MEMORANDUM FINDINGS OF FACT AND OPINION
STERRETT, Judge: By notice of deficiency dated March 28, 1979 respondent determined deficiencies in and additions to petitioner's Federal income taxes as follows:
| Taxable year | | Addition to tax under |
| ended Dec. 31, | Deficiency | sec. 6653(a) |
| 1975 | $6,083.32 | $304.16 |
| 1976 | 12,717.95 | 635.90 |
The issues for decision are: (1) whether petitioner understated his taxable income in the amounts determined by respondent for the taxable years 1975 and 1976, (2) whether petitioner is entitled to an investment tax credit and a depreciation deduction claimed in 1975 on an airplane and whether he is entitled to depreciation deductions taken on an automobile and on two airplanes in 1976; and (3) whether petitioner is liable for additions to tax pursuant to section 6653(a), I.R.C. 1954.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioner James Michael Kinerd resided in Sweetwater, Texas at the time of filing the petition herein. Petitioner and his wife filed joint Federal income tax returns for the taxable years 1975 and 1976 with the Office of the Director, Internal Revenue Service. 1
Throughout 1975 and 1976 petitioner operated a Texaco service station in Sweetwater, Texas from which he sold petroleum products, repaired automobiles, conducted a wrecker service and rented trailers. Additionally, petitioner leased a Texaco service station in Roscoe, Texas during 1975 and 1976. During 1975 the Roscoe service station was operated as a partnership, from which petitioner received a net gain of $6,331.69. Petitioner also operated a bail bond business and owned an interest in a janitorial supply business during the years at issue.
During 1975 and 1976 petitioner maintained a bank account in the name of the Sweetwater Texaco station at the First National Bank of Sweetwater, Texas. During these 2 years, deposits were made by petitioner into this account totaling $70,565.49 in 1975 and $52,927.53 in 1976. Petitioner also maintained a personal bank account at the First National Bank of Sweetwater, Texas in his own name. He made deposits into this account totaling $40,530 in 1975 and $40,877.03 in 1976. A third bank account was maintained by petitioner during 1976 in the name of the Roscoe Texaco station at the Roscoe State Bank, Roscoe, Texas. During that year deposits were made into this account in the total amount of $69,567.04. During 1976 petitioner also maintained a savings account at the First National Bank of Sweetwater, Texas into which he deposited a total of $12,500 during the year.
Throughout 1975 and 1976 petitioner allowed customers to charge their purchases provided they had an acceptable credit card. Petitioner used these charge slips to purchase gasoline and make other payments to Texaco. The charge slips used in this fashion were included in cash expenditures by respondent in his statutory notice of deficiency. The total cash expenditures as calculated by respondent were $299,087.05 in 1975 and $382,542.67 in 1976. Also during 1976 petitioner made note payments in cash in the amount of $8,554.43.
Petitioner reported income (other than wages, dividends and interest) of $14,827.97 in 1975 and of $7,924.33 in 1976. Petitioner reported income from his bail bond business of $2,605.35 for 1975 and $8,114 for 1976. He also reported interest income in the amount of $1,200.18 for 1975 and $1,577.50 for 1976. In addition, during the years in question, petitioner had an interest in a gas well and received money from a wrecker service.
In 1975 and 1976 petitioner purchased a Chevolet El Camino pickup truck for $6,600, a Chevrolet Corvette automobile for $9,950, an airplane for $15,000, and an airplane for $8,375. He also added a new den to his home at a cost of $10,000.
According to respondent's worksheet and to testimony presented at trial, respondent calculated that petitioner underreported his taxable income for 1975 in an amount totaling $18,590.74 2 and for 1976 in an amount totaling $40,799.49. 3
Respondent's curiosity in this case initially was aroused by what he considered to be too extravagant a lifestyle for a gas station owner. During audit it was discovered that petitioner had made a large number of deposits during the 1975 and 1976 taxable years. The source of these deposits was unexplained. Respondent conjectured that petitioner had received income from his various business ventures that had not been reported.
