                        T.C. Memo. 2000-263



                      UNITED STATES TAX COURT



             MICHAEL AND KAZUKO YANG, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11158-99.                     Filed August 17, 2000.


     John E. Cicero II, for petitioners.

     Anne S. Daugharty and William A. McCarthy, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes and penalties as follows:

                                  Accuracy-Related
                                      Penalty
          Year       Deficiency     Sec. 6662(a)
          1995        $27,031        $5,406.20
          1996         68,194        13,638.80
                                 - 2 -

     The issues for decision are:    (1) Whether the amounts

deposited into petitioners’ bank accounts are income or

nontaxable gifts; (2) whether respondent counted certain deposits

twice when determining petitioners’ deficiencies; (3) whether

petitioners are liable for the self-employment tax under section

1401;1 and (4) whether petitioners are liable for accuracy-

related penalties pursuant to section 6662(a).

                          FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.    Petitioners, Mr. Yang and

Mrs. Yang, are husband and wife and resided in Bellevue,

Washington, at the time they filed their petition.

     Mr. Yang was born in Taiwan and became a U.S. citizen in

1985.    Mr. Yang worked as a programmer/analyst for Mattel

Electronic in Los Angeles, California, from 1976 to 1982, a

system programmer for First Interstate Bank of California from

1982 to 1987, and a programmer specialist for Hughes Aircraft in

Los Angeles from 1987 to 1992.    Mr. Yang also periodically

provided programming consulting services.    Mrs. Yang has been a

homemaker since 1986.    Mr. Yang owns a 3- to 4-percent interest



     1
      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.
                               - 3 -

in a family-operated factory in Taiwan.   Mr. Yang’s father passed

away in 1997.

     In 1991, Mr. Yang incorporated “Torrance Consulting, Inc.”

(Torrance Consulting) under the laws of the State of California

for the purpose of engaging in contracting work.   In 1993,

petitioners sold their home in California and moved to

Washington.   On June 8, 1993, petitioners signed a home loan

application for residential property in Bellevue, Washington.

The application was signed under penalty of perjury.2    In the

application, petitioners reported gross monthly income of $7,000

from Torrance Consulting and gross monthly income of $1,000 from

dividends/interest.   The address for Torrance Consulting that

petitioners put on their application was the same as their home

address.   Petitioners also reported owning a business with a net



     2
      The application the petitioners signed was a Freddie Mac
Form 65/Rev. 10/92 which contained the following certification
above petitioners’ signature:

     Certification: I/We certify that the information
     provided in this application is true and correct as of
     the date set forth opposite my/our signature(s) on this
     application and acknowledge my/our understanding that
     any intentional or negligent misrepresentation(s) of
     the information contained in this application may
     result in civil liability and/or criminal penalties
     including, but not limited to, fine or imprisonment or
     both under the provisions of Title 18, United States
     Code, Section 1001, et seq. and liability for monetary
     damages to the Lender, its agents, successors and
     assigns, insurers and any other person who may suffer
     any loss due to reliance upon any misrepresentation
     which I/we have made on this application.
                               - 4 -

worth of $400,000.   Mr. Yang was listed as president of Torrance

Consulting, as self-employed, and as working at Torrance

Consulting for the previous 1-1/2 years.   The loan application

also contained the following notation next to Mr. Yang’s

employment information:   “Borrower’s business can be located

anywhere he sells overseas and has no storefront.”   In a letter

attached to the loan application, Mr. Yang stated:

     I’ve been working as a computer systems consultant for
     the past one and half years. My business clients are
     those medium to large-sized manufacturers located in
     Taiwan and China.

     In trying to help them modernize their computer
     systems, I found myself spending more and more time
     overseas, and there is really no compelling reason to
     live in L.A. anymore.

     In addition, by moving to Seattle area, with Microsoft
     close by, I hope to gain earlier insight of the latest
     technology and thus better serve my customers.

     On June 14, 1996, petitioners signed, under penalty of

perjury, a loan application to refinance the 1993 home loan.3     In

the application, they reported gross monthly income of $7,000

from “Summit Consulting, Inc.” (Summit Consulting) and net

monthly income of $5,000 for business in Taiwan.   Petitioners

also reported owning a business with a net worth of $200,000.

