Ketler v. Comm'r

T.C. Memo. 1999-68

UNITED STATES TAX COURT

WARREN R. KETLER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7662-96. Filed March 5, 1999.

Warren R. Ketler, pro se.

Jeffrey L. Heinkel, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GALE, Judge: Respondent determined deficiencies and

additions to tax in petitioner's Federal income taxes as follows:
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Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6654(a)

1990 $9,318 $2,330 $610
1991 7,110 1,778 406

Respondent subsequently filed an amendment to answer,

asserting increased deficiencies and additions to tax to the

following amounts:

Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6654(a)

1990 $33,544 $8,386 $2,209
1991 29,402 7,351 1,691

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable years in

issue. All Rule references are to the Tax Court Rules of

Practice and Procedure.

The issues for decision are: (1) Whether petitioner failed

to report income for 1990 in the amount of $92,656; (2) whether

petitioner failed to report income in 1991 in the amount of

$78,996; (3) whether petitioner is liable for self-employment

taxes in the amounts of $7,849 and $9,038 for the years 1990 and

1991, respectively; (4) whether petitioner is subject to

additions to tax for failure to file Federal income tax returns

for the years 1990 and 1991; and (5) whether petitioner is liable

for additions to tax for failure to make estimated tax payments

for the taxable years 1990 and 1991.

FINDINGS OF FACT

Petitioner was a resident of California at the time the

petition herein was filed. Petitioner did not file Federal
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individual income tax returns for his taxable years 1990 and

1991. Nor did he make estimated tax payments for those years.

During 1990 and 1991, under his personal Social Security

number and at his mailing address, petitioner received payments

on behalf of "California Barbecue". On the basis of information

reported by payers, respondent determined that petitioner, doing

business as California Barbecue, had received the following

nonemployee compensation during those years:

Payer 1990 1991

Hewlett-Packard Co. $774 ---
Stanford University 736 $28,072
Syva Co. 1,858 ---
Apple Computer, Inc. 5,405 ---
Oracle Corp. 1,071 ---
Nordstrom, Inc. 5,515 ---

Respondent further determined that, during the same years

petitioner had received payments of interest as follows, on the

basis of reports of the payer:

Payer 1990 1991

Great Western Bank $644 $138

Additionally, records filed with respondent by the Social

Security Administration reflect that petitioner received Social

Security payments as follows:

Payer 1990 1991

Social Security Admin. $9,496 $10,006

Of the payments from the Social Security Administration, $4,748

represents taxable income for petitioner's taxable year 1990 and
 - 4 -

$5,003 represents taxable income for petitioner's taxable year

1991.

With respect to 1990, respondent consulted Bureau of Labor

Statistics (BLS) tables to determine the average amount of income

that a person who met certain criteria applicable to petitioner

would have earned during that year. Respondent then added an

additional amount to the sums revealed as income in the Forms

1099-MISC in order to arrive at a reconstructed income for

petitioner that equaled the average determined by using the BLS

tables.

During the pretrial phase of this case, respondent served a

request for admissions and a request for production of documents

upon petitioner. Although petitioner acknowledges receiving

these items, no response was forthcoming.1 On March 19, 1997,

respondent served a motion to compel production of documents.

This motion was returned to respondent on or about April 2, 1997.

Respondent then realized that the request for production of

documents, as well as the motion to compel production of

documents, had been addressed to petitioner at P.O. Box 239, Palo

Alto CA 94023, instead of at the address reflected on his

petition, P.O. Box 239, Los Altos CA 94023. On April 11, 1997,

respondent served another copy of the motion to compel production

1
The matters set forth in the request for admissions are
deemed admitted. See Rules 90(c), 104(d). We note further that
other evidence presented by respondent at trial substantiates the
matters deemed admitted.
 - 5 -

of documents at the proper address. Petitioner did not respond

to this motion.

Shortly before the trial opened, the Great Western Bank,

pursuant to a summons, provided respondent with bank records.

The records reveal that, during the years in issue, petitioner

maintained a Great Western Bank account in the name of "Warren R.

Ketler, D.B.A. Thru The Lens". The signature card for the

account used petitioner's Social Security number and address.

Thru The Lens is a photography business. Bank statements of this

account, No. 308-8083971, reveal total deposits of $8,563 for

petitioner's taxable year 1990 and $23,691 for 1991.

The summoned records also reveal that petitioner had a

separate individual account at Great Western Bank, No. 308-

8064948, maintained under his own Social Security number and

mailing address. Statements of this account reveal total

deposits of $80,609 for 1990 and $39,467 for 1991. Petitioner

commingled the income and expenses of Thru The Lens between

account Nos. 308-8083971 and 308-8064948.