During audit on May 5, 1977 petitioner told Revenue Agent Bedford that he had borrowed $7,000 from his father during 1975 and 1976. On July 13, 1977 petitioner allegedly told Revenue Agent Bedford that he had borrowed $20,000 from his father in 1972 or 1973 and had used this money to purchase certificates of deposit. At trial both petitioner and his father denied the existence of a $20,000 "loan" in 1972 or 1973.
Petitioner testified that during the 2 years in question he borrowed a total of $37,500 from his father. The purported loans were made in cash payments, the largest of which was $7,000 and the smallest of which was $1,500. According to petitioner and his father, the loans were made periodically throughout the 2 years in question.
On June 12, 1978 petitioner's father told Revenue Agent Bedford that the "loans" to petitioner had been in cash and that he had gone to his safe deposit box to get the money for the loans. At trial petitioner's father testified that the most money he ever had at one time was about $40,000, all of which he had saved over a long period of years.He stated that he kept about $30,000 of this in the safe deposit box at his bank and the remainder hidden in his home.Also on June 12, 1978 petitioner's father contacted Agent Bedford and told him the exact months he had loaned petitioner money in 1975 and 1976. At trial petitioner's father introduced two calendars that allegedly were used to record the loans made to petitioner. The information elicited at trial is inconsistent with the information provided to Agent Bedford on June 12, 1979. 4
On his 1975 return petitioner claimed an investment credit of $1,000 and depreciation of $625 related to the purchase of an airplane on July 1, 1975. In computing the depreciation deduction for that year petitioner treated the airplane as being used for business 50 percent of the time. This percentage was not determined by reference to a flight log but was selected by petitioner's tax return preparer "to stay on the safe side." No specific information was provided to the tax return preparer or to this Court concerning the number of days or hours the airplane purchased in 1975 was used for business.However, petitioner stated at trial that the airplane was used in his bail bond business to pick up bail jumpers and that his use of the airplane was completely for business purposes. 5
On his 1976 return petitioner claimed depreciation in the amounts of $2,250, $625 and $628.10 related to an automobile and to two airplanes. The automobile was a 1976 Chevrolet Corvette purchased on August 4, 1976. This car was depreciated as being used 100 percent for business. Petitioner made no allocation between business mileage and personal mileage. The airplanes were both depreciated as being used 50 percent for business. 6
In his notice of deficiency respondent determined that petitioner had understated his income for the 1975 taxable year by $18,590.74 and for the 1976 taxable year by $40,799.49. Additionally, respondent denied petitioner's claimed investment tax credit and depreciation for the airplane purchased in 1975 and denied petitioner's claimed depreciation on the Corvette automobile taken in 1976 and on the two airplanes taken in that year.
OPINION
Realistically the first issue we must decide is one of credibility. Respondent utilizes the bank deposits plus cash expenditures method to support his determination that petitioner had income in the taxable years 1975 and 1976 that he failed to report.Petitioner counters that his books and records accurately reflect the income he received for the years in question. He accounts for the unexplained bank deposits with the assertion that they stemmed from a number of loans made to him by his father during 1975 and 1976. The total amount of such loans was alleged to be $37,500.
Respondent's determination of deficiency is presumed correct and petitioner has the burden of proving otherwise. Welch v. Helvering,290 U.S. 111 (1933); Marcello v. Commissioner,380 F.2d 509 (5th Cir. 1967), affg. a Memorandum Opinion of this Court. 7 It is settled that a deficiency determination properly based on unexplained bank deposits is entitled to the presumption of correctness. Armes v. Commisisoner,448 F.2d 972 (5th Cir. 1971), revg. on other issues a Memorandum Opinion of this Court; 8Estate of Mason v. Commissioner,64 T.C. 651, 656-657 (1975), affd. 566 F.2d 2 (6th Cir. 1977).
