Yu-Yang Wu v. Commissioner
| Decision Date | 22 March 2002 |
| Docket Number | Docket No. 19108-99. |
| Citation | 83 T.C.M. 1363 |
| Parties | Yu-Yang Wu v. Commissioner. |
| Court | U.S. Tax Court |
Yu-Yang Wu, pro se.
Dale A. Zusi, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies and fraud addition to tax and penalties with respect to petitioner's Federal income taxes:
Addition to Tax Penalty
Year Deficiency Sec. 6653(b) Sec. 6663
1988 . . . . . . . . . . $35,523 $26,642 --
1989 . . . . . . . . . . 17,502 -- $13,127
1990 . . . . . . . . . . 29,203 -- 21,902
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The deficiencies were based on respondent's determinations that petitioner failed to report income of $93,374 in 1988, $52,543 in 1989, and $78,253 in 1990. At trial, respondent conceded that petitioner's unreported income should be reduced by $10,997 in 1990 to reflect items that respondent inadvertently double counted. We sustain respondent's deficiency determinations, as adjusted, and the fraud addition to tax and penalties applicable thereto.
Some of the facts have been stipulated and are so found. The stipulation of facts and the related exhibits are incorporated by this reference.
Petitioner, who is also known as David Wu, resided in Palo Alto, California, when he filed his petition.
During the years at issue, petitioner owned at least 30 percent of Palo Alto Computer, doing business as Palo Alto Microsystems (PAC), a subchapter C corporation. The record does not disclose who, if anyone, owned the remaining interests in PAC. PAC was in the business of selling and repairing personal computers and computer parts.
Petitioner was in charge of PAC. He made the day-to-day business decisions for PAC, signed its corporate income tax returns, had sole signature authority for PAC's business checking account, hired and supervised PAC's bookkeepers and return preparers, and dealt with customers daily by making sales and receiving payments.
Petitioner understood that all revenue receipts from the sale of computer equipment and from repairs performed by PAC should be deposited in PAC's business account. Petitioner also understood that PAC's accountant was preparing PAC's income tax returns on the basis of information regarding sales, purchases, and expenses that petitioner provided to him from PAC's books and records. PAC's books and records were maintained under petitioner's supervision and control. Petitioner understood that if he failed to record sales revenues in PAC's books and records, those revenues would not be reported on PAC's income tax returns.
Petitioner instructed many of PAC's customers to pay for their purchases or repairs in cash, to leave the payee lines of their checks blank, or to write petitioner's name on the payee lines of their checks. Petitioner also wrote, or asked PAC's customers to write, on the memo lines of their checks to petitioner that the payments were on account of loans even though he knew that the payments were on account of computer sales or services.
Petitioner deposited or caused to be deposited in his personal bank account substantial amounts of money representing revenues belonging to PAC's business. Petitioner deposited or caused to be deposited into his personal bank account at least $58,798.44 in 1988, $36,091.69 in 1989, and $50,837.89 in 1990 of income belonging to PAC that was not reported on either PAC's or petitioner's income tax returns.1
Petitioner hired different accountants to prepare PAC's and his personal income tax returns and provided them with only limited financial information in aid of his efforts to avoid detection of his unreported income.
On his Forms 1040, U.S. Individual Income Tax Return, for 1988, 1989, and 1990, petitioner reported wage income from PAC of only $9,000, $9,000, and $10,000, respectively. For 1988, 1989, and 1990, petitioner reported gross income of $62,655, $30,254, and $62,457, respectively, and paid taxes of $7,750, zero, and $14,720, respectively.
Despite showing only relatively modest amounts of income on his tax returns, petitioner purchased during the years in issue and the following year (1988, 1989 and 1991) four parcels of improved real property for $1,925,000 and made total downpayments of $755,037.57.2
In support of his applications for loans to finance these purchases, petitioner made numerous representations concerning his income that were inconsistent with the positions he took on his income tax returns. Petitioner claimed in a 1988 loan application to receive $8,000 per month in wages from PAC, while reporting only $9,000 for the entire year on his 1988 Federal income tax return. In a 1989 loan application, petitioner claimed to receive $6,000 per month salary and $4,000 per month in rental income, while reporting on his tax return only $9,000 in wages and $20,560 in rental income for the entire year.
Petitioner understood his legal obligation to report all his income on his Federal income tax returns. Petitioner was advised repeatedly by his and PAC's accountants of the need to report all his income. Petitioner knowingly and intentionally structured transactions to avoid detection of his schemes to underreport income.