Mr. Yang was listed as president of Summit Consulting, as self-

employed, and as working at Summit Consulting for the previous 5



     3
      The 1996 loan application was also on a Freddie Mac Form
65/Rev. 10/92.
                                 - 5 -

years.   The address for Summit Consulting that petitioners put on

their application was the same as their home address.   In an

attached letter, Mr. Yang made reference to a $63,985 transfer

“from my business account in Taiwan.”

     During 1995 and 1996, petitioners had bank accounts at the

Bank of Taiwan, in Taiwan, and at Seafirst Bank, in Washington.

The Bank of Taiwan account was in Mr. Yang’s name.   This account

allowed persons other than petitioners to access the account

through the use of a passbook.    Mr. Yang also withdrew funds from

the Bank of Taiwan account during his frequent visits to Taiwan

between 1995 and 1999.   During 1996, funds were withdrawn from

the Bank of Taiwan account and wire transferred to the Seafirst

Bank account.

     During 1995 and 1996, the following deposits were made to

Mr. Yang’s account at the Bank of Taiwan:4




     4
      The conversion rate in effect for the years 1995 and 1996
was NT$27.54 to 1 U.S. dollar. U.S. dollar amounts are rounded
to the nearest dollar.
                                - 6 -

 Date of                                 Amount
 Deposit             Taiwanese Dollars            U.S. Dollars
 5/30/95                 NT$2,000                       $73
 6/21/95                        5                         0
 8/31/95                   70,602                     2,564
 9/14/95                   70,000                     2,542
 9/29/95                   81,375                     2,955
10/17/95                   81,375                     2,955
10/27/95                  230,000                     8,351
12/01/95                  162,750                     5,910
12/21/95                    1,646                        60
                                                  1
  Totals (1995)        NT$699,753                   $25,409

 1/29/96                NT$81,375                    $2,955
 2/28/96                   81,375                     2,955
 3/08/96                   78,750                     2,859
 4/12/96                   78,750                     2,859
 4/15/96                  602,990                    21,895
 5/10/96                   71,250                     2,587
 6/15/96                   71,250                     2,587
 6/21/96                    3,341                       121
 8/07/96                  142,500                     5,174
 9/16/96                   67,500                     2,451
10/15/96                   67,500                     2,451
11/01/96                   67,500                     2,451
12/01/96                   67,500                     2,451
12/21/96                    2,227                        81
                                                  2
  Totals (1996)      NT$1,483,808                   $53,878
     1
        This figure is $1 more than the sum of the components due to
rounding off of the U.S. dollar amounts.
     2
       This figure is $1 less than the sum of the components due to
rounding off of the U.S. dollar amounts.

     During 1995 and 1996, the following withdrawals were made

from Mr. Yang’s account at the Bank of Taiwan:5




     5
      The conversion rate in effect for the years 1995 and 1996
was 27.54 Taiwanese dollars to 1 U.S. dollar. U.S. dollars
amounts are rounded off to the nearest dollar.
                                 - 7 -

 Date of                                   Amount
Withdrawal             Taiwanese Dollars            U.S. Dollars
  9/13/95                 NT$70,000                    $2,542
 10/23/95                   230,000                     8,351
 11/02/95                    10,007                       363
 11/04/95                    90,000                     3,268
 11/06/95                     5,007                       182
 12/11/95                   160,000                     5,810
  Totals (1995)          NT$565,014                   $20,516

  3/01/96                NT$201,200                     $7,306
  3/18/96                    10,000                        363
  3/27/96                    10,007                        363
  3/28/96                    10,007                        363
  4/01/96                    20,000                        726
  4/23/96                    10,000                        363
  4/24/96                   741,840                     26,937
  4/25/96                     3,007                        109
  4/25/96                     2,007                         73
  8/23/96                   326,600                     11,859
 11/01/96                   179,400                      6,514
                                                     1
  Totals (1996)        NT$1,514,068                    $54,977
     1
      This figure is $1 more than the sum of the components due to
rounding off of the U.S. dollar amounts.