Respondent then reconstructed petitioner's income on the

basis of these bank records. Respondent determined that some of

the deposits into the Thru The Lens account were not accessions

to income but rather transfers from petitioner's individual

account. These transfers totaled $2,900 in 1990 and $1,000 in

1991. Respondent further determined that some expenditures from

the Thru The Lens account were deductible business expenditures;

these totaled $4,499 for 1990 and $6,168 for 1991.
 - 6 -

On the basis of the foregoing, respondent calculated that

petitioner had additional income in 1990 and 1991 from Thru The

Lens, as follows:

1990 1991

Total deposits $89,172 $63,158
Less transfers (2,900) (1,000)

Net deposits 86,272 62,158
Less business expenses (4,499) (6,168)

Net profit 81,773 55,990

Respondent's counsel then contacted petitioner and asked

whether petitioner would attend a meeting to review and explain

the entries in the bank records. Petitioner declined to do so.

At trial, we granted respondent leave to file an amendment to

answer, setting forth the increased deficiencies based upon the

inclusion of the Thru The Lens income.2

OPINION

The determinations of the Commissioner in a notice of

deficiency are presumed correct, and the taxpayer bears the

burden of proving that the determinations are in error. See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In cases

involving the Commissioner’s determinations of unreported income,

2
Respondent's amendment to answer indicates petitioner
earned more than enough income to support himself during 1990.
Accordingly, respondent did not use BLS statistics to calculate
the amount of deficiencies set forth in the amendment to answer.
Nor did the deficiencies reflected in the amendment to answer
include payments of interest from Great Western Bank. Apparently
respondent omitted that interest income as a separate item
because it was part of the reconstructed income reflected as
deposits to petitioner's bank account.
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the presumption of correctness may not attach, and the finding of

unreported income may be arbitrary, unless the Commissioner links

the taxpayer to an income-producing activity, see Palmer v. IRS,

116 F.3d 1309, 1313 (9th Cir. 1997); Rapp v. Commissioner, 774

F.2d 932, 935 (9th Cir. 1985); or to ownership of liquid assets,

see Erickson v. Commissioner, 937 F.2d 1548, 1551-1552 (10th Cir.

1991), affg. T.C. Memo. 1989-552; Delaney v. Commissioner, 743

F.2d 670, 672 (9th Cir. 1984), affg. T.C. Memo. 1982-666;

Tokarski v. Commissioner, 87 T.C. 74, 76 (1986).3

Respondent has linked petitioner to income-producing

activities and ownership of liquid assets in 1990 and 1991.

Petitioner is deemed to have admitted, and third-party

information returns document, that he received nonemployee

compensation in 1990 in connection with the California Barbecue

activity from Hewlett-Packard Co., Stanford University, Syva Co.,

Apple Computer, Inc., Oracle Corp., and Nordstrom, Inc.; and in

1991 from Stanford University. This evidence further shows that

Forms 1099-MISC were issued by the foregoing payers to California

Barbecue at petitioner’s address, with a taxpayer identification

number that matched petitioner’s Social Security number.

3
The rule requiring the Commissioner to provide an
evidentiary foundation linking the taxpayer to the income-
producing activity arose in connection with illegal-source
income. See Weimerskirch v. Commissioner, 596 F.2d 358, 361-362
(9th Cir. 1979), revg. 67 T.C. 672 (1977). It is now established
that the Court of Appeals for the Ninth Circuit, to which an
appeal of this case would lie, applies the rule in all cases
involving the receipt of unreported income. Cf. Palmer v. IRS,
116 F.3d 1309, 1313 (9th Cir. 1997); Edwards v. Commissioner, 680
F.2d 1268, 1270-1271 (9th Cir. 1982).
 - 8 -

Further, the regularly maintained business records of Behring

Diagnostics, the corporate successor of Syva Co., contain

invoices from California Barbecue for various catering services

in 1990 and 1991, as well as copies of Syva Co.’s checks in

payment of these invoices. Syva Co.’s records also contain a

copy of a Form 1099-MISC issued to California Barbecue for 1990

(listing petitioner’s Social Security number as the taxpayer

identification number), and no Form 1099-MISC for 1991 (in which

payments to California Barbecue did not exceed $600). Syva Co.’s

records also contain invoices with the legend “California

Barbeque” and petitioner’s address printed thereon. Further, it

was Syva Co.’s policy to obtain a taxpayer identification number

before making payment on an invoice.

