T.C. Memo. 1998-121
UNITED STATES TAX COURT
BOBBY E. WELCH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
BOBBY E. WELCH AND KATHLEEN NEWMAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 23725-95, 24065-95. Filed March 30, 1998.
Wayne Hagendorf, for petitioners.
Steven M. Roth, for respondent.
MEMORANDUM OPINION
WRIGHT, Judge: In these consolidated cases respondent
determined deficiencies, additions to tax, and penalties in
petitioners' Federal income taxes as follows:
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Bobby E. Welch, docket No. 23725-95
Additions to Tax
Year Deficiency Sec. 6651(a) Sec. 6653(a)(1) Sec. 6653(a)(1)(A) Sec. 6661(a)
1986 $173,118 $43,517 --- $8,703 $10,107
1987 27,070 6,860 --- 1,372 5,722
1988 25,958 6,564 $1,313 --- 4,952
All section references are to the Internal Revenue Code in
effect for the years in issue. Rule references are to the Tax
Court Rules of Practice and Procedure.
Pursuant to section 6653(a)(1)(B) respondent also determined
additions to tax for 1986 and 1987 in amounts equal to 50 percent
of the interest due on the respective deficiencies.
Bobby E. Welch & Kathleen Newman, docket No. 24065-95
Additions to Tax Penalties
Year Deficiency Sec. 6651(a) Sec. 6662(a)
1989 $49,091 $12,327 $9,818
1990 74,461 18,634 14,892
The deficiencies result from increases in gross income based
on bank deposit analyses and the disallowances of net operating
loss carryovers. The primary issues concern those adjustments
and whether petitioners are liable for the additions to tax and
penalties for the years at issue. Respondent has made some
concessions that will be reflected in the Rule 155 computations.
Summary of Background Facts
Certain facts have been stipulated and are so found. The
stipulation of facts with attached exhibits is incorporated
herein by this reference.
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Petitioners resided in Glendale, California, at the time the
petitions were filed in these cases.
During all the years at issue Bobby E. Welch (petitioner)
was engaged in the electrical contracting business and had
several other ill-defined business activities. On the Federal
income tax returns for these years, petitioner reported the
following on Schedules C and claimed net operating loss (NOL)
carryovers as follows:
Year Gross Receipts Net Profit NOL
1986 $751,169 $7,713 $80,853
1987 79,453 2,992 71,149
1988 64,647 (166) 65,455
1989 104,940 8,665 60,197
1990 179,111 9,392 51,532
Petitioner did not keep books and records from which the
gross receipts could be verified. Respondent performed a bank
deposit analysis for each year. The following total deposits
were made to various bank accounts controlled by petitioner:
Year Total Bank Deposits
1986 $1,105,003
1988 150,181
1989 269,491
1990 422,926
The following table shows the deposit amounts that are still in
dispute:
Year Balance of Deposits
in Dispute
1986 $352,281
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1988 78,231
1989 117,865
1990 165,843
In October 1987, petitioner claimed that since 1986 he had
made contributions totaling approximately $164,000 to the Church
of Scientology (the church). On the 1986 Federal income tax
return, petitioner claimed no deduction for these contributions.
On a 1987 return attached to the petition,1 petitioner showed a
$5,787 charitable contribution and a carryover from the prior
year in the amount of $51,010. On the 1989 return, petitioner
showed a contribution to the church in the amount of $57,998 and
a carryover from the prior year in the amount of $56,797. On the
1990 return, petitioner showed charitable contributions in the
amount of $74,055 and a carryover from prior years in the amount
of $105,885.
With respect to the unreported income, the gravamens of
petitioner's arguments are that the balances in dispute were
either loans from Stanley Zurn (Mr. Zurn) in the amounts of
$375,000 in 1986, $70,000 to $75,000 in 1988, $70,000 in 1989,
1
The record contains two 1987 tax returns. A copy of one
return was attached to the petition. That return, prepared by
Arthur T. Moore, a certified public accountant, is a joint
return, and shows the charitable contribution and carryover
amounts. The second return is Exhibit 4-D attached to the
stipulation of facts. That return, prepared by William D. Truax,
E.A., Inc., has a filing status of married filing separate and
claims no charitable contribution or carryover. The record is
silent concerning this anomaly.