     During 1995 and 1996, the following amounts were wire

transferred and deposited into petitioners’ account at Seafirst

Bank:6

     Date of                                     Amount
     Deposit           Payor/Source         (In U.S. Dollars)
     3/17/95           Yang                     $49,968
    11/06/95           Yang Fan Hsing            36,700
      Total (1995)                              $86,668

     3/01/96           Yang Yu Mei She          $19,985
     4/12/96           Michael Yang               6,528
     4/24/96           Yang Fen Shine            63,985
     8/23/96           Yang You Mei Sheue        29,985
    11/01/96           Yang You Mei Shue         49,980
      Total (1996)                             $170,463



     6
         The U.S. dollar amounts are rounded to the nearest dollar.
                               - 8 -

     For the years 1995 and 1996, Mr. Yang personally prepared

petitioners’ Federal income tax returns.   On their 1995 return,

petitioners reported total gross income of $1,903 ($1,716

interest and $187 capital gain).   On their 1996 return,

petitioners reported total gross income of $3,660 ($2,872

interest and $788 capital gain).   The returns listed Mr. Yang’s

occupation as unemployed, reported that petitioners had no

interest in a foreign bank account, and reported no income from

Torrance Consulting, Summit Consulting, or Mr. Yang’s interest in

the family operated factory in Taiwan.   On March 19, 1999,

respondent issued a notice of deficiency for the years 1995 and

1996.

                              OPINION

     Respondent’s notice of deficiency determined unreported

income based on the bank deposits method of reconstructing

income.   Respondent’s determination is entitled to the

presumption of correctness, and petitioners bear the burden of

proving that such determination is incorrect.   See Rule 142(a);

Tokarski v. Commissioner, 87 T.C. 74, 76-77 (1986); Estate of

Mason v. Commissioner, 64 T.C. 651, 657 (1975), affd. 566 F.2d 2

(6th Cir. 1977).

     Petitioners claim that the amounts deposited to their bank

accounts were nontaxable gifts from Mr. Yang’s father.
                               - 9 -

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

from whatever source derived, unless otherwise specifically

excluded.   Section 102(a) excludes the value of property acquired

by gift from gross income.   For income tax purposes, a gift must

proceed from a detached and disinterested generosity, motivated

by affection, respect, admiration, charity, or the like.    See

Duberstein v. Commissioner, 363 U.S. 278, 285 (1960).

     Petitioners rely on their own testimony and that of Mr.

Yang’s brother, Fang Long Yang.   Mr. Yang testified that Fang

Long Yang opened the Bank of Taiwan account and controlled it for

Mr. Yang by making deposits and wire transferring money to the

Seafirst Bank account.   Fang Long Yang testified that he did not

personally set up the Bank of Taiwan account and that he did not

know the details surrounding the wire transfers to Mr. Yang.      Mr.

Yang and Fang Long Yang claim that their father made equal gifts

to his four sons during 1995 and 1996.    The alleged gifts to Mr.

Yang in 1995 and 1996 were substantial ($112,077 and $224,340),

yet Fang Long Yang could not remember, or even estimate, the

amounts he received or the amounts petitioners received.     We are

not required to accept petitioners’ or Fang Long Yang’s self-

serving testimony, where it is improbable, unreasonable, or

questionable.   See Tokarski v. Commissioner, supra at 77; Clower

v. Commissioner, T.C. Memo. 1990-74.     In light of the evidence,
                               - 10 -

including inconsistencies in their testimony, we do not find Mr.

Yang or Fang Long Yang to be credible with respect to this issue.

     Petitioners’ explanation for the bank deposits is that all

of the money deposited was the proceeds of gifts.    Petitioners

testified that neither of them was gainfully employed or engaged

in business after Mr. Yang discontinued his employment at Hughes

Aircraft.

     However, in their loan applications, signed under penalty of

perjury, petitioners told a different story.    They reported

earning substantial amounts of business income, and Mr. Yang was

classified as self-employed.    The Bank of Taiwan account was

referred to as a “business account”,7 Mr. Yang admitted spending

an increasing amount of time overseas for work, and he stated

that he had manufacturing clients in Taiwan.    Petitioners claim

that they misrepresented their financial information on the loan

applications in order to get the loans approved and inadvertently

failed to disclose the Bank of Taiwan account on their income tax

returns.    Based on the contradictory evidence, we do not find

petitioners’ explanations to be persuasive.    Accordingly, with

the exceptions noted below, we hold that the amounts deposited

into petitioners’ bank accounts in 1995 and 1996 are taxable

income.