In addition, respondent has matched petitioner’s Social

Security number and address to a bank account registered in his

name “D.B.A. Thru The Lens, Sole Proprietor”. Numerous deposits

were made to, and checks drawn on, this account during 1990 and

1991. The checks for this account were preprinted with

petitioner’s address and the legend “Thru The Lens”.

Accordingly, the determination of unreported income in the

notice of deficiency is presumptively correct, and the unreported

income alleged in respondent’s amendment to answer is not

arbitrarily asserted.
 - 9 -

A. Reconstruction of Income

Every individual liable for income taxes is required to

maintain books and records sufficient to establish the amount of

his or her gross income. See sec. 6001; DiLeo v. Commissioner,

96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992). In

the absence of books and records, the Commissioner may

reconstruct a taxpayer's income by any method that clearly

reflects income. Sec. 446(b). The choice of the method of

reconstruction of income lies with the Commissioner. See Estate

of Rau v. Commissioner, 301 F.2d 51, 54 (9th Cir. 1962) (citing

Schellenbarg v. Commissioner, 31 T.C. 1269, 1277 (1959), affd. in

part and remanded on another issue 283 F.2d 871 (6th Cir. 1960)),

affg. T.C. Memo. 1959-117. The Commissioner possesses

substantial latitude in reconstructing a taxpayer's income when

the taxpayer fails to maintain records. See Petzoldt v.

Commissioner, 92 T.C. 661, 695-696 (1989).

Here, respondent has reconstructed petitioner’s income using

both information received from third-party payers concerning

payments made with respect to petitioner’s Social Security

number, address, and a business, California Barbecue, with which

he acknowledges involvement; and bank accounts bearing his name,

Social Security number, and address. We accept both methods as

permissible means of reconstructing income.
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1. Income Reported on Information Returns

The Commissioner may properly reconstruct a taxpayer's

income from third-party payers’ reports, such as Forms 1099-

MISC.4 See Parker v. Commissioner, 117 F.3d 785 (5th Cir. 1997);

Andrews v. Commissioner, T.C. Memo. 1998-316; White v.

Commissioner, T.C. Memo. 1997-459. In this case we conclude that

petitioner received the amounts of income reported to respondent

in the Forms 1099-MISC as payments to California Barbecue for the

years in issue. The evidence suggests that this income

represents amounts paid for large-volume food catering services

provided by petitioner. Petitioner, however, did not provide any

information about California Barbecue or its operations, income

or expenses to respondent or the Court. Thus, while petitioner

4
Although neither party has raised the issue, we note that
sec. 6201(d), as amended by the Taxpayer Bill of Rights 2, Pub.
L. 104-168, sec. 602(a), 110 Stat. 1452, 1463 (1996), was
effective as of July 30, 1996. Sec. 6201(d) provides that if the
taxpayer, in a court proceeding, asserts a reasonable dispute
with respect to the income reported on an information return, and
fully cooperates with the Commissioner, then the Commissioner
shall have the burden of producing reasonable and probative
information in addition to the information return.
Even if petitioner had advanced that argument, we would
conclude he had not asserted a reasonable dispute with respect to
any item of income reported on an information return. He did not
file a Federal income tax return, nor did he offer testimony
indicating that he did not receive those items of income reported
on the Forms 1099-MISC. Nor, for that matter, did he deny
receiving the amounts deposited in the Great Western Bank.
Additionally, sec. 6201(d) would not be applicable because
petitioner offered no evidence that he fully cooperated with
respondent. To the contrary, the record amply demonstrates his
failure to cooperate, including his failure to provide access to
documents within his control. We hold that petitioner retained
the burden of proof as to the taxability of the income revealed
in the Forms 1099-MISC. Cf. Parker v. Commissioner, 117 F.3d 785
(5th Cir. 1997).
 - 11 -

likely incurred deductible expenses relating to the California

Barbecue business, we have no evidence regarding the amount of

such expenses. "While it is within the purview of this Court to

estimate the amount of allowable deductions where there is

evidence that deductible expenses were incurred (Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930)), we must have some

basis on which an estimate may be made." Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985). Here, petitioner

could have provided such a basis but refused to do so. Without

such a basis, the allowance of any such deductions would amount

to "unguided largess". Williams v. United States, 245 F.2d 559,

560 (5th Cir. 1957). Accordingly, on the evidence before us, we

hold that petitioner is liable for taxes upon the amounts

reported in the Forms 1099-MISC.5

At trial, petitioner argued that California Barbecue was

merely a business name for a corporation named Kaytoo, Inc.