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and $180,000 in 1990 or were so-called accommodation deposits2
from Sergio Antonucci (Mr. Antonucci) in the amounts of
$30,000 on January 5, 1989, $7,5003 on March 31, 1989, and $5,000
on May 15, 1989, through an account under the name of Morgan
Stern Group during 1989.
Mr. Zurn testified that he lent petitioner approximately
$700,000 over the years in question. With the exception of a
copy of an alleged journal pertaining to funds received from Mr.
Zurn to construct an apartment building, see discussion infra,
there are no documents showing transfers of funds between
petitioner and Mr. Zurn. During this time petitioner did perform
services for Mr. Zurn and/or Zurn-related activities.
With regard to the NOL carryovers, petitioner alleges that
he suffered an NOL in 1984 in the amount of $146,058, which,
together with a carryover from prior years in the amount of
$4,907, produced an NOL carryover in the amount of $150,965.
Petitioner introduced a copy of his 1984 return that was
allegedly filed and included, inter alia, a Schedule C reporting
2
As we understand it, Mr. Antonucci would allegedly send
money to petitioner's account, and then later petitioner would
pay the money to Mr. Antonucci or have it paid on the latter's
behalf.
3
The transcript refers to this amount as $75,000. The
exhibit to which the testimony related shows $7,500 to be the
actual amount.
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gross receipts in the amount of $737,86 .4 Arthur T. Moore (Mr.
Moore), a certified public accountant, prepared petitioner's 1984
return from information supplied by petitioner and sent the
return to petitioner. Petitioner has no original books or
records supporting the figures that appear on the copy of the
1984 return. Petitioner, however, has a work sheet allegedly
prepared in-house showing a trial balance of his business as of
December 30, 1984. Mr. Moore did not know whether the 1984
return that he prepared was filed, and petitioner did not testify
that he filed the return. The record does not contain any
information concerning petitioner's 1981, 1982, 1983, and 1985
tax returns.
Petitioner did not testify as to the date that he filed the
returns for the years at issue. A copy of the 1986 return shows
that petitioner executed that return on September 26, 1992. That
return was prepared by "Greenberg & Jackson, CPA'S" (Greenberg
firm). A copy of the return for 1987 attached to the petition
shows that it was prepared by Mr. Moore and shows a date of
February 20, 1994, whereas a copy of the 1987 return attached to
the stipulation of facts is undated and shows that it was
prepared by "William D. Truax, E.A., Inc." (Truax). A copy of
the 1988 return indicates that it was prepared on August 19,
1992, by Truax. Copies of the 1989 and 1990 returns show that
4
The copy of this return cuts off the last digit on the
right-hand column of the Schedule C.
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they were prepared by Mr. Moore and bear the date of February 20,
1994. There is no explanation as to the reasons why the tax
returns were not timely filed. No one from the Greenberg firm or
Truax testified concerning the preparation of the returns for
1986 and 1988. Mr. Moore testified that he prepared the returns
for 1989 and 1990 from information petitioner gave him.
During the redirect examination of petitioner, he testified
that in making deposits during 1986, he received "cash back" from
checks that were deposited, and, therefore, he made net deposits.
The total amount of the so-called cash back was $5,713. In
reconstructing petitioner's 1986 gross income by the bank deposit
method, respondent had used the net deposits shown on the monthly
statements from the bank. At the close of the testimony
respondent orally moved to amend the answer for the 1986 taxable
year and increase petitioner's gross income by the amount of
$5,713. The Court took respondent's oral motion and petitioner's
objection thereto under advisement.
Discussion
Petitioner does not dispute the amount of the deposits that
went into his bank accounts as determined by respondent. Rather,
he contends that the difference between the total deposits and
the gross income reported results from the loans from Mr. Zurn
and the so-called accommodation deposits from Mr. Antonucci.
