                             T.C. Memo. 2001-161



                        UNITED STATES TAX COURT



         COLIN KELLY AND SHARON K. KAUFMAN, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12363-99.                             Filed July 2, 2001.


     Colin Kelly Kaufman, for petitioners.

     John D. Faucher, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:    Respondent determined deficiencies, additions

to tax, and a penalty as follows:

                                                 Additions to Tax/Penalty
                                            Sec.          Sec.        Sec.
Petitioner            Year     Deficiency   6651(a)(1)    6654(a)     6662(a)

Colin Kelly Kaufman   1992      $25,084     $5,056        $857         -
Sharon K. Kaufman     1992       20,486      3,907         658         -
Colin Kelly &         1993       24,310        -            -        $4,862
  Sharon K. Kaufman
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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.   After concessions, the issue for decision is whether

certain legal fees received by petitioners were taxable when

received or were unearned “retainers” during the years in issue.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioners resided in Corpus Christi, Texas, at the time that

they filed their petition.   During 1992 and 1993, petitioner

Colin Kelly Kaufman (petitioner) practiced bankruptcy law in

Corpus Christi.   Petitioner Sharon K. Kaufman worked as the

office supervisor in petitioner’s law practice.

     During the years in issue, petitioner received payments from

clients for work that had been performed and “retainers” from

clients for work to be performed in the future.   Petitioner did

not enter into written agreements with the clients explaining the

terms under which the retainers were received and applied.

Petitioners did not maintain any books or records that indicated

which payments received by petitioners were for fees earned and

which payments received were retainers or when retainers were

earned.   Some retainers were deposited into petitioners’ trust

account, and amounts from the trust account were later
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transferred to petitioners’ business or personal accounts.     For

example, petitioners transferred $5,000 relating to Del Anderson

from their trust account to their personal joint account in

October 1992, and they transferred $10,000 relating to Allan

Potter from their trust account by check payable to petitioner in

November 1992.   In 1993, petitioners transferred a total of

$40,000 relating to Allan Potter from their trust account to

their business account.

     Neither petitioner filed a tax return for 1992 until

November 30, 2000, after the petition in this case was filed and

shortly prior to trial.   Petitioners filed a timely return for

1993 and filed an amended 1993 return on November 30, 2000.     In

June 1996, a revenue agent commenced an audit of petitioners’

income tax liability for 1992 and 1993.   The revenue agent

reconstructed petitioners’ income after meeting with petitioners

and their representative.   The revenue agent did not include

deposits into the trust account as income in her reconstruction.

She did, however, include transfers from the trust account into

petitioners’ business or personal accounts.   The items that were

included as transfers were in many instances identified on

written lists of income items provided to the revenue agent by

petitioners or their representative.   In determining the amount

of unreported income, the revenue agent deducted the amounts that
                                 - 4 -

she could identify as reported by petitioners for 1992 (on their

belated return) and for 1993.

                                OPINION

     Petitioners presented no evidence that they are entitled to

deductions beyond those allowed by respondent.     Petitioners

stipulated that they do not contest any Schedule C, Profit or

Loss From Business, expenses not mentioned in the stipulation.

Petitioners contend that the amount of the penalty and additions

to tax determined by respondent should be reduced in accordance

with their claims of reduction in their taxable income.

Petitioners presented neither evidence nor argument about the

basis for imposition of the penalty and additions to tax.     Thus,

they have conceded these issues.    See, e.g., Money v.

Commissioner, 89 T.C. 46, 48 (1987).      The issue remaining for

decision is whether certain legal fees received by petitioners

were taxable when received or were unearned “retainers” during

the years in issue.

     Petitioners contend that certain rounded dollar amounts

included in respondent’s reconstruction of their income for 1992

and 1993 were unearned retainers rather than taxable income

during the years in issue.   The only evidence in support of

petitioners’ contention is petitioner’s testimony.     We need not

accept uncontroverted testimony at face value if it is

improbable, unreasonable, or questionable, see, e.g., Lovell &
                               - 5 -

Hart, Inc. v. Commissioner, 456 F.2d 145, 148 (6th Cir. 1972),

affg. T.C. Memo. 1970-335; Stein v. Commissioner, 322 F.2d 78, 82

(5th Cir. 1963), affg. T.C. Memo. 1962-19, or if the totality of

the evidence conveys a different impression, see Diamond Bros.