The bank deposits plus cash expenditures method is a method for establishing the existence of unreported income. See Marcello v. Commissioner,380 F.2d 509, 511 (5th Cir. 1967), affg. a Memorandum Opinion of this Court. 9 Contrary to petitioner's contention, the internal consistency of a taxpayer's books and records does not establish their accuracy. See Holland v. United States,348 U.S. 121, 132 (1954); Foster v. Commissioner,487 F.2d 902, 903 (6th Cir. 1973), affg. a Memorandum Opinion of this Court. 10
Respondent suggests a number of potential sources of the alleged unreported income. These include petitioner's service stations, his bail bond business and his janitorial service. Additionall, respondent suggests that petitioner may have received the alleged unreported income from his interest in a gas well, from a wrecker service associated with his gas stations, and from the purchase and resale of automobiles and trucks. Respondent alleges that petitioner's modest income as reported on his tax returns for the years in question could not have supported his extravagant spending, which included the purchase of an El Camino pickup truck for $6,600, a Chevrolet Corvette automobile for $9,950, an airplane for $15,000, and an airplane for $8,375. Additionally, petitioner added a new den to his home at a cost of $10,000. 11
Respondent has mounted an impressive assault against petitioner's contention that some of the unexplained bank deposits were derived from monies loaned to him by his father. He points to inconsistencies in petitioner's and his father's testimony. Respondent further points to the disparities between (1) petitioner's father's visits to his safe deposit box from 1974 through the end of 1976, (2) the timing and amounts of loans made according to a conversation with petitioner's father that took place on June 12, 1978, (3) the timing and amounts of loans according to calendars submitted by petitioner at trial, and (4) cash deposits made by petitioner during the years in question. Respondent asserts that the large number of inconsistencies in petitioner's statements with respect to the loans totally undermines the credibility of both petitioner and his father and suggests that the most that petitioner's father loaned his son during the years in question was $7,000.
We fully acknowledge and appreciate the inconsistencies to which respondent has drawn our attention. In another case at another time, such evidence would certainly more than carry the day. However, in this case we are confronted with a very difficult decision, for we found both petitioner and his father to be, albeit somewhat confused, entirely credible and trustworthy with respect to the existence of periodic loans during 1975 and 1976. Petitioner's sincerity was most evident at the end of trial when he delivered a spontaneous declamation negating the thrust of respondent's assertions. This controversy has been long and bitter and has centered, to respondent's benefit, upon a family situation that deteriorated to the point of hostility.We agree with petitioner, as he stated at trial, that "we haven't even skimmed the surface of [this case] because we're talking about peoples lives and we're talking about feelings, and we're talking about family when we talk about this money."
Petitioner did not appear as a complex individual. He evidenced little sophistication both with respect to tax matters generally and to the true nature of the specific dispute herein. This, of course, works to his disadvantage. He was not prepared to confront the multitude of assertions made by respondent (in total good faith, we might add) at trial and, like many pro se taxpayers, had no concept or appreciation of the burden of proof he faced herein. Petitioner showed little understanding of respondent's admittedly complex derivation of his income by means of the bank deposits and cash expenditures method, and we believe petitioner when he says that he was unable to afford to pay a lawyer well versed in such arcanum.
We have found this to be an extremely close case and we have no assurance that we can divine the correct result. We have carefully considered the evidence and the reliability and trustworthiness of petitioner and his father.All in all, petitioner's evidentiary presentation and attempted point-by-point refutation of respondent's assertion were lacking; however, his sincerity and credibility in this effort were not. We believe petitioner and his father in their representations that periodic loans were made throughout the years in question, although their vagueness and confusion with respect to the timing and amounts of these loans must weigh against them. Thus, we hold that the discrepancies revealed by respondent's bank deposits and cash expenditures method are in part attributable to loans made by petitioner's father to ppetitioner in the amount of $8,000 in 1975 and $15,000 in 1976. In so holding, we apply principles analogous to those expounded in Cohan v. Commissioner,39 F.2d 540 (2d Cir. 1930). See Llorente v. Commissioner,74 T.C. 260, 268 (1980), affd. in part and revd. in part on other grounds, 649 F.2d 152 (2d Cir. 1981).