There is no question that the funds were actually received. The
only question is whether petitioner has established that the
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funds in dispute were derived from nontaxable sources. Rule
142(a); Tokarski v. Commissioner, 87 T.C. 74 (1986); see also
Rockwell v. Commissioner, 512 F.2d 882, 885-887 (9th Cir. 1975).
We turn to an examination of the facts concerning the two alleged
sources of the deposits.
Funds From Mr. Zurn
Petitioner's relationship with Mr. Zurn may be described as,
to say the least, confusing. Indeed, there is even confusion as
to when petitioner and Mr. Zurn became associated. Petitioner
testified that he met Mr. Zurn in 1984. However, in a prior
trial involving Mr. Zurn's tax liabilities, petitioner testified
that they became associated in 1987, or possibly 1986. This date
is important because petitioner alleges that he received funds
from Mr. Zurn in 1985 and 1986 to construct an apartment building
(referred to herein as the Montrose property). Petitioner's
version of the events, however, is questionable in light of a
loan application dated July 14, 1986, in which petitioner stated
that he was receiving monthly rental income from the Montrose
property in the amount of $5,640. Finally, there is the peculiar
grant deed dated August 2, 1985, purportedly conveying the
Montrose property to Mr. Zurn and a John Nuckols. Petitioner
testified that at the time he conveyed the property to Messrs.
Zurn and Nuckols, Mr. Zurn had advanced at least $50,000 to
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construct the improvements.5 But that is contradicted by
petitioner's alleged journal on the Montrose property showing
that moneys were not spent in any amounts until after August 1,
1985.6 We are faced, therefore, with inconsistencies not only in
petitioner's testimony but also between his testimony and the
documents.
These are not the only weaknesses in the alleged Welch/Zurn
financial relationship. There are no indicia of a normal
debtor/creditor relationship supporting petitioner's version of
the facts. There were no notes, no due dates or payment
schedules, and no stated rate of interest.7 Indeed, at the
trial, while both petitioner and Mr. Zurn testified that
5
We have tried in vain to correlate the checks from Mr.
Zurn that were deposited in the Montrose property account with
the expenditures listed on the alleged journal on the Montrose
property.
6
Respondent objects to Exhibit 44AR, which was offered as
a record of Mr. Zurn's advances to the Montrose property. The
only reference that may be to Mr. Zurn is an ambiguous notation
on page 2 of Exhibit 44AR that reads "$202.31 - 18 Dec. - 15 shts
3/4 CDX Grossman's - pd by Stan Zurn". We do not accept that
this was a contemporaneous record of funds allegedly borrowed by
petitioner. We do admit the exhibit as a record created by
petitioner, but we have little confidence in the document as
being a record of loans from Mr. Zurn to petitioner.
7
Petitioner argues that the interest rate at the beginning
was 6 percent and then was changed to 17.136 percent, as
evidenced by a notation on the alleged journal on the Montrose
property. The reference in the journal reads "Feb. 21, 85 to
B.W. 17.136%." Whatever this may refer to, we do not believe
that it relates to the interest that petitioner was expected to
pay. We note further that petitioner did not claim any deduction
for interest on his 1986 tax return.
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petitioner was still indebted to Mr. Zurn, neither could give a
definite current balance of the debt. Furthermore, during the
time that petitioner was allegedly borrowing approximately
$700,000 from Mr. Zurn to keep his businesses going, he also
allegedly gave approximately $300,000 to the church and/or
charities. While allegedly all of the funds lent in 1986 were
used for the Montrose property, $47,000 from the account to which
the alleged loans from Mr. Zurn were deposited was sent to the
church. This was at a time when at least Mr. Zurn was under the
impression that "Things were kind of tough [for petitioner]."
