                          T.C. Memo. 1999-375



                        UNITED STATES TAX COURT



 PAUL I. YOSHIHARA, LAURA L. YOSHIHARA, AND KRISTA A. YOSHIHARA,
   Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 19171-97.                Filed November 12, 1999.



       Laura L. Yoshihara, pro se.

       Robert S. Scarbrough, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION

       PARR, Judge:   Respondent determined deficiencies in and

additions to petitioners' Federal income tax as follows:

                  Paul I. Yoshihara (Mr. Yoshihara)
                                       Additions to tax
Year        Deficiency      Sec. 6651(a)(1)          Sec. 6654
1992         $30,911            $7,728                $1,348
1993          17,912             4,478                   751
1994           6,452             1,613                   332
1995           6,802             1,701                   370
                                - 2 -



                 Laura L. Yoshihara (Mrs. Yoshihara)
                                       Additions to tax
Year        Deficiency      Sec. 6651(a)(1)          Sec. 6654
1992         $21,958            $5,490                $955
1993           9,551             2,388                  399
1994           3,235               809                  167
1995           3,492               873                  193

                         Krista A. Yoshihara
                                       Additions to tax
Year        Deficiency     Sec. 6651(a)(1)           Sec. 6654
1992         $48,493           $12,123                $2,112
1993          19,493             4,873                   818

       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, unless otherwise

indicated.

       After concessions,1 the issues for decision are:   (1)

Whether petitioners had unreported income from landscaping

services for the taxable years 1992, 1993, 1994, and 1995.       We

hold they did.    (2) Whether Mr. Yoshihara incurred self-

employment tax for the taxable years 1992, 1993, 1994, and 1995.


       1
      On brief, respondent states that the notice of deficiency
relating to 1992 and 1993 sent to Krista A. Yoshihara was only a
protective measure to avoid a whipsaw situation. Accordingly,
respondent concedes that there is no deficiency against Krista A.
Yoshihara for 1992 and 1993 if we sustain the deficiencies
against petitioners Paul I. Yoshihara and Laura L. Yoshihara.
Although the deficiency amounts for 1993 will be recalculated
under a Rule 155 computation to reflect our findings, this
decision does not place respondent in a whipsaw situation.
Therefore, the deficiency determined for Krista A. Yoshihara is
conceded. Consequently, the term "petitioners" in the remainder
of this opinion refers exclusively to Paul I. Yoshihara and Laura
L. Yoshihara.
                                - 3 -


We hold he did.    (3) Whether petitioners are liable for additions

to tax under section 6651(a) for failure to timely file their

Federal income tax returns for the taxable years 1992, 1993,

1994, and 1995.    We hold they are liable.   (4) Whether

petitioners are liable for additions to tax under section 6654

for failure to pay estimated tax for the taxable years 1992,

1993, 1994, and 1995.    We hold they are liable.

     We find the following facts based upon the pleadings of this

case and the deemed admissions contained in respondent's request

for admissions.2

                          FINDINGS OF FACT

     Petitioners resided in Everett, Washington, at the time the

petition was filed in this case.    The taxable years in issue are

1992, 1993, 1994, and 1995.

     For the taxable year 1991, petitioners filed a tax return

which reflected a Schedule C business named Yoshihara

Landscaping.   In each of the years in issue, petitioners

contracted to do business in the State of Washington in the name

of the following entities (or a combination of these entities):

Mountlake College (Mountlake); Yoshihara Landscaping

(Landscaping); and Green Acres Landscaping (Green Acres).   During



     2
      Rule 90(f) provides in relevant part: "Any matter admitted
under this Rule is conclusively established unless the Court on
motion permits withdrawal or modification of the admission."
                                - 4 -


the years in issue, petitioners received checks made payable to

Landscaping or Paul Yoshihara for landscaping services performed.

In 1992, 1993, 1994, and 1995, petitioners received income from

landscaping services totaling $175,258, $74,895, $25,995, and

$27,290, respectively.    During 1994 and 1995, petitioners

expended a total of $47,300 for food, housing, transportation,

clothing, medical expenses, and other personal items.