Petitioner asserted that the remainder of the unreported income determined by respondent was attributable to savings from prior years, the sale of a piece of property in 1973 for $8,530, monies received from his bail bond business that he reported as income in later years, and additional transfers from one bank account to another. We accept the testimony with respect to the receipt of $8,530. With respect to the monies received from petitioner's bail bond business that he reported in income in later years, such amounts should have been reported during the years of receipt, and petitioner's only recourse with respect to these amounts is to amend his returns for the later years (if these years remain open under the statutue of limitations), reducing income by the amounts wrongfully reported in those years. With respect to the other allegations, we find that petitioner's proof was not specific enough to enable us to make a finding in his favor. The assertions with respect to the sources of deposits, with the exception of the loans from his father and the $8,530 from the sale of property, were entirely too vague and disorganized to enable petitioner to carry his burden of proof with respect to these items. Welch v. Helvering,290 U.S. 111 (1933). 12 Thus, respondent's application of the bank deposits plus cash expenditures method is sustained to the extent the amounts determined to have been underreported exceed $16,530 in 1975 and $15,000 in 1976. 13
On July 1, 1975 petitioner purchased an airplane. On his return for that year he claimed investment tax credit of $1,000 and depreciation of $625 on the plane. In computing the depreciation deduction petitioner treated the plan as being used for business 50 percent of the time. No flight log recording the business versus personal use of the plane was submitted to the Court. Petitioner stated that he used the plane exclusively in his bail bond business but that his tax return preparer conservatively chose a 50-percent figure for the sake of safety.
On August 4, 1976 petitioner purchased a 1976 Chevrolet Corvette that was depreciated on his return as if it had been purchased on January 1, 1976 and used entirely for business. No records were kept with respect to the business versus personal mileage of the car. Also, on his 1976 return the two airplanes owned by petitioner were depreciated as if used 50 percent of the time for business purposes.
Section 162 provides for a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in the carrying on of a trade or business. Section 167 provides that there shall be a deduction for the exhaustion, wear and tear of property used in a trade or business or property held for the production of income. If property is used in part for business purposes and in part for personal purposes, depreciation is deductible only to the extent of the business use. Steen v. Commissioner,508 F.2d 268, 270 (5th Cir. 1975), affg. 61 T.C. 298 (1973).
Petitioner testified that he used his airplanes exclusively for his bail bond business but that he claimed depreciation as if the planes had been used only 50 percent of the time for business purposes. Unlike respondent, we do not believe that petitioner's tax return preparer's conservative stance should be used as an excuse for completely undermining petitioner's claim for a deduction. Petitioner stated that he used the plane on four separate occasions to make long-distance trips in connection with his bail bond business. We believe this testimony to be credible. However, petitioner's failure to introduce into evidence a flight log or any other documentary evidence works against him. We believe that some business use was made of both airplanes during the 2 years in question. However, because petitioner has failed to submit specific evidence of his business usage of the airplanes, we must limit his depreciation deductions to 25 percent for the years in question. Cohan v. Commissioner,supra.Additionally, as respondent contends, petitioner must recapture in 1976 that portion of the investment tax credit properly taken in 1975. Sec. 47(a).
With respect to the Corvette automobile purchased on August 4, 1976, respondent is correct in his assertion that depreciation only can be taken from the date of purchase until the end of the taxable year and not as if the automobile had been purchased on January 1 of the taxable year. See sec. 1.167(a)-10(b), Income Tax Regs. Because petitioner failed to memorialize his business usage of the car as distinguished from his personal usage, we must deny the bulk of his claimed depreciation deduction for the remainder of the year. However, we do believe that the car was used by petitioner in his various businesses and therefore allow him depreciation as if the car were used 15 percent for business. Cohan v. Commissioner,supra.14
Petitioner failed to present evidence contravening respondent's determination of an addition to tax pursuant to section 6653(a), and therefore we sustain respondent on this issue. To reflect the foregoing,
Decision will be entered under Rule 155.