                        T.C. Memo. 1998-113



                      UNITED STATES TAX COURT



               ROLF E. POLENTARUTTI, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17117-95.                     Filed March 19, 1998.



     Rolf Polentarutti, pro se.

     James F. Kearney, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined that petitioner had a

deficiency in income tax for 1989 of $78,123, and was liable for

an addition to tax of $3,906 under section 6651(a)(1) for failure

to file timely and an accuracy-related penalty of $15,625 under

section 6662(a) for negligence.
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      Respondent determined that petitioner received $258,542 in

unreported income in 1989 but now concedes that the amount is

$218,542.    Petitioner contends that $200,000 of this amount was

nontaxable.    After concessions, we must decide:

      1.    Whether $200,000 petitioner received in wire transfers

from investors and used for personal purposes in 1989 is taxable

as income to him.    We hold that it is.

      2.    Whether petitioner is liable for the addition to tax

under section 6651(a)(1) for failure to timely file his 1989

income tax return.    We hold that he is.

      3.    Whether petitioner is liable for the accuracy-related

penalty under section 6662(a) for negligence.    We hold that he

is.

      Section references are to the Internal Revenue Code.     Rule

references are to the Tax Court Rules of Practice and Procedure.

                        I.   FINDINGS OF FACT

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

A.    Petitioner

      Petitioner lived in Merritt Island, Florida, when he filed

his petition in this case.

B.    Petitioner's Business Activities

      In 1989, petitioner developed real estate through various

entities, including partnerships, corporations, joint ventures,

and sole proprietorships.    World Golf & Tennis, Ranches of

Daytona Beach, and Wildbahn and Clam were three of his projects
                                 - 3 -

in Florida in 1989.    Petitioner received, held, and invested

money from foreign investors to finance his real estate

development activity.    Investors wired money to petitioner's bank

accounts.   He controlled these funds.

     At times during 1989, petitioner received money from his

foreign investors before he needed it for the real estate

developments.    On several occasions, petitioner used money from

these funds for his personal investments, such as real estate

projects other than those in which the foreign investors were

participating.   For example, petitioner used $40,000 from World

Golf & Tennis for a personal investment in a salmon fishery in

Iceland around November 1989.1

     During 1989, petitioner borrowed $40,000 from Gilbert Amman.

He repaid those funds in 1989 from the proceeds of the sale of

property at 2171 Rockledge Drive (Rockledge Drive property),

Rockledge, Florida.2

     During 1989, petitioner received $934,183 and disbursed

$1,245,625 that did not relate to his investor-funded projects.

He received no gifts or inheritances in 1989.




     1
       Petitioner concedes that the source of the funds for his
Iceland investment was taxable.
     2
       Respondent concedes that petitioner is not taxable on this
$40,000.
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     Petitioner received an extension of time to October 15,

1990, to file his 1989 Federal income tax return.     He filed that

return on October 29, 1990.

     One of petitioner's European investors was Juerg Aeberhard

(Aeberhard).   He lent petitioner $200,000 in 1990.   Petitioner

gave Aeberhard a note for $200,000 secured by a mortgage on the

Rockledge Drive property.   Petitioner had not repaid any of the

$200,000 to Aeberhard at the time of trial.

C.   Respondent's Audit and Determination

     Revenue Agent Carmen Elwood (Elwood) audited petitioner's

1989 income tax return.   Elwood examined petitioner's financial

records for 1989 and did not find any record that petitioner

received a $200,000 loan in 1989.    Petitioner told Elwood that he

received a $200,000 loan from Aeberhard in 1989 that was secured

by a mortgage on petitioner's home.    Elwood searched the

courthouse records but did not find a mortgage recorded on

petitioner's home.

     On March 1, 1993, Elwood sent a letter written in German to

some of petitioner's investors, including Aeberhard, to ask how

they paid petitioner for his investment services and whether they

had authorized petitioner to use the investment money for

personal purposes.   The letter had several grammatical mistakes.