     Although petitioners received income from landscaping

services, petitioners did not file tax returns for 1992, 1993,

1994, and 1995.   In addition, petitioners have no documentation

substantiating any loans, nontaxable income, gifts, or

inheritances that they may have received during 1992, 1993, 1994,

and 1995.

     Petitioners assigned all income they earned from 1992

through 1995 to Mountlake.    Mountlake is a nonprofit corporation

formed in the State of Washington in 1965.    The only individuals

attending Mountlake between 1992 and 1995 were petitioners or

their family members.    In addition, petitioners were the only

individuals who held signature authority over accounts used by
                                - 5 -


Mountlake between 1992 and 1995.3     Tax exempt status has never

been obtained for Mountlake under section 501(c)(3).4

                               OPINION

Issue 1.    Unreported Income From Landscaping Services

     The Commissioner's determinations of fact are presumptively

correct, and the taxpayer bears the burden of proving by a

preponderance of evidence that those determinations are

erroneous.    See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933); United States v. Molitor, 337 F.2d 917, 922 (9th Cir.

1964).

     A.    Reconstruction of Income

     Respondent used indirect methods of reconstructing

petitioners' income for the years in issue.     Deficiencies arising

from unreported income as determined by indirect methods of proof

are entitled to a presumption of correctness "once some

substantive evidence is introduced demonstrating that the

taxpayer received unreported income."     United States v.

Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983).     Petitioners

admit that they received income from the provision of landscaping

services.    The burden is therefore on petitioners to show any


     3
      In 1992, 1993, 1994, and 1995, petitioners were also the
only individuals to hold signature authority over accounts used
by Green Acres and Landscaping.
     4
      We also note that tax-exempt status has never been obtained
for Green Acres or Landscaping.
                                 - 6 -


claimed inaccuracy in respondent's calculations.    See id. at

1294; Webb v. Commissioner, 394 F.2d 366, 372 (5th Cir. 1968),

affg. T.C. Memo. 1966-81; DiLeo v. Commissioner, 96 T.C. 858, 871

(1991), affd. 959 F.2d 16 (2d Cir. 1992); Harper v. Commissioner,

54 T.C. 1121, 1129 (1970).    The reconstruction of income need

only be reasonable in light of all surrounding facts and

circumstances.   See Giddio v. Commissioner, 54 T.C. 1530, 1533

(1970); Schroeder v. Commissioner, 40 T.C. 30, 33 (1963).    For

1992 and 1993, respondent determined petitioners' income using

the bank deposits method.     In 1994 and 1995, respondent

determined petitioners' income using the cash expenditures

method.

     1.   Bank Deposits Analysis

     In general, the bank deposits method reconstructs a

taxpayer's income by analyzing deposits and withdrawals from a

taxpayer's bank account.     See Dodge v. Commissioner, 96 T.C. 172,

181 (1991), affd. in part and revd. in part on another ground and

remanded 981 F.2d 350 (8th Cir. 1992).    Bank deposits are prima

facie evidence of income, and the Commissioner need not show a

likely source of that income.    See Tokarski v. Commissioner, 87

T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C. 651,

656-657 (1975), affd. 566 F.2d 2 (6th Cir. 1977).    When the bank

deposits method is employed, however, the Commissioner must take

into account any nontaxable source or deductible expense of which
                               - 7 -


he has knowledge.   See DiLeo v. Commissioner, supra at 868.

However, the Commissioner is not required to show that all

deposits constitute taxable income.    See Estate of Mason v.

Commissioner, supra at 657; Gemma v. Commissioner, 46 T.C. 821,

833 (1966).   Consequently, in analyzing a bank deposits case,

deposits are considered income when there is no evidence that

they represent anything other than income.   See Price v. United

States, 335 F.2d 671, 677 (5th Cir. 1964); United States v.

Doyle, 234 F.2d 788, 793 (7th Cir. 1956).    The burden of showing

duplications is on the taxpayer.   See Zarnow v. Commissioner, 48

T.C. 213, 216 (1967).