Co. v. Commissioner, 322 F.2d 725, 731 (3d Cir. 1963), affg. T.C.

Memo. 1962-132.

     Petitioners argue that respondent erroneously included funds

deposited into their trust account as income during the years in

issue.   The revenue agent testified in detail that only transfers

from the trust account and other deposits into petitioners’

business or personal accounts were included in respondent’s

reconstruction.   We accept this testimony, which is not

controverted in any way.

     Petitioners concede that they did not maintain books that

would distinguish between earned fees and unearned retainers.

They belatedly claim that the schedules provided to the revenue

agent during the audit were lists of all receipts, rather than

lists of income received.   They argue that the requirement of

Texas law that they maintain retainers in a separate trust

account somehow excuses their failure to keep the amounts

segregated or to provide written agreements to their clients.

Their arguments assume, contrary to the evidence, that identified

amounts were shown to be clients’ funds.
                               - 6 -

     Petitioner’s testimony was that he thought it “probable”

that the rounded dollar amounts were not income during the years

in which they were received and transferred from the trust

account to another account.   In petitioners’ brief, they argue:

          b. Large Rounded Off Numbers. Mr. Kaufman has
     always contended that bills for work and expenses
     already done typically total up to odd dollars and
     cents; and that large rounded off amounts (such as
     $40,000) are much more likely to be retainers for
     future work than they are to be bills for work and
     expenses already done. Paragraph 6 of the petitioners’
     pre-trial memorandum. And common sense tells you
     that’s true; and that the petitioners’ position is
     inherently probable. And the reason why you would get
     three checks from the company to make up the $40,000
     amount is that different investors and reinsurers are
     responsible for different levels of risk at many of
     these companies, so that different (typically
     reinsurer) authorizations are required to get money in
     excess of a certain level (say, $20,000).

     Petitioners further show their tendency to rely on

speculative afterthought in the following passage from their

brief:

          51. The $50,000 Heggen Mistake. The night before
     trial, Mr. Kaufman discovered he was been [sic]
     mistaken about a $50,000 Heggen item in 1992. * * *
     So he admitted that to the Court. But it now occurs to
     the petitioners, after further thought, that this
     mistake did not require the $50,000 to be INCOME.
     Getting it and putting it into the TRUST account would
     mean it still was NOT INCOME, though received.
     Respondent had a burden to show that it was EARNED that
     year as well as received into the trust account.

Petitioner’s uncorroborated testimony is patently unreliable.    We

are not persuaded by petitioner’s belated rationalizations and

attempts to exclude from taxable income amounts that he received
                                 - 7 -

during the years in issue without any evidence of limitation on

their use.     We are not persuaded by petitioner’s belated attempts

to disavow the lists of income items provided to respondent’s

agent during the audit of petitioners’ returns for 1992 and 1993.

Petitioners’ inability to prove their contentions is undoubtedly

of their own making.

     Petitioners are required to maintain records from which

their tax liability may be ascertained; in the absence of

adequate books and records, respondent may use a reasonable

method, such as a bank deposits analysis, to reconstruct

petitioners’ income.     See Estate of Mason v. Commissioner, 64

T.C. 651, 656, 658-659 (1975), affd. 566 F.2d 2 (6th Cir. 1977).

Respondent did so in this case.     Contrary to petitioners’

contention, respondent does not have to show that legal fees

received during a taxable year were “earned” during the same

year.     See Miller v. Commissioner, T.C. Memo. 1989-128, affd.

without published opinion 909 F.2d 509 (8th Cir. 1990).        That

burden is on petitioners, and they have failed to meet it.

        Section 7491(a), cited by petitioners, does not apply

because the examination was begun in 1996, prior to the effective

date of the burden of proof rule provided by the section.        In any

event, the provisions of section 7491(a) would not help

petitioners’ case.     See Higbee v. Commissioner, 116 T.C. __

(June 6, 2001).
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To reflect stipulated adjustments,

                                      Decision will be entered

                                 under Rule 155.