Holger Markmann (Markmann), one of petitioner's investors,

answered the letter in March 1993.
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     Petitioner did not keep any records of his real estate

development business in 1989.    Petitioner reconstructed his

income, personal and business expenses, and nontaxable sources of

funds from his bank books during respondent's audit.

     Elwood used the sources and applications method to

reconstruct petitioner's income for 1989.      She calculated the

following:

     Applications (Disbursements)                 $1,245,625
     Sources                                         934,183
     Excess disbursements                           $311,442
     Amount reported                                  52,900
     Adjustment to income                           $258,542

                           II.    OPINION

A.   Whether Petitioner Is Taxable on $200,000 He Received in
     Wire Transfers

     1.   Whether Aeberhard Lent $200,000 to Petitioner in 1989

     Petitioner does not dispute respondent's computations,

except he contends that he borrowed $200,000 from Aeberhard late

in 1989 and another $200,000 in 1990.       Petitioner contends that

the 1989 loan was a nontaxable source of funds.      Petitioner has

the burden of proving that respondent's determinations in the

notice of deficiency are erroneous.      Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

     We have found that Aeberhard lent $200,000 to petitioner in

1990, but petitioner has not proven that Aeberhard lent $200,000

to him late in 1989.   There is no evidence that Aeberhard made a

wire transfer to him, and there is no debt instrument or other
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documentary evidence of a loan from Aeberhard.     Petitioner

contends that he has no documentary evidence because his European

investors did not require more than a handshake for transactions

with him.    Petitioner's claim is inconsistent with other evidence

in the record.    Petitioner gave Aeberhard a promissory note for

the $200,000 loan in 1990 and secured it with a mortgage.       This

casts doubt on petitioner's claim that Aeberhard would have

required nothing more than a handshake for a loan in 1989.      We

find that Aeberhard did not lend $200,000 to petitioner in 1989.

     2.     Whether Petitioner's Investors Authorized Him To Use
            Their Funds for Personal Purposes

     Petitioner's investors made numerous deposits in his

accounts in 1989.     Petitioner stated that he borrowed surplus

money from investors' funds to invest in a "good deal" on several

occasions when he was short of cash.

     Petitioner contends that his foreign investors knew and did

not mind that he used some of their funds to invest for his own

purposes.    He contends that he could use those funds for personal

investments, in part because he was not paid for his work and had

overhead costs.     However, he concedes that he had no written

authority to do so.     He contends that he repaid those funds as

soon as the project for which they were intended needed them.

     We disagree.    Markmann stated that petitioner could use

"small amounts" to pay for office expenses.     We believe that
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petitioner's extensive use of funds to make personal investments

exceeded his authority.

     Petitioner offered into evidence a copy of a fax purportedly

from Aeberhard to petitioner dated 3 days before the trial in

this case.    We did not admit the fax into evidence because it was

hearsay, and it was not exchanged at least 15 days before the

first day of the trial session as required by our standing

pretrial order.   Materials not provided in compliance with our

standing pretrial order may be excluded from evidence.   Rules

104(c)(2), 132(b); Moretti v. Commissioner, 77 F.3d 637, 644 (2d

Cir. 1996).

     Even if we had admitted the Aeberhard fax, it would not have

convinced us that petitioner had authority to use $200,000 of the

investors' funds for personal purposes.   The fax states that it

responds to Elwood's letter sent about 4 years earlier, and that

Aeberhard gave petitioner permission to use his funds.

Aeberhard's fax says that petitioner was supposed to pay office

expenses and overhead as his contribution to the projects in

return for a percentage of the profits.   The fax also says that

petitioner told Aeberhard that he sometimes took funds from the

projects to use for personal purposes, but that most of the time

he had other funds available for this, and that Aeberhard did not

object if petitioner repaid the funds and the projects did not

suffer.   The fax does not show that Aeberhard knew and approved

of petitioner's use of $200,000 for his own investments.
                                 - 8 -

     Petitioner contends that a judge dismissed a civil lawsuit

by petitioner's investors against him and contends that this

shows that he did nothing wrong.    We disagree.   The record does

not show why the lawsuit against petitioner was dismissed.    We

draw no inference from his unsubstantiated statement that a suit

against him was dismissed.