Moreover, there is the matter of the "Community Land & Oil
Corporation Trust Lot 2160" transaction (Lot 2160 transaction) in
1989. While the facts surrounding the Lot 2160 transaction are
unclear, during 1989 Mr. Zurn issued a check in the amount of
$258,351 to the "Fountain Exchange", which went into an account
that petitioner controlled to purchase Lot 2160, a parcel of real
estate that petitioner owned. Later Mr. Zurn allegedly
determined that Lot 2160 was not worth the money that he had
paid. It is unclear exactly what happened next, but it is clear
that petitioner never returned the $258,000.8 It is also strange
that, notwithstanding Mr. Zurn's view that petitioner had sold
him a worthless lot for $258,000, according to their testimonies,
8
The Lot 2160 transaction has been before the Court before
in Zurn v. Commissioner, T.C. Memo. 1996-386. In that case we
determined, partly on the basis of this transaction, that Mr.
Zurn had committed tax fraud.
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Mr. Zurn continued to advance petitioner money without any
security or, indeed, any notes of the debt.
Finally, we are troubled by Mr. Zurn's lack of specificity
as to the sources of the funds allegedly lent to petitioner.9 In
Zurn v. Commissioner, T.C. Memo. 1996-386, we found that during
1986 and 1987 Mr. Zurn had advanced $677,652 to an entity known
as Cities Development Group, Inc. (Cities). If petitioner's
version that the 1986 deposits in the amount of $375,000 came
from Mr. Zurn is to be believed, then Mr. Zurn lent over $1
million during this time. Mr. Zurn's Federal income tax returns
during this period clearly do not reveal the sources of the funds
that gave rise to this benevolent lending. We recognize that Mr.
Zurn owned various rental properties that could generate cash
that would not reflect taxable income, but even the gross income
from rentals does not explain the source of these funds. While
Mr. Zurn did sell some property for approximately $104,000, that
and the gross rents are far from the $1 million allegedly lent.
Taking all the confusion, contradictions, and other
anomalies in Mr. Zurn's and petitioner's testimonies into
account, we do not find it believable that loans from Mr. Zurn
9
Mr. Zurn testified that
The source would have been previous monies that I
had, it would have been real estate money, it
would have been any property that was sold, it
would have been borrowed money, it would have been
family money, what--what I had, you know, the
different sources.
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were the source of petitioner's unexplained deposits for any of
the years in question. Even accepting the alleged unusual
business habits of both, we cannot accept that some $700,000 in
loans exchanged hands. It is clear that funds did flow between
Mr. Zurn and petitioner, but it is also clear that petitioner
performed services for Mr. Zurn. We do not know the reasons for
many of the transfers. At least in the case of the funds
involved on the so-called Lot 2160 transaction, while we do not
know details of the transaction, it certainly appears that from
petitioner's position some type of taxable transaction took place
and that transaction was not reported on petitioner's tax return.
While it may be that Mr. Zurn did lend petitioner money, the
paucity of records of both Mr. Zurn and petitioner makes it
impossible to separate the possible wheat from the definite chaff
in the transfers of funds between the two. Accordingly, we
sustain respondent's determinations based on the bank deposit
analyses for all the years at issue.10
The Accommodation Deposits
During 1987 through 1989, Mr. Zurn and petitioner were
engaged in some type of an alleged export activity under the name
10
There are other peculiarities. For example, the gross
income on petitioner's 1986 Schedule C reflects $751,169 and a
net profit of $7,713. In an income statement prepared by Mr.
Moore for the first 9 months of 1986, petitioner's gross income
was shown to be $853,122 with a net profit of $108,058. While
Mr. Moore prepared the income statement, he did not prepare the
1986 tax return.
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of Star Global. Star Global had been owned by either Paul Tallis
(Mr. Tallis) or Mr. Tallis and petitioner. Sometime between the
end of 1987 and the beginning of 1989, Mr. Tallis sold Star
Global to Mr. Zurn. Mr. Tallis remained with Star Global until
January 1989. After he acquired an interest in Star Global, Mr.
