                        T.C. Memo. 2000-152



                      UNITED STATES TAX COURT



                    MIKE AMINI, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6977-98.                        Filed May 5, 2000.



     John R. Riley, for petitioner.

     David W. Sorensen, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies in

petitioner's Federal income taxes, additions to tax, and penalties

as follows:
                                         - 2 -



                                        Additions to Tax and Penalties
Year    Deficiency     Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B) Sec. 6653(b)(1) Sec. 6663
1986      $25,086           $18,815               *                ---          ---
1987       20,122            15,092               *                ---          ---
1988       26,970             ---                ---             $20,228        ---
1989       44,426             ---                ---               ---        $33,320
1990       62,817             ---                ---               ---         47,113
1991       38,498             ---                ---               ---         28,874


                 *   Amounts to be calculated at 50 percent of interest
                     due on portion of underpayments attributable to fraud.


            Unless otherwise indicated, 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.

            The issues for decision involve the amount of embezzled

       funds that should be charged as gross income to petitioner and

       whether the fraud additions to tax and fraud-related penalties

       apply.


                                   FINDINGS OF FACT

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

            When the petition was filed, petitioner resided in South

       Jordan, Utah.   From 1984 until terminated in 1991, petitioner was

       employed as a pharmacist at the outpatient pharmacy (OPP) at LDS

       Hospital in Salt Lake City, Utah.

            The procedures for the “closing” each day of the cash

       register by the OPP pharmacists consisted of the following steps:
                             - 3 -

     (1) The cash register was to be cleared for the day by
     printing from the register a report of total sales for
     the OPP;

     (2) The cash and the checks were to be removed from the
     cash register drawer;

     (3) The cash was to be counted;

     (4) An adding machine tape was to be printed reflecting
     the total amount of the checks;

     (5) The total amount of the cash and the checks was to
     be calculated;

     (6) The amount of the total sales was to be entered
     into a written log book maintained by the OPP;

     (7) The   report of total sales, the cash, the checks,
     and the   adding machine tape were to be placed in a
     deposit   bag that was to be secured overnight in a safe
     located   in the OPP; and

     (8) $200 in cash was to be left in the OPP cash
     register drawer for the next day's business.


The next morning, an OPP pharmacist would retrieve the deposit

bag from the OPP safe and would arrange for its delivery to the

hospital's main cashier where the cash and the checks in the

deposit bag were to be accounted for by the hospital.

     On days when he worked at the OPP, petitioner consistently

volunteered to perform the cash register closing procedures

described above.    From 1986 through 1991, however, petitioner

embezzled cash from the OPP by modifying the above cash register

closing procedures as follows:


     (1) Before closing the OPP for the day, petitioner would
     take from the OPP cash register drawer either cash or a
                            - 4 -

     check which he would cash at the hospital's main cashier;

     (2) Petitioner would keep and use for his own purposes the
     cash obtained per (1) above;

     (3) Petitioner would remove from the cash register
     drawer the remaining cash and checks reflecting the
     balance of the OPP sales for the day;

     (4) Petitioner would clear the cash register for the day
     by printing from the register a report of total sales
     for the OPP, and petitioner would then discard this
     report in the trash;

     (5) Petitioner would print an adding machine tape
     reflecting the sum of the remaining checks in the
     register;

     (6) Petitioner would calculate the total amount of the
     remaining cash and checks in the register;

     (7) Petitioner would enter a fabricated total sales
     figure for the day into the written log book reflecting
     the total amount of the remaining cash and checks;

     (8) Petitioner would print an adding machine tape
     reflecting the fabricated total OPP sales figure for the
     day;

     (9) Petitioner would place the remaining cash and checks
     and the adding machine tapes reflecting the checks and
     the fabricated total sales in a deposit bag that was
     secured overnight in the OPP safe; and

     (10) Petitioner would leave $200 in cash in the OPP cash
     register drawer for the next day's business.


     From 1986 through 1991, of the 1,288 days petitioner closed

the OPP cash register, 1,101 of the original daily sales reports

that were to be printed by the cash register are missing.

     In August of 1991, another pharmacist became suspicious of

petitioner's conduct in closing the OPP cash register and
                                - 5 -

informed hospital administrators of possible irregularities.

Internal auditors for the hospital commenced an investigation and

uncovered petitioner's embezzlement.    Confronted with the

evidence from the investigation, petitioner admitted embezzling

from the OPP $25,000 to $30,000.

       Unknown to petitioner, through an internal control

mechanism, the OPP cash register maintained an internal running

or cumulative sales figure that did not reset at the end of each

day.    By subtracting from these correct running total sales

figures maintained by the cash register the daily total sales

figures written in the log book and an average figure for daily

returns and void transactions, internal auditors from the

hospital were able to calculate the total amount petitioner

embezzled each year from the OPP.1

       The schedule below reflects, for each year in issue, the

total amount petitioner embezzled as calculated by the hospital’s




1
   We note that the hospital's internal auditors were able to
calculate only a close estimate of the amount of actual funds
petitioner embezzled. Because petitioner discarded many of the
actual daily total sales reports printed by the cash register,
internal auditors had no way of reconstructing for each day the
precise amounts of refunds or void transactions. The internal
auditors, however, were able to estimate the refunds and void
transactions for each day by averaging for each day the amounts
of refunds and void transactions for the days for which the
actual cash register daily sales reports were available.
                               - 6 -

internal auditors, and the total amount of unexplained cash

deposits made into bank accounts owned by petitioner and his

wife:


            Hospital's Calculation           Unexplained Cash
                of Total Amount           Deposits to Petitioner
 Year       Embezzled by Petitioner    and His Wife's Bank Accounts
 1986              $ 42,105                      $ 63,446
 1987                72,727                        56,681
 1988               105,968                        86,383
 1989               157,396                       138,294
 1990               228,890                       203,133
 1991               193,187                       120,846
        Total      $800,273                      $668,783


     For the years in issue, petitioner and his wife timely filed

joint Federal income tax returns reporting their wages, interest,

and dividend income.   For the years in issue, however, petitioner

and his wife did not report on their joint Federal income tax

returns any of the funds petitioner embezzled from the OPP.