     On the basis of the deemed admissions, respondent determined

petitioners received $175,258 and $74,895 in income from

landscaping services during 1992 and 1993, respectively.   At

trial or on brief petitioners did not question respondent's

determinations of the amount of income earned by them in 1992 and

1993.   In addition, petitioners are deemed to have admitted that

they have no documentation substantiating any loans, nontaxable

income, gifts, or inheritances they may have received during 1992

or 1993.   Accordingly, petitioners did not meet their burden of

proving that respondent's determinations of petitioners' income

for 1992 and 1993 was erroneous.

     In 1992, the income deemed admitted is $220 greater than the

income amount in the notices of deficiency sent to petitioners.
                                 - 8 -


Because respondent has not asserted an increased deficiency in

1992 to reflect the full amount of income deemed admitted, we

disregard the additional $220.

     The notices of deficiency for 1993 determined income from

landscaping services totaling $96,228.    Petitioners are deemed to

have admitted that they received $74,895 in income from such

services in 1993.    Respondent presented no evidence to

substantiate the greater amount determined in the notices of

deficiency.   Accordingly, we hold that petitioners received

income of $74,895 in 1993.

     2.   Cash Expenditures Analysis

     The cash expenditures method is a variant of the net worth

method that is designed to reconstruct the income of a taxpayer

who consumes his income during the year and does not invest it.

See Petzoldt v. Commissioner, 92 T.C. 661, 694 (1989).     This

method is well accepted by the courts.    See United States v.

Johnson, 319 U.S. 503, 517-518 (1943); DeVenney v. Commissioner,

85 T.C. 927, 930 (1985).    It is based on the assumption that the

amount by which a taxpayer's expenditures during a taxable year

exceed his reported income has taxable origins, unless the

taxpayer can show that the expenditures were made from some

nontaxable source.    See DeVenney v. Commissioner, supra at 930.

Income is reconstructed pursuant to the cash expenditures method

as follows:
                               - 9 -


     after taking into account the amount of resources the
     taxpayer had on hand at the beginning of a period, the
     income received by the taxpayer for the same period is
     compared with his expenditures that are not
     attributable to his resources on hand or non-taxable
     receipts during the period. A substantial excess of
     expenditures over the combination of reported income,
     non-taxable receipts, and cash on hand may establish
     the existence of unreported income. [United States v.
     Citron, 783 F.2d 307, 310 (2d Cir. 1986); fn. ref.
     omitted.]

     Formal opening net worth statements are not required

provided the evidence shows "'the extent of any contribution

which beginning resources or a diminution of resources over time

could have made to expenditures.'"     Petzoldt v. Commissioner,

supra at 695 (quoting Taglianetti v. United States, 398 F.2d 558,

565 (1st Cir. 1968)).   To carry their burden of proof,

petitioners must show that the expenditures in question were made

from some nontaxable source of funds, such as loans, gifts, or

assets on hand at the beginning of the period.    See DeVenney v.

Commissioner, supra at 931.   Alternatively, petitioners may show

that the expenditures were allowable business expenses, in which

case they would offset the income presumed to have been received

by them.   See Curry v. Commissioner, T.C. Memo. 1991-102.

     At trial or on brief petitioners did not question

respondent's determinations, based on the cash expenditures

method, of the amount of income earned by them in 1994 and 1995.

In addition, petitioners are deemed to have admitted that they
                               - 10 -


have no documentation substantiating the receipt of any loans,

nontaxable income, gifts, or inheritances during 1994 or 1995.

     Respondent determined that petitioners expended a total of

$47,300 for food, housing, transportation, clothing, medical

expenses, and other personal items in 1994 and 1995.   However,

respondent conceded on brief that petitioners used only $25,995

and $27,290 of income to make those expenditures in 1994 and

1995, respectively.   In the notices of deficiency, respondent

states that income must be divided equally between petitioners

because they reside in Washington, a community property State.

We agree with this determination.   However, for 1994 and 1995,

the notice of deficiency sent to Mr. Yoshihara assigns 100

percent of petitioners' income to him, and the notice of

deficiency sent to Mrs. Yoshihara assigns 100 percent of

petitioners' income to her.    This results in a double counting.

On the basis of respondent's concession, we find that income

totaling $25,995 in 1994 and $27,290 in 1995 should be divided

equally between petitioners.   This finding should be reflected in

the Rule 155 calculation.