Zurn did not have signatory authority over Star Global's bank
account. Petitioner and his wife had that authority and used the
account as their account. At some point, petitioner became
acquainted with Mr. Antonucci. Mr. Antonucci did not testify,
and there was no explanation as to the reason that he was
unavailable. Mr. Tallis testified that "He [Mr. Antonucci]
basically was--he ostensibly was there to show us how to do
things like trusts, et cetera. He was quite a flashy guy. He's
have [sic] a Rolls Royce and--and he'd run his money through our
accounts because he--that's what he wanted to do". There are no
documents that connect Mr. Antonucci with any deposits to or
subsequent withdrawals from the Star Global bank account. Mr.
Tallis, however, could identify one wire transfer deposit made on
January 5, 1989, in the amount of $30,000 and a withdrawal in the
amount of $30,000 made on January 9, 1989, from Mr. Antonucci.11
11
At first Mr. Tallis identified several other deposits
and withdrawals as being part of Mr. Antonucci's transactions.
These transactions, however, took place after Mr. Tallis had left
Star Global. Petitioner testified that $14,500 was from Mr.
Antonucci. We have been unable to identify either the deposit or
a withdrawal.
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In considering both the deposits from purported loans and
the accommodation deposits, we are left with the decided
impression that petitioner is engaged in a shell game. We have
no confidence in petitioner's testimony. Nonetheless, we do
accept Mr. Tallis' testimony that the deposit of January 5, 1989,
in the amount of $30,000 was not income to petitioner. None of
the other alleged accommodation deposits were verified by another
party, nor is there a clear trail of a withdrawal of the funds.
With the exception of the $30,000 January 5, 1989, deposit, we
reject petitioner's argument concerning the accommodation
deposits.
Increased Income and Deficiency--1986
At the close of the evidence respondent orally moved to
amend the answer to conform to the evidence and to increase the
deficiency by the tax on $5,713 for 1986. Petitioner objects to
the amendment. We agree with respondent. See Rule 41(b)(1) and
(2). The evidence underlying respondent's motion was introduced
by petitioner on redirect examination for petitioner's own
reasons. Petitioner's testimony, however, is a double-edge
sword, a cut from which petitioner now seeks to avoid. In this
regard, petitioner does not dispute that the amount involved was
not included in respondent's bank deposit analysis, nor does he
disavow his testimony that he received cash from the items
deposited.
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Rather, petitioner argues that respondent should be
precluded by the stipulation from raising the issue. In
paragraph 6 the parties stipulated that for 1986 the total
deposits were $1,105,003. In paragraph 9 the parties stipulated
that the "unexplained deposits which remain at issue" for 1986
were $352,281. The problem with petitioner's position is that we
are not concerned here with unexplained deposits. To the
contrary, the amount in question admittedly was not deposited,
and respondent is not attempting to change the amount of deposits
which were the subject of the stipulation.12 Nor do we find
convincing petitioner's argument that he was surprised. It was
petitioner who brought the subject up during his testimony.
We recognize that any time there is an amendment to a
pleading that either increases or decreases a deficiency, there
is a pecuniary prejudice to the other party. But that is not the
prejudice we are concerned with here. Rather we are concerned
with whether petitioner was unfairly prejudiced in presenting his
case, and we do not find that type of prejudice. Thus, we will
allow respondent to amend the answer in docket No. 23725-95 to
increase the deficiency for 1986 by the tax on $5,713.
We next turn to the question whether petitioner had
unreported income during 1986 in the amount of $5,713. Since
12
Petitioner appears to argue that the parties stipulated
the amount of the deficiency for 1986. If, indeed, that were the
case, we are unsure of the reason for a 2-day trial.
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this would lead to an increased deficiency, respondent has the
burden of proof. Rule 142(a). As mentioned, petitioner does not
contend that this amount was deposited and not included in
respondent's bank deposit analysis. Petitioner argues in his
brief that "the cash was reported on his income tax returns."
Petitioner's testimony was as follows:
Q: Did you report these monies as income * * * on your
tax returns?
