50 T.C.M. (CCH) 797
GERONIMO V. BOGGS, Petitioner
COMMISSIONER OF INTERNAL REVENUE, Respondent
United States Tax Court
August 15, 1985
DOUGLAS E. LITTLE and ROBERT M. MUSSELMAN, for the petitioner.
JOHN C. McDOUGAL, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in and additions to petitioner's Federal income tax as follows:
After concessions, the issues remaining for decision are: (1) Whether certain deposits made by petitioner into various Canadian banks during his 1973, 1974, and 1975 taxable years represent unreported taxable income as determined by respondent through use of the bank deposits method of reconstructing income; (2) Whether the interest earned on the above deposits and on the various other bank accounts into which these deposits were subsequently transferred is taxable to petitioner during the years in issue; (3) Whether petitioner realized a long-term capital gain in taxable year 1974 from the involuntary conversion of a dwelling destroyed by fire, and, if so, the amount thereof; and (4) Whether petitioner is liable for the section 6653(b) fraud addition for each of the taxable years in issue. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, second stipulation of facts, and exhibits attached thereto are incorporated herein by this reference. I. GENERAL FACTS Petitioner, Geronimo Vernon Boggs, resided in Luray, Virginia at the time he filed his petition herein, and currently resides in Crab Run, West Virginia. During the taxable years at issue, petitioner was married to Mary L. Boggs (Mrs. Boggs), with whom he has four children:
| Geronimo Vernon, Jr.
For taxable years 1973, 1974, and 1975, petitioner and Mrs. Boggs filed joint Federal income tax returns (Forms 1040). For taxable year 1976, petitioner originally filed his return separately from Mrs. Boggs; however, during audit respondent allowed petitioner to elect joint filing status for taxable year 1976 and, in accordance therewith, made several corresponding adjustments to petitioner's separate return to reflect this change in filing status, none of which are contested by petitioner herein. Petitioner is a dentist, now retired. After serving as a dentist in the United States Army, in 1962 petitioner opened a general dentistry practice in Luray, Virginia. In approximately 1968, petitioner also began to do prosthetic dental work, which involved fitting and supplying patients with dentures. In 1971, petitioner began to specialize exclusively in prosthetic dental work, and no longer performed general dentistry. Although the dentures were fitted in petitioner's office, they were manufactured by contract with outside laboratories. Petitioner's dental office consisted of a waiting room and four separate treatment rooms. The office was open four days per week from 10 a.m. until 4 p.m. Patients were seen on a ‘ first come, first served‘ basis, and not by appointment. Petitioner saw about 30 patients a day. From August of 1973 through March of 1974, petitioner's license was suspended and he treated no patients. During this time the practice was maintained by Dr. David C. Buckis. 
At the conclusion of his suspension, petitioner resumed his dental practice and continued it throughout the years in issue. Petitioner's records indicate that he treated a total of 652 patients in 1973 and 1,268 patients in 1974. The parties have stipulated that petitioner's records of income and expenses reconcile to his tax returns filed for taxable years 1973, 1974, and 1975. For reasons set out below, the Court concludes that petitioner's records were incomplete. During 1973, petitioner charged approximately $39 to $45 for a single denture and $75 to $85 for a double set. The record contains no evidence as to the prices charged during the later years in issue, but they were at least equal to those prevailing in 1973. Gross receipts from petitioner's dental practice amounted to approximately $3,000 per day during all of the years before the Court. The policy of petitioner's dental practice was to request payment in cash or by certified check, and a sign on display at the receptionist's desk indicated that payments were to be made in cash only. Although some payments were made by personal check, the great majority of the payments were in cash. Receipts for cash payments were generally given only if the particular patient requested one. Information regarding charges for dental services and lab expenses was recorded by petitioner or his office assistants on patient cards. A patient card generally indicated the patient's name, date of visit, type of treatment received and the charge therefor, payments made on such charges and date thereof, and the outstanding balance due, if any. Aside from the patient cards, petitioner's records of his dental practice consisted of cancelled checks, invoices from laboratories and other suppliers, and receipts for small items purchased by cash. A sample laboratory invoice for the dentures fitted by petitioner was introduced into evidence. Such invoice indicates the name of the patient for whom the denture was made, the type of denture made, the date and the cost of the denture to petitioner. All of the dentures fitted by petitioner were manufactured by outside laboratories, and there should be a separate laboratory invoice for all of the dentures fitted by petitioner. The record does not show whether petitioner retained such an invoice for each of the patients he treated during the years in issue, but, if so, the invoices were not produced at the trial. While petitioner suggested at the trial that such invoices were obtainable from the various manufacturers themselves, he did not obtain them or make them available at the trial. The person generally in charge of petitioner's record keeping during most of the period here in issue was an employee named Janet Shenk. The record keeping performed by Ms. Shenk consisted primarily of putting fully paid patient cards into a box, where they were kept until tax time. Ms. Shenk did not total the cards on a daily or weekly basis. The numbering system employed for the patient cards was not sequential, and Ms. Shenk could not determine whether all of the cards were in the box at the end of each year. As fees for dental work were collected by Ms. Shenk or other employees, the money was placed in a box and given to petitioner at the end of each day. No record of the total daily or weekly receipts was ever prepared or maintained by Ms. Shenk or any other employees. Petitioner was solely responsible for the disposition of the daily receipts. However, Ms. Shenk did make occasional deposits to petitioner's checking accounts when given a deposit slip and requested to do so by petitioner. During the six-month period in which the dental practice was conducted by Dr. Buckis, the finances were handled in essentially the same way, except that the daily receipts were accumulated until weekends and then given to petitioner. At the end of each year, Ms. Shenk summarized petitioner's business income and expenses based on the cancelled checks, invoices, receipts, adding machine tapes of patient cards, and other figures given to her by petitioner. 
The parties have introduced into evidence copies of the worksheets prepared by Ms. Shenks for petitioner's 1973, 1974, and 1975 taxable years. Except with respect to petitioner's 1973 taxable year, such workpapers, as they relate to petitioner's dental practice, consist exclusively of monthly and annual summaries of the expenses of the dental practice, and contain no information as to the receipts or income generated thereby. As to petitioner's 1973 taxable year, a portion of the workpapers purport to deal with petitioner's net income from the practice on a quarterly basis, but the copy thereof introduced into evidence is largely illegible and appears incomplete in any event, since it contains no information concerning petitioner's gross income from which the purported net income figures were derived, instead merely listing the alleged amount of the quarterly net income. When Ms. Shenk completed preparation of the annual summaries, they were given to petitioner. Petitioner then gave the summary information to his accountants, the firm of Robert L. Hueston, C.P.A. (hereinafter the Hueston firm). Petitioner's 1973 Federal income tax return was personally prepared by Robert L. Hueston (Hueston) from information provided to him exclusively by petitioner. On the front of the Form 1040 was the stamped notation ‘ This return was prepared by Robert L. Hueston without audit or verification by him, from summarized figures supplied by taxpayer.‘ At petitioner's request, Hueston listed petitioner's home address on the Form 1040 as ‘ 3303 12th St., Vernon, B.C., Canada,‘ the address of certain real property located in Canada which petitioner had purchased in September of 1973. In accordance with Hueston's normal practice in preparing Federal income tax returns, and also because of the Canadian address given by petitioner, Hueston inquired into the existence of foreign bank accounts owned by petitioner. Petitioner originally denied having any foreign accounts, but subsequently told Hueston he did have one foreign account with a value of less than...