Respondent's certified transcripts of account indicate, however,

that income paid to California Barbecue was paid to petitioner

individually. An example of such evidence is a certified

5
Petitioner deposited income from California Barbecue into
the Great Western Bank, under account No. 308-80757-8. At the
time of trial, respondent did not have records of amounts
deposited into Great Western Bank account No. 308-80757-8.
Accordingly, the income attributed to petitioner doing business
as California Barbecue reflects only those amounts revealed in
the Forms 1099-MISC; it does not include other amounts that may
have been deposited into that account. In this regard, we note
that third-party payers are required only to report payments over
$600. Sec. 6041(a). We have no information of the extent to
which petitioner, doing business as California Barbecue, received
payments of less than $600.
 - 12 -

official record which demonstrates that Stanford University

issued a Form 1099-MISC reporting $28,072 paid to California

Barbecue in 1991, using petitioner's mailing address and

petitioner's individual Social Security number as the "Taxpayer

Identification Number". Petitioner subsequently placed in

evidence a "corrected" Form 1099-MISC reflecting payment of the

same $28,072 by Stanford University to California Barbecue in

1991. The corrected Form 1099-MISC, however, was sent to "Kaytoo

Corporation, D.B.A. California Barbecue". It also provided a

taxpayer identification number that was not petitioner's Social

Security number. Although the postmark on the envelope enclosing

this reissued Form 1099-MISC is barely legible, it does establish

that the corrected Form was mailed to respondent no earlier than

April 27, 1996, after petitioner had filed this case. At trial,

petitioner provided only evasive and irrelevant testimony as to

the circumstances surrounding the issuance or reissuance of this

Form 1099-MISC.6 Under these circumstances, we are of the

opinion that the reissued document has no probative value in

establishing that amounts paid to California Barbecue were paid

to a corporation rather than to petitioner as an individual. To

6
For example, petitioner refused to answer questions as to
the Stanford University Forms 1099-MISC based upon his Fifth
Amendment rights. It is settled that a taxpayer’s right not to
be deprived of property under the Fifth Amendment to the
Constitution is not a defense to collection of taxes. Nor,
absent a demonstration of a real and appreciable danger of
criminal prosecution, may a taxpayer invoke the Fifth Amendment
protections against self-incrimination. See United States v.
Carlson, 617 F.2d 518, 522-523 (9th Cir. 1980); Rowlee v.
Commissioner, 80 T.C. 1111, 1122 (1983), and cases cited therein.
 - 13 -

the contrary, as we have found, the $28,072 paid by Stanford

University in 1991 to California Barbecue is properly taxable to

petitioner as an individual.

2. Bank Deposits Analysis

Respondent, in an amendment to his answer, asserts increased

deficiencies based upon deposits made into bank accounts

maintained in petitioner’s name and Social Security number.

Because respondent first asserted the increases in deficiency in

an amendment to the answer, respondent bears the burden of proof

as to those increases. See Rule 142(a).

Bank deposits are prima facie evidence of income. See

Tokarski v. Commissioner, 87 T.C. at 77. In demonstrating the

existence of income under the bank deposits method, the

Commissioner is not required to show a likely source of that

income. See Clayton v. Commissioner, 102 T.C. 632, 645 (1994).

The bank deposits method assumes that all money deposited in a

taxpayer's bank account during a given period constitutes taxable

income, although the Commissioner must take into account any

nontaxable source or deductible expense of which the Commissioner

has knowledge. See id.; DiLeo v. Commissioner, 96 T.C. at 868.

In this case, respondent has met his burden of proof as to

income under the bank deposits method. Respondent produced

records from two Great Western Bank accounts, Nos. 308-8083971

and 308-8064948, maintained by petitioner. The first used the

name "Warren R. Ketler, D.B.A. Thru The Lens" and employed

petitioner's Social Security number and address. The second was
 - 14 -

in petitioner's own name and used petitioner's Social Security

number and address.

In reconstructing petitioner's income, respondent has

properly excluded several items from the total deposits in

account No. 308-8083971. Respondent excluded these items because

they appeared to be transfers from account No. 308-8064948, and,

as such, they had already been included as income in the form of

deposits to account No. 308-8064948. From the remaining amounts

in each account, respondent also properly subtracted a number of

items that appeared to be checks issued in payment of deductible

business expenses. The remaining unexplained deposits totaled

$81,773 and $55,990 for the respective years in issue.

Respondent invited petitioner to confer so that petitioner could

explain the transactions in these bank accounts, but petitioner

refused to do so. When asked at trial to explain the

transactions reflected in these accounts, petitioner again

declined to do so.

We hold that under the bank deposits method, respondent has

borne the burden of showing that these amounts, $81,773 and

$55,990, are additional unreported taxable income for the years

1990 and 1991, respectively. See United States v. Stone, 770

F.2d 842, 845 (9th Cir. 1985); United States v. Soulard, 730 F.2d

1292, 1298 (9th Cir. 1984).

