutes   taxable   income    when    its

recipient has such control over it that, as a practical matter, he

derives readily realizable economic value from it.'"                James v.

United States, 366 U.S. 213, 219 (1961)(quoting Rutkin v. United

States, 343 U.S. 130, 137 (1952)). In determining what constitutes

gross income, mere dominion and control over money and property, as

may be exercised by a debtor or trustee, is not necessarily

decisive.     Rather, all relevant facts and circumstances must be

considered. Liddy v. Commissioner, supra. A taxpayer has dominion

and control over cash when he or she has the freedom to use it at

will, even though that freedom may be assailable by persons with

better title.       Rutkin v. United States, supra.       For instance, the

use of money for personal purposes is an indication of dominion and

control.     Woods v. Commissioner, T.C. Memo. 1989-611, affd. per
                               - 11 -


curiam without published opinion 929 F.2d 702 (6th Cir. 1991).

Furthermore, amounts received as to which a taxpayer is acting as

an agent or conduit are not required to be reported as income.

Goodwin v. Commissioner, 73 T.C. 215, 230 (1979); see also Liddy v.

Commissioner, supra.    As we stated in Diamond v. Commissioner, 56

T.C. 530, 541 (1971), affd. 492 F.2d 286 (7th Cir. 1974):        "We

accept as sound law the rule that a taxpayer need not treat as

income moneys which he did not receive under a claim of right,

which were not his to keep, and which he was required to transmit

to someone else as a mere conduit."

     Petitioners have the burden of proof on this issue, Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933), and resolution of

the issue depends upon our believing petitioner's explanation that

he was acting as an agent for Mr. Macias--in essence, holding Mr.

Macias' money for safekeeping--and that no portion thereof was used

for petitioners' personal benefit.      Accordingly, we must distill

truth from falsehood.   See Diaz v. Commissioner, 58 T.C. 560, 564

(1972).

     Although the facts herein may seem improbable, we believe them

to be true.   As acknowledged by respondent, this case hinges on the

credibility of the witnesses. We found Messrs. Morera, Chavez, and

petitioner to be credible witnesses.       We especially found Mr.

Chavez to be trustworthy, along with the notations in his diary.

Mr. Macias' affidavit and Agent Swaffort's testimony confirm the
                                    - 12 -


amazing "story" that unfolded at trial.            We believe that $106,000

of the total $201,034 found in petitioner's cooler indeed belonged

to Mr. Macias.     By storing the money with petitioner, Mr. Macias

followed a pattern:         First he stored the money with Mr. Morera,

then with Mr. Chavez, and finally with petitioner.               Consequently,

petitioner acted as a conduit or agent for Mr. Macias.

     We agree with respondent that a taxpayer's forfeiture of

seized currency does not prevent it from being included in his

gross income.      See, e.g., Gambina v. Commissioner, 91 T.C. 826

(1988).    However, we disagree with respondent's contention that in

this case substantive evidence exists proving that the $106,000

seized    and   forfeited    was   linked    to   petitioner's   drug-related

activities.      During cross-examination, petitioner asserted his

Fifth Amendment rights and refused to answer questions posed to him

by   respondent's      counsel      concerning      petitioner's      possible

involvement in selling drugs.          Although we are mindful that an

individual's failure to answer questions may give rise to an

inference that if he had answered, the answers would have harmed

him, Baxter v. Palmigiano, 425 U.S. 308, 316-319 (1976), we do not

believe this inference directly links the $106,000 at issue to an

illegal activity involving petitioner.

     Additionally, we disagree with respondent's argument that

because petitioner was a claimant in the State and Federal actions,

the $106,000 at issue must have belonged to him.           "A claimant need
                                    - 13 -


not own the property in order to have standing to contest its

forfeiture; a lesser property interest, such as a possessory

interest, is sufficient for standing." United States v. $38,000.00

in U.S. Currency, 816 F.2d 1538, 1544 (11th Cir. 1987).

     Considering     all   the    facts   and   circumstances       herein,   we

conclude that petitioners are not required to include in gross

income   the    $106,000   of    forfeited    funds.   Thus,   we    hold   that

petitioners are not liable for the 1991 deficiency.

     Based upon our holding above that petitioners are not liable

for the 1991 deficiency, we need not decide whether Mrs. Arcia was

an innocent spouse in that year.             Moreover, as a result of our

holding that petitioners are not liable for the 1991 deficiency, no

part of the section 6651(a)(1) addition to tax is attributable to

the deficiency, and consequently we have no jurisdiction over this

addition.      See sec. 6665(b); Meyer v. Commissioner, 97 T.C. 555,

562 (1991). Finally, based upon our holding that no understatement

exists, we need not address whether petitioners are liable for the

section 6662(a) penalty.

     To reflect the foregoing,



                                                       Decisions will be

                                                 entered for petitioners.