     7
      Petitioners failed to report their interest in the Bank of
Taiwan account on their 1995 and 1996 tax returns.
                              - 11 -

     Petitioners contend that substantially all the funds

deposited into their Bank of Taiwan account in 1996 were

subsequently wire transferred to their Seafirst Bank account.

Petitioners bear the burden of proving such duplicate deposits.

See Estate of Mason v. Commissioner, supra at 657; Zarnow v.

Commissioner, 48 T.C. 213, 216 (1967).

     Petitioners concede that there are no duplications for 1995.

Mr. Yang testified that 90 to 99 percent of the amounts withdrawn

from the Bank of Taiwan account in 1996 were transferred to the

Seafirst Bank account and specifically identified the

duplications.   In 1996, the following transactions occurred on

the same days with respect to petitioners’ bank accounts:8

   Date    Withdrawal (Bank of Taiwan)   Deposit (Seafirst Bank)
 3/01/96             $7,306                      $19,985
 4/24/96             26,937                       63,985
 8/23/96             11,859                       29,985
11/01/96              6,514                       49,980

     Mr. Yang testified that a family member would make the

withdrawal from the Bank of Taiwan account, add in more money,

and then wire this larger amount to the Seafirst Bank account.

Based on Mr. Yang’s explanation of the differences in amounts and

the corresponding nature of the withdrawals and deposits, we are

persuaded that respondent’s determination contained duplications.

We hold that the amounts withdrawn from the Bank of Taiwan

account on March 1, 1996, April 24, 1996, August 23, 1996, and


     8
      Amounts are in U.S. dollars.
                               - 12 -

November 1, 1996, in the amounts of $7,306, $26,937, $11,859, and

$6,5149, respectively, must be subtracted from respondent’s bank

deposits determination of income for 1996.

     Section 1401 imposes a tax on the "self-employment income"

of every individual.   Section 1402(b) defines "self-employment

income" as "net earnings from self-employment".    Section 1402(a)

generally defines "net earnings from self-employment" as gross

income derived by an individual from any trade or business

carried on by such individual, less deductions allowed.

Petitioners bear the burden of proving that they are not liable

for the self-employment tax.   See Rule 142(a).

     On their 1993 and 1996 loan applications, petitioners

reported owning businesses, listed the same address for both

their home and businesses, and classified Mr. Yang as self-

employed.   Petitioners claim that they misrepresented information

on the loan applications, that Mr. Yang has been unemployed since

1992, and that they have never owned a business.   On the basis of

the evidence in the record, we do not find petitioners’ testimony

persuasive and hold that they are liable for the self-employment

tax for 1995 and 1996.

     Section 6662(a) imposes a penalty equal to 20 percent of the

portion of an underpayment of tax attributable to a taxpayer’s

negligence, disregard of rules or regulations, or substantial


     9
      Amounts are rounded to the nearest dollar.
                                - 13 -

understatement of income tax.    See sec. 6662(a), (b)(1), and

(b)(2).   “Negligence” has been defined as the failure to do what

a reasonable and ordinarily prudent person would do under the

circumstances.    Neely v. Commissioner, 85 T.C. 934, 947 (1985).

The term “disregard” includes any careless, reckless, or

intentional disregard of rules or regulations.    Sec. 6662(c).     An

understatement is “substantial” if it exceeds the greater of

$5,000 or 10 percent of the tax required to be shown on the

return.   Sec. 6662(d)(1) and (d)(2).    Respondent’s determination

that petitioners were negligent is presumptively correct, and the

burden is on petitioners to show a lack of negligence.    See Hall

v. Commissioner, 729 F.2d 632, 635 (9th Cir. 1984), affg. T.C.

Memo. 1982-337.   The accuracy-related penalty applies unless

petitioners demonstrate that there was reasonable cause for the

underpayment and that they acted in good faith with respect to

the underpayment.   See sec. 6664(c).

     Petitioners have not established that their underpayments

for 1995 and 1996 were due to reasonable cause or a lack of

negligence.   Accordingly, we hold that petitioners are liable for

the accuracy-related penalty for 1995 and 1996.


                                           Decision will be entered

                                     under Rule 155.