     B.   Petitioners' Legal Contentions

     In their amended petition, petitioners asserted that they

have "taken vows of poverty and are members and/or overseers of

the religious societies" where "Any and all funds and donations

are given to the general membership to run the religious
                              - 11 -


societies".   Further, on brief, petitioners assert that "Churches

that are not [section] 501C3 are not under IRS regulation code".

Respondent determined that petitioners are liable for tax on

their income from landscaping services.

     Petitioners earned income from landscaping services during

the years in issue.   Petitioners assigned the income they earned

to Mountlake.   Respondent determined that the income derived from

landscaping services must be included in petitioners' income

pursuant to section 61.   Section 61(a) provides that, except as

otherwise provided by law, gross income includes income from

whatever source derived, including compensation for services.

See sec. 61(a)(1).

     It is fundamental to our system of taxation that income must

be taxed to the one who earns it.   See Commissioner v.

Culbertson, 337 U.S. 733, 739-740 (1949).   This has been

described as "the first principle of taxation".   Id. at 739.    The

question of who should be taxed depends on which person or entity

in fact controls the earning of the income rather than who

ultimately receives the income.   See Commissioner v. Sunnen, 333

U.S. 591, 604-606 (1948); Corliss v. Bowers, 281 U.S. 376, 378

(1930); Vercio v. Commissioner, 73 T.C. 1246, 1253 (1980); see

also Ronan State Bank v. Commissioner, 62 T.C. 27, 35 (1974);

American Sav. Bank v. Commissioner, 56 T.C. 828 (1971); Nat

Harrison Associates, Inc. v. Commissioner, 42 T.C. 601 (1964).      A
                               - 12 -


taxpayer realizes income if he controls the disposition of that

which he could receive himself but diverts to another as a means

of procuring the satisfaction of his goals.   The receipt of

income by the other party under such circumstances is merely the

fruition of the taxpayer's economic gain.   See Commissioner v.

Sunnen, supra at 605-606; Helvering v. Horst, 311 U.S. 112, 116-

117 (1940).

     In this case, petitioners attempted to assert that they had

taken "vows of poverty" assigning "Any and all funds" to a

religious institution(s).5   Petitioners offered no evidence to

substantiate their claim.    When secular services are rendered by

individuals, income received by them in an individual capacity

and not on behalf of a separate and distinct principal is taxable

to the individuals.   See Pollard v. Commissioner, 786 F.2d 1063

(11th Cir. 1986), affg. T.C. Memo. 1984-536; McGahen v.

Commissioner, 76 T.C. 468 (1981), affd. without published opinion

720 F.2d 664 (3d Cir. 1983); Kelley v. Commissioner, 62 T.C. 131

(1974).   Accordingly, we find the income earned by petitioners

for landscaping services is taxable to them individually.


     5
      We see no need to address whether Mountlake is a church or
other religious institution. Petitioners did not assert at trial
or on brief that the income assigned to Mountlake qualified for
the charitable contribution deduction under sec. 170. In
addition, since Mountlake is not a sec. 501(c)(3) organization,
there is no presumption that petitioners' contributions to the
organization are deductible from their taxable income. See sec.
170(c) (defining deductible charitable contribution).
                               - 13 -


     Where taxpayers have trade or business income, they

ordinarily have business and other deductions.    Deductions are

strictly a matter of legislative grace, however, and petitioners

bear the burden of providing evidence to substantiate the claimed

deductions.   See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992).   A taxpayer must keep sufficient records to

establish their amount.   See sec. 6001.   Except in the case of

expenses subject to section 274, if the taxpayer's records are

inadequate or there are no records, we may still allow a

deduction based on a reasonable estimate.    See Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).    However, the

taxpayer must present evidence sufficient to provide some

rational basis upon which estimates of deductible expenses may be

made.    See Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

In this case, petitioners provided no evidence at trial or

argument on brief that they are entitled to deductions from their

income.6   Accordingly, we cannot estimate petitioners' deductions

under the Cohan rule.




     6
      At trial, this Court repeatedly asked petitioners whether
they were entitled to various deductions from their income.
Petitioners refused to offer any evidence substantiating
deductions. This Court also held the record open for 10 days
after the trial to allow petitioners to substantiate any
deductions. Petitioners presented no posttrial evidence
substantiating the entitlement to deductions.
                                  - 14 -


Issue 2.    Self-Employment Tax

     In the notice of deficiency issued to petitioner Paul I.