A: I always had a cash item--you know--a cash amount
that would be put in * * * because that was pretty
visible, and that was part of the record. On those
particular ones, though, I had discussed that with Mr.
Shors [the revenue agent who audited petitioners'
returns] and he said that he wasn't asking for those,
nor would that become part of--or be part of this
procedure and trial.
We are somewhat unsure as to the meaning of this testimony. The
Greenberg firm prepared the 1986 return. There are no documents
that indicate that petitioner included the cash in the income
figures that he gave the Greenberg firm to prepare that return.
More important, even if he did include cash on his reported gross
receipts, the fact is that his total gross income from the bank
deposits was $5,713 greater than the total upon which
respondent's calculation was made.
With regard to the part of the testimony referring to Mr.
Shors, during the audit examination Mr. Shors took the total
deposits from the monthly bank statements and not from the
deposit slips. Even if Mr. Shors made some comment during the
audit to the effect that he was not concerned with so-called
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cash-back deposits, which we doubt, respondent would not be
precluded from raising the issue, especially when he relies on
petitioner's own testimony.
In sum, we hold that respondent may amend the answer to
raise the issue. Furthermore, the evidence clearly established
that the gross receipts from the bank deposit analysis for 1986
were understated by $5,713.
Net Operating Loss (NOL) Carryover from 1984
Petitioner contends that he is entitled to deductions for
the taxable years after 1985 for NOL carryovers from the 1984
taxable year. Section 172(a) allows a deduction for an NOL
carryover to a taxable year plus an NOL carryback to that year.
For the years before the Court, an NOL would be carried back for
3 years and carried over for 15 years.13 A taxpayer can,
however, elect to relinquish the carryback period. Such an
election must be made by the due date for filing the taxpayer's
return for the taxable year of the NOL for which the election is
to be in effect, in a manner prescribed by the Secretary. Sec.
172(b)(3)(C). Such an election:
shall be made by a statement attached to the
return (or amended return) for the taxable
13
Before 1986, an NOL could be carried over for 5 years.
Sec. 172(b)(1)(B). Sec. 1009(c)(3) of the Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat.
3342, 3449, extended the carryover period for NOL's for losses
occurring after Dec. 31, 1975, to 15 years.
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year. The statement required * * * shall
indicate the section under which the election
is being made and shall set forth information
to identify the election, the period for
which it applies, and the taxpayer's basis or
entitlement for making the election.
Sec. 301.9100-12T(d), Temporary Proced. & Admin. Regs., 57 Fed.
Reg. 43893 (Sept. 23, 1992) (redesignating sec. 7.0, Temporary
Income Tax Regs., 42 Fed. Reg. 1469 (Jan. 7, 1977) ("Various
elections under the Tax Reform Act of 1976")).
Petitioner must first establish that he suffered an NOL for
the taxable year 1984. To meet this burden petitioner relies on
a purported retained copy of his 1984 return that was prepared by
Mr. Moore. That return shows an NOL from petitioner's sole
proprietorship "Bob Welch Electric" in the amount of $146,058 and
an NOL carryforward in the amount of $4,907. Respondent has no
record of the return's being filed and disputes the amount of the
NOL claimed. For the purpose of discussion only, we are willing
to assume that the return was timely filed and accurately
reflects the loss. Petitioner, however, still faces the problem
that there is no statement attached to the return identifying
that an election has been made. Indeed, there is no evidence
that any election to relinquish the carryback was ever made.
Thus, under the general rule, the 1984 NOL would be carried back
to the 1981, 1982, and 1983 taxable years and carried forward to
the 1985 taxable year before it would be carried forward to any
of the years before the Court. There is nothing in this record
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that provides any basis from which we could determine the amount
of the 1984 NOL that was absorbed in the years before 1986, the
earliest year before the Court. Accordingly, petitioner has not
shown that he is entitled to deductions under section 172 for any
of the years before the Court.