B. Petitioner's Legal Contentions

On brief, petitioner's response to the deficiencies and

additions to tax has been to assert discredited tax-protester
 - 15 -

arguments, such as his assertion that he is a "not a taxpayer"

and therefore not subject to the internal revenue laws. The

Court of Appeals for the Ninth Circuit has characterized this

argument as "frivolous", noting that it "has been consistently

and thoroughly rejected by every branch of the government for

decades. Indeed, advancement of such utterly meritless arguments

is now the basis for serious sanctions imposed on civil litigants

who raise them." United States v. Studley, 783 F.2d 934, 937 n.3

(9th Cir. 1986).

Moreover, petitioner, having invoked the jurisdiction of

this Court, now seeks to defeat it, arguing that we lack personal

jurisdiction over him. This argument is also baseless. Section

6213(a) authorizes this Court to redetermine deficiencies in

income tax if a timely petition is filed by a taxpayer in respect

of a notice of deficiency sent to the taxpayer by the

Commissioner. Here, petitioner himself invoked this Court's

jurisdiction over the matter of his tax deficiencies for the

years in issue by filing a timely petition. Borders v.

Commissioner, T.C. Memo. 1994-626. The jurisdiction of this

Court, once invoked, remains unimpaired until it decides the

controversy. Dorl v. Commissioner, 57 T.C. 720 (1972).

Petitioner's arguments continue through 13 "notices", none

of which addresses the factual accuracy of respondent's

determinations of deficiencies and additions to tax. None

presents justiciable issues of fact or law concerning

petitioner's liabilities for the deficiencies in tax and
 - 16 -

additions to tax at issue. They are instead recastings of

contentions which we have termed "nothing more than tax protester

rhetoric and legalistic gibberish, which have absolutely no

merit”. Howard v. Commissioner, T.C. Memo. 1998-57.7 We decline

to address them further. In McCoy v. Commissioner, 76 T.C. 1027,

1029-1030 (1981), affd. 696 F.2d 1234 (9th Cir. 1983), we stated

that

The time has arrived when the Court should deal
summarily and decisively with such cases without
engaging in scholarly discussion of the issues or
attempting to soothe the feelings of the petitioners by
referring to the supposed "sincerity" of their wildly
espoused positions.

C. Self-Employment Tax

Section 1401 imposes a tax on an individual’s self-

employment income, which is defined as the net earnings from

self-employment derived by an individual during the taxable

years. See sec. 1402(b). Net earning from self-employment means

gross income, less certain deductions, derived by an individual

from any trade or business carried on by the individual. See

7
Before trial and on brief, petitioner asserted that he did
not understand the word "income". At calendar call we referred
petitioner to members of the Taxation Section of the California
Bar Association who were present in the courtroom, explaining
that they had offered to assist with such questions on a pro bono
basis. Petitioner declined to accept our referral. Petitioner's
obvious intelligence and experience in conducting business makes
us doubt his sincerity in arguing that he failed to understand
the concept of "income". Instead, his consistently frivolous
contentions indicate that his asserted misunderstanding of the
word "income" was willful, based upon discredited tax-protester
arguments that the income he undoubtedly received was somehow
something else. Cf. United States v. Buras, 633 F.2d 1356, 1361
(9th Cir. 1980); Rowlee v. Commissioner, 80 T.C. at 1120-1122.
 - 17 -

sec. 1402(a). Respondent determined that petitioner is liable

for self-employment taxes under section 1401 as part of the

deficiencies at issue for 1990 and 1991. The evidence in this

case indicates that petitioner earned self-employment income from

both the California Barbecue and the Thru The Lens activities.

Petitioner has offered no evidence or argument to rebut that

evidence. He is liable for the self-employment tax for 1990 and

1991 determined by respondent and asserted in the amendment to

answer.

D. Additions to Tax Under Section 6651(a)(1)

Respondent determined additions to tax under section

6651(a)(1) for failure to file returns. Petitioner did not file

Federal income tax returns for the years in issue. He makes only

tax-protester arguments in response to the charge that he failed

to file such returns. Accordingly, the additions to tax under

section 6651(a)(1) determined by respondent and asserted in the

amendment to answer are sustained.

E. Additions to Tax Under Section 6654(a)

Respondent determined additions to tax under section 6654(a)

for underpayment of individual estimated tax. Petitioner failed

to pay estimated tax during the years in issue. Accordingly, the

additions to tax under section 6654 determined by respondent and

asserted in the amendment to answer are sustained.

In view of the foregoing,

Decision will be entered

for respondent.