Yoshihara, respondent determined that he was liable for self-

employment tax on the unreported income from landscaping

services.    Section 1401 imposes a tax on the self-employment

income of every individual.    An individual's self-employment

income depends on his "net earnings from self-employment".    Sec.

1402(b).    In relevant part, the term "net earnings from self-

employment" means the gross income derived by an individual from

any trade or business carried on by such individual less

allowable deductions attributable to such trade or business.      See

sec. 1402(a).    Under section 1402(a)(5), where the income from a

trade or business is community income, as in this case, all of

the gross income and deductions attributable to such trade or

business shall be treated as the gross income and deductions of

the husband, unless the wife exercises substantially all of the

management and control of the trade or business, in which case

all such gross income and deductions shall be treated as hers.

Accordingly, under section 1401, the spouse deemed to have

management and control of the business activity is subject to

self-employment tax, and the tax is computed on the total gross

income less the total deductions of the business, notwithstanding

the attribution of one-half of the income to the other spouse for

income tax purposes.
                                - 15 -


     On brief, respondent contends that petitioners are liable

for self-employment tax.     Respondent's brief is contrary to the

notices of deficiency sent to petitioners.     In the notices of

deficiency, only Mr. Yoshihara is determined to have liability

for self-employment tax under section 1401.     On the basis of the

record and sections 1401 and 1402(a)(5), we find that all the

self-employment tax liability for 1992, 1993, 1994, and 1995 is

attributable to the business managed and controlled by Mr.

Yoshihara, and that he is liable for self-employment tax during

the years in issue.

Issue 3.    Failure To Timely File Tax Return or To Pay Tax

     Petitioners did not file tax returns for any of the years in

issue.     Respondent determined that the addition to tax for

failure to timely file a tax return was applicable for each of

the years in issue.     An income tax return must be filed by all

individuals receiving gross income in excess of certain minimum

amounts.     See sec. 6012; sec. 1.6012-1(a), Income Tax Regs.   For

1992, 1993, 1994, and 1995, petitioners' gross income, as defined

in section 61(a), was well in excess of the minimum amounts

specified in section 6012.     Therefore, petitioners were required

to file Federal income tax returns for 1992, 1993, 1994, and

1995.    See secs. 6011, 6012(a)(1)(A), 7701(a)(1); sec. 1.6012-

1(a), Income Tax Regs.
                               - 16 -


     Section 6651(a) imposes an addition to tax for failure to

timely file a return, unless the taxpayer establishes:    (1) The

failure did not result from willful neglect; and (2) the failure

was due to reasonable cause.    See United States v. Boyle, 469

U.S. 241, 245-246 (1985).    Petitioners bear the burden of proof

on this issue.    See Rule 142(a); Baldwin v. Commissioner, 84 T.C.

859, 870 (1985).    Petitioners failed to prove reasonable cause

for their failure to file.    Accordingly, the addition to tax for

failure to file returns under section 6651(a) is sustained.

Issue 4.   Failure To Pay Estimated Income Tax

     Respondent determined that petitioners were liable for the

addition to tax under section 6654(a) for failure to pay

estimated tax for 1992, 1993, 1994, and 1995.    Where payments of

tax, either through withholding or by making estimated quarterly

tax payments during the course of the year, do not equal the

percentage of total liability required under the statute,

imposition of the addition to tax under section 6654(a) is

automatic, unless petitioners show that one of the statutory

exceptions applies.    See Niedringhaus v. Commissioner, 99 T.C.

202, 222 (1992); Habersham-Bey v. Commissioner, 78 T.C. 304, 319-

320 (1982); Grosshandler v. Commissioner, 75 T.C. 1, 20-21

(1980).    Petitioners have provided no evidence at trial or

argument on brief that any of these exceptions apply.    We

therefore sustain respondent on this issue.
                             - 17 -


     All other contentions in this case that have not been

addressed are irrelevant, moot, or meritless.

     To reflect the foregoing,

                                        Decision will be entered

                                   under Rule 155.