     In the notice of deficiency for the years in issue,

utilizing for each year the total of unexplained cash deposits

into petitioner and his wife’s bank accounts, respondent

determined that petitioner and his wife received a cumulative

total of $668,783 in unreported embezzlement income from the OPP.

Respondent also determined that petitioner and his wife were both

liable for the fraud additions to tax and penalties and that

fraud was attributable to the entire resulting underreporting of

income.   Petitioner's wife has filed a separate petition in this

Court (docket No. 6978-98) which is awaiting our decision herein.
                               - 7 -

     On October 27, 1993, after a criminal investigation by the

U.S. Attorney's Office and by respondent (and after seizure of

bank accounts, investment holdings, and other assets owned by

petitioner and his wife totaling $511,788), petitioner was

indicted and pleaded guilty to theft and to filing a false or

fraudulent Federal income tax return for 1990.   Under the plea

agreement, petitioner agreed (for purposes of sentencing only and

without prejudice to claim a different amount in a civil lawsuit

with LDS Hospital) to an order of restitution in the amount of

$668,783 relating to the above embezzlement.


                              OPINION

     Gross income under section 61(a) includes amounts received

from illegal activity such as embezzlement.    See James v. United

States, 366 U.S. 213, 219 (1961); United States v. Lippincott,

579 F.2d 551, 552 (10th Cir. 1978); Romer v. Commissioner, T.C.

Memo. 1996-287.

     Where taxpayers fail to keep accurate records, respondent

has considerable discretion in how the taxpayers' income is to be

calculated.   See Erickson v. Commissioner, 937 F.2d 1548, 1553

(10th Cir. 1991), affg. T.C. Memo. 1989-552; Webb v.

Commissioner, 394 F.2d 366, 372 (5th Cir. 1968) (“when the

taxpayer has defaulted in his task of supplying adequate records,

he is not in a position to be hypercritical of the Commissioner's

labor”), affg. T.C. Memo. 1966-81; Factor v. Commissioner,
                               - 8 -

281 F.2d 100, 108 (9th Cir. 1960) (“all that the Tax Court can do

is to 'make as close an approximation as it can, bearing heavily

if it chooses upon the taxpayer whose inexactitude is of his own

making'”, quoting Cohan v. Commissioner, 39 F.2d 540, 543-544

(2d Cir. 1930)), affg. T.C. Memo. 1958-94.   Respondent's

reconstruction of income need only be reasonable in light of all

the surrounding circumstances, and bank deposits are generally

treated as prima facie evidence of taxable income.   See, e.g.,

Parks v. Commissioner, 94 T.C. 654, 658 (1990); Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986); Schroeder v. Commissioner,

40 T.C. 30, 33 (1963).

     Generally, taxpayers bear the burden of proving that

determinations made by respondent are erroneous.   See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Respondent contends that for the years in issue the cash

deposits into the bank accounts owned by petitioner and his wife

(after accounting for wages, loans, interfund transfers, and

other nontaxable funds) constitute funds petitioner embezzled

from the OPP and must be included in petitioner and his wife's

gross income.

     Petitioner argues that the cash deposits in question relate

to family lands seized in the 1940's by the Government of Iran

and, as an inheritance to petitioner, should be excluded from

income under section 102.   Also, petitioner alleges that each
                               - 9 -

month beginning in 1986 cash was brought to his home from Iran by

foreign students or politicians.   Petitioner contends that

respondent has not established a sufficient link between

petitioner and the embezzled funds and that respondent's

calculations of income are arbitrary and capricious.   We

disagree.

     Petitioner has provided no credible evidence that the

unexplained deposits into petitioner and his wife's personal bank

accounts constitute anything other than proceeds of petitioner's

embezzlement activity.   We reject as a total fabrication

petitioner's allegation that the cash came from Iran as an

inheritance.

     The evidence in this case establishes, among other things,

petitioner's guilty plea acknowledging a $668,783 restitution

obligation to LDS Hospital, LDS Hospital's internal investigation

showing that petitioner embezzled approximately $800,273, and

detailed bank account statements evidencing significant and

regular unexplained cash deposits into petitioner and his wife's

bank accounts.

     In light of the ample evidence linking petitioner with the

embezzled funds and in the absence of the actual cash register

daily sales reports that would establish the precise amounts

embezzled by petitioner, respondent's determination is sustained
                              - 10 -

that, for the years 1986 through 1991, petitioner omitted a

cumulative total of $668,783 in embezzlement income.      We sustain

respondent’s determination of petitioner’s income for each year.

     With regard to the fraud additions to tax and fraud-related

penalties, respondent has the burden of proving fraud by clear

and convincing evidence.   See sec. 7454(a); Rule 142(b); Bagby v.

Commissioner, 102 T.C. 596, 607 (1994).     Indicia of petitioner's

fraud in this case include understatements of income, illegal

activity, inadequate books and records, dealing in cash, and

implausible or inconsistent explanations.      See, e.g., Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601; Clayton v. Commissioner, 102 T.C. 632, 647

(1994).

     The evidence clearly and convincingly establishes that

petitioner realized significant income from embezzlement and that

he intentionally failed to report such income on his and his

wife's joint Federal income tax returns.       For each year in issue,

petitioner is liable for the fraud additions to tax and fraud-

related penalties as determined by respondent.

     To reflect the foregoing,

                                      Decision will be entered for

                                 respondent.