Additions to Tax and Penalties
Respondent determined additions to tax for failure to timely
file returns under section 6651(a) for all the years at issue;
additions to tax for negligence under section 6653(a)(1)(A) and
(B) for 1986 and 1987; an addition to tax for negligence under
section 6653(a)(1) for 1988; additions to tax for substantial
understatements under section 6661(a) for 1986, 1987, and 1988;
and accuracy-related penalties for negligence under section
6662(a) for 1989 and 1990.
Section 6651(a) imposes an addition to tax for failure to
timely file returns "unless it is shown that such failure is due
to reasonable cause and not due to willful neglect". Sec.
6651(a)(1). Reasonable cause "calls on the taxpayer to
demonstrate that he exercised 'ordinary business care and
prudence' but nevertheless was 'unable to file the return within
the prescribed time.'" United States v. Boyle, 469 U.S. 241, 246
(1985) (quoting sec. 301.6651-1(c)(1), Proced. & Admin. Regs).
Willful neglect means "a conscious, intentional failure or
reckless indifference." United States v. Boyle, supra at 245.
It is undisputed that the returns for the taxable years 1986
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through 1990 were not timely filed. Furthermore, there is
nothing in this record that would even remotely indicate that
these failures were due to reasonable cause and not due to
willful neglect. Therefore, we sustain respondent's
determinations with respect to the additions to tax under section
6651(a) for all the years at issue.
Sections 6653(a) and 6662(a) impose additions to tax and
penalties for negligence or disregard of rules or regulations.
If any part of the underpayment is due to negligence, under
section 6653(a)(1) the addition to tax is equal to 5 percent of
the amount of the underpayment. Under section 6662(a) the
accuracy-related penalty is equal to 20 percent of the portion of
the underpayment due to negligence. It is clear that petitioner
is liable for these additions to tax and accuracy-related
penalties. Under section 6001 a taxpayer is required to keep
records. As far as we can determine, petitioner kept no records
from which his (taxable) income could be determined. While
petitioner used accounting firms to prepare his returns, as far
as Mr. Moore was concerned, petitioner supplied the information
in summary fashion. None of the other return preparers
testified. With respect to petitioner's gross income, the
information was greatly understated. Furthermore, with regard to
the accuracy-related penalties, the entire underpayment for each
of the taxable years 1989 and 1990 was attributable to
negligence. We sustain respondent's determinations with respect
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to the additions to tax under section 6653(a) for 1986, 1987, and
1988 and the penalties under section 6662(a) for 1989 and 1990.
Section 6661(a) provides that "If there is a substantial
understatement of income tax for any taxable year, there shall be
added to the tax an amount equal to 25 percent of the amount of
any underpayment attributable to such understatement." See also
Pallottini v. Commissioner, 90 T.C. 498 (1988). There is a
substantial understatement if the amount of the understatement
exceeds the greater of $5,000 or 10 percent of the tax required
to be shown on the return. Sec. 6661(b)(1)(A). The amount of
the understatement shall be reduced if there is substantial
authority for the tax treatment of any item or there is
disclosure of the relevant facts affecting the item's tax
treatment. Sec. 6661(b)(2)(B). The understatements of tax here
essentially result from unreported income and the disallowed NOL
carryovers, and are substantial under section 6661(b)(1). There
was no substantial authority for either position taken, nor was
there adequate disclosure of the relevant facts. Therefore, we
sustain respondent's determinations with respect to the additions
to tax under section 6661(a) for 1986, 1987, and 1988.
Tax on Self-Employment Income
Section 1401(a) imposes a tax "on the self-employment income
of every individual". As we understand it, petitioner does not
dispute that he is liable for the tax. Rather, he contends that
his self-employment income should not be increased by the
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disputed unreported income. His arguments, therefore, are
essentially that he had no unreported income. We have rejected
those arguments, and the increased tax on self-employment income
follows from that rejection.
To reflect the foregoing,
An order will be issued
granting respondent's motion to
amend the answer in docket No.
23725-95 and decisions will be
entered under Rule 155.