     Petitioner contends that we can reasonably infer from the

fact that his investors generally did not respond to Elwood's

letter that he had authority to use their funds for personal

investments.   We disagree.   As petitioner noted, the investors

may have had several reasons for not answering Elwood's letters,

such as they did not want to help petitioner because they were

angry that they had lost substantial sums of money, or they did

not take the letter seriously because it contained grammatical

mistakes.   We do not believe that their silence shows that they

approved.

     Petitioner contends that the fact that he borrowed $200,000

in 1990 to repay money he received in 1989 to invest in World

Golf & Tennis but instead used for personal investments shows

that the funds he received in 1989 were a loan.    Petitioner's

argument misses the mark.     Even if petitioner used the funds he

borrowed in 1990 to replace the $200,000 he used for personal

purposes in 1989, he has not shown that those funds were a loan

to him in 1989.
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     3.   Conclusion

     During 1989, petitioner received $934,183 and disbursed

$1,245,625 that did not relate to his investor-funded projects.

Most of the difference is accounted for by the $200,000 of

investors' funds that he used for personal purposes.    Petitioner

has not shown that he had authority to use the investors' funds

for his personal investments or that he received loans that he

used for personal purposes.   See Commissioner v. Glenshaw Glass

Co., 348 U.S. 426, 431 (1955) (taxpayer is taxable on accessions

to wealth over which he or she has complete dominion).

Petitioner had income in 1989 to the extent that he did not have

an additional nontaxable source of funds for that year or that he

used investors' funds for personal purposes without authority.

Thus, we conclude that petitioner underreported his taxable

income by $218,542.

B.   Whether Petitioner is Liable for the Addition to Tax Under
     Section 6651(a)(1) for Failure To File Timely

     Section 6651(a)(1) imposes an addition to tax of up to 25

percent for failure to file timely Federal income tax returns

unless the taxpayer shows that such failure was due to reasonable

cause and not willful neglect.     United States v. Boyle, 469 U.S.

241, 245 (1985).   To prove "reasonable cause", a taxpayer must

show that he exercised ordinary business care and prudence and

was nevertheless unable to file the return within the prescribed
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time.     Crocker v. Commissioner, 92 T.C. 899, 913 (1989); sec.

301.6651-1(c)(1), Proced. & Admin. Regs.

        Petitioner offers no argument that he is not liable for the

addition to tax for failure to timely file his 1989 return.        We

treat this as a concession by petitioner.     Rothstein v.

Commissioner, 90 T.C. 488, 497 (1988); Reaves v. Commissioner, 31

T.C. 690, 722 (1958), affd. 295 F.2d 336 (5th Cir. 1961).       We

conclude that petitioner is liable for the addition to tax under

section 6651(a)(1) for failure to timely file his income tax

return for 1989.

C.      Whether Petitioner Is Liable for the Accuracy-Related
        Penalty Under Section 6662(a)

        Respondent determined that petitioner is liable for the

accuracy-related penalty for negligence for 1989 under section

6662(a).

        Taxpayers are liable for a penalty equal to 20 percent of

the part of the underpayment to which section 6662 applies.        Sec.

6662(a).     For purposes of section 6662(a), negligence includes

any failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code.     Sec. 6662(c).   The

accuracy-related penalty under section 6662(a) does not apply to

any part of an underpayment if the taxpayer shows that there was

reasonable cause for that part and that the taxpayer acted in

good faith.     Sec. 6664(c)(1).
                              - 11 -

     Petitioner made no argument that he is not liable for the

accuracy-related penalty.   We treat this as a concession by

petitioner.   Rothstein v. Commissioner, supra; Reaves v.

Commissioner, supra.   We conclude that petitioner is liable for

the accuracy-related penalty for 1989 under section 6662(a) for

negligence or intentional disregard of the rules or regulations

and that all of the deficiency is due to negligence.

     To reflect concessions and the foregoing,


                                         Decision will be entered

                                    under Rule 155.