On June 6, 1995, petitioner was indicted on eight counts of Federal income tax evasion and filing false Federal income tax returns for the years 1988 through 1991. As part of a plea bargain, petitioner pled guilty to one count of tax evasion for 1988 in return for the dismissal of the remaining counts. In the final judgment, petitioner was sentenced to 2 years of probation, was fined $8,050, and was required to participate in home detention with electronic monitoring for 6 months.
On December 12, 2000, respondent served on petitioner requests for admission, a first request for production of documents, and a first set of interrogatories. Petitioner did not respond to respondent's admissions and discovery requests. By order dated January 30, 2001, this Court granted respondent's motion to compel responses, ordering petitioner to respond to respondent's interrogatories and document requests by February 12, 2001. In our order, we advised petitioner that "in the event petitioner does not fully comply with the provisions of this order, this Court will be inclined to impose sanctions pursuant to Tax Court Rule 104." By order dated February 21, 2001, we held that the matters set forth in respondent's request for admissions were deemed admitted pursuant to Rule 90(e) by reason of petitioner's failure to respond thereto.
At trial, the Court granted respondent's motion for discovery sanctions, which was grounded upon petitioner's inadequate responses to respondent's discovery requests: the Court ruled that any documents covered by respondent's requests that petitioner failed to provide to respondent before trial would not be admitted into evidence at trial. The Court also refused petitioner's request at trial that we hold the record open to allow him to supplement the factual record after trial with additional evidence allegedly held by his former attorney.
OPINIONIssue 1. Petitioner's Liability for Deficiencies
In Judy v. Commissioner [Dec. 52,051(M)], T.C. Memo. 1997-232, we stated:
Every taxpayer is required to maintain sufficient records to enable the Commissioner to establish the amount of his taxable income. Sec. 6001; sec. 1.6001-1(a) and (b), Income Tax Regs. If such records are lacking, the Commissioner may reconstruct the taxpayer's income by any indirect method that is reasonable under the circumstances. Cebollero v. Commissioner [92-2 USTC ¶ 50,327], 967 F.2d 986, 989 (4th Cir. 1992), affg. [Dec. 47,018(M)] T.C. Memo. 1990-618; Petzoldt v. Commissioner [Dec. 45,566], 92 T.C. 661, 687 (1989); Schellenbarg v. Commissioner [Dec. 23,230], 31 T.C. 1269, 1277 (1959), affd. in part and revd. and remanded in part on another issue 283 F.2d 871 (6th Cir. 1960).
In order to prove that petitioner received income and did not report it on his income tax returns, respondent called seven witnesses: Barry Sharrow, Richard Eberli, Dexter Duncan, Dale Rutz, Tim Earle, Gordon Anderson, and Gerald Latter. Each of these witnesses credibly testified to purchasing computers or computer parts from petitioner and to paying for them either with cash or with checks not made payable to PAC. Those who paid by check credibly testified that petitioner told them either to leave the payee line blank or to enter petitioner's name on the payee line. Respondent established that the payments made by these customers were not reported on petitioner's or PAC's income tax returns.
Having established the existence of unreported income (and the inaccuracy of petitioner's books and records), respondent is given substantial latitude in choosing an appropriate method to reconstruct petitioner's income. One reconstruction method we have repeatedly accepted is the bank deposits method. As we recognized in Zuckerman v. Commissioner [Dec. 51,823(M)], T.C. Memo. 1997-21:
Use of the bank deposits method for reconstructing income is well established. DiLeo v. Commissioner [Dec. 47,423], 96 T.C. 858, 867 (1991), affd. [92-1 USTC ¶ 50,197] 959 F.2d 16 (2d Cir. 1992); Estate of Mason v. Commissioner [Dec. 33,349], 64 T.C. 651, 656 (1975), affd. [78-1 USTC ¶ 9162] 566 F.2d 2 (6th Cir. 1977). Under the bank deposits method there is a rebuttable presumption that all funds deposited to a taxpayer's bank account constitute taxable income. Price v. United States [64-2 USTC ¶ 9708], 335 F.2d 671, 677 (5th Cir. 1964); Hague Estate v. Commissioner [43-1 USTC ¶ 9258], 132 F.2d 775, 777-778 (2d Cir. 1943), affg. [Dec. 12,070] 45 B.T.A. 104 (1941); DiLeo v....
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