The bank deposit method supports an IRS underpayment assessment.
The Tax Court denied a taxpayer's claim that deposits to his bank account were not taxable income but repayments of amounts he had loaned his mother to pay her own tax debts and to buy real properties.
Facts: Christopher Dufresne worked as a psychic counselor in the S corporation business of his mother, Sylvia Browne, a well-known psychic who authored books, lectured, and made television appearances. Between 2004 and 2010, he earned about $14 million from the company, but each year after, his reported wages for income tax purposes were a fraction of that amount and zero in 2013.
In 2014, the IRS examined Dufresne's returns for 2010 through 2013, determining he had unreported cash bank deposits totaling more than $1.5 million in those years. Determining the amounts were taxable income, the Service assessed deficiencies totaling more than $500,000 and accuracy-related penalties totaling in excess of $101,000. Sylvia Browne was ill and in debt and filed for bankruptcy in the years before she died in 2013, and the corporation was dissolved in 2015.
Issues: Dufresne contended the deposits were not taxable income because they were repayments of amounts he had loaned his mother. He produced a letter dated January 2008, stating that his mother owed him $1,182,670 for purchases of five real estate properties Dufresne had made on her behalf, although he was the owner of record during the years at issue. She paid him rent on one of the properties. A second letter, dated February 2010, stated that Browne owed Dufresne $307,718 for paying past-due federal taxes on her behalf. Both letters bore Browne's signature, but neither addressed terms of regular repayment, interest, or collateral or security, nor did Dufresne produce any other evidence to that effect. However, he testified at trial that he had expected his mother to repay him and introduced a list of bank deposit amounts that he said were such repayments.
The IRS contended that the bank deposits were disguised compensation for Dufresne's work for the psychic business and were unreported taxable income. Dufresne countered that he was willing to accept the lower salary because of his mother's ill health and their close relationship, and he believed the corporation would be able to pay him his customary salary eventually.
Holding: Noting that intrafamily purported loans are subject to...