Golub v. Commissioner

T.C. Memo. 1999-288

UNITED STATES TAX COURT

J. DAVID GOLUB, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 26507-95. Filed August 30, 1999.

J. David Golub, pro se.

Paul L. Darcy, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GALE, Judge: In a notice of deficiency dated September 20,

1995, respondent determined deficiencies, an addition to tax, and

penalties with respect to petitioner’s Federal income taxes as

follows:
 - 2 -

Penalties Addition to Tax
Year Deficiency Sec. 6662(a) Sec. 6651(a)(1)

1991 $112,652 $22,530 $5,125
1992 1,746 349 -0-

Respondent subsequently conceded that petitioner is not

liable for the addition to tax under section 6651(a)(1).

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 interest income, taxable dividends, and capital gains

from the sale of securities on his 1991 Federal income tax

return; (2) whether a State tax refund and credit to petitioner

in 1991 are subject to Federal income tax; (3) whether petitioner

properly claimed Schedule C deductions on his 1991 and 1992

Federal income tax returns; (4) whether petitioner is permitted

to carry over net operating losses to compute his 1991 and 1992

Federal income tax liabilities; (5) whether alleged procedural

errors by respondent affect petitioner’s liability for the

deficiencies and penalties at issue; (6) whether petitioner is

liable for accuracy-related penalties under section 6662(a) for

1991 and 1992; and (7) whether petitioner is liable for a penalty

under section 6673.
 - 3 -

FINDINGS OF FACT

The parties filed a stipulation of facts with attached

exhibits. The facts reflected therein are so found, and, by this

reference, are incorporated herein. Petitioner is a certified

public accountant. He resided in Staten Island, New York, when

the petition herein was filed.

The University of Chicago Litigation

In 1981, petitioner began filing lawsuits against the

University of Chicago, IBM Corp., Ernst & Whinney, and Weiner &

Co. alleging employment discrimination. In each of the

proceedings, the trial court ruled against petitioner, and the

U.S. Court of Appeals for the Second Circuit affirmed.1

On June 5, 1989, the U.S. District Court for the Eastern

District of New York ordered its Clerk not to accept future

filings made by petitioner against the University of Chicago, IBM

Corp., Ernst & Whinney, and Weiner & Co., unless a U.S.

1
See Golub v. Ernst & Whinney, 779 F.2d 38 (2d Cir. 1985),
cert. denied 476 U.S. 1178 (1986); Golub v. University of
Chicago, 876 F.2d 890 (2d Cir. 1989), cert. denied sub nom. Golub
v. IBM Corp., 495 U.S. 941 (1990); Golub v. IBM Corp., 888 F.2d
1376 (2d Cir. 1989), cert. denied 495 U.S. 941 (1990); Golub v.
Ernst & Whinney, 891 F.2d 277 (2d Cir. 1989), cert. denied sub
nom. Golub v. IBM Corp., 495 U.S. 941 (1990); Golub v. Ernst &
Whinney, IBM Corp., University of Chicago, Weiner & Co., Docket
No. 89-7460 (2d Cir. Nov. 2, 1989); Golub v. Weiner & Co., 896
F.2d 543 (2d Cir. 1990), cert. denied sub nom. Golub v. IBM
Corp., 495 U.S. 941 (1990); Golub v. Ernst & Whinney; IBM Corp.,
University of Chicago, Weiner & Co., Docket Nos. 90-7180 and 90-
7496 (2d Cir. Jan. 7, 1991).
 - 4 -

magistrate first granted leave. In response, petitioner filed

another lawsuit naming the same defendants in the U.S. District

Court for the Southern District of New York. As a result of this

filing, the U.S. District Court for the Eastern District issued

an order enjoining petitioner from filing further lawsuits

against those defendants. It also required petitioner to pay

costs in the form of defendants’ legal fees.

On January 11, 1991, the U.S. Court of Appeals for the

Second Circuit affirmed the District Court’s order and imposed

additional sanctions of $1,000 upon petitioner. The Court of

Appeals determined that petitioner’s suit against the University

of Chicago, IBM Corp., Ernst & Whinney, and Weiner & Co. totally

lacked merit. The court observed:

Golub persists in filing duplicative claims that have
been conclusively found to be wholly lacking in merit.
He is a serial litigator whose conduct can no longer be
tolerated. Although we are aware of his pro se status,
we are convinced that measures must be taken to prevent
Golub from continuing to file such vexatious litigation
which unfairly burdens the parties he names as
defendants and the courts.

In addition to affirming the district court’s
award of attorney’s fees, we believe that the
imposition of sanctions is warranted to deter Golub
from continuing his attempts to harass. * * *

Accordingly, we conclude that the imposition of
damages in the amount of one thousand dollars ($1,000)
is appropriate. Additionally, the Clerk of this Court
is directed not to accept any future filings by Golub,
except for filings seeking further review of our
decision herein, until the sanctions awarded by the
district court are satisfied in full. This disposition
 - 5 -

should serve as a clear and unambiguous message to
Golub that the courts are not to be used as vehicles
for harassment.

The Kidder Peabody Litigation

By 1981, approximately the time he instituted the litigation

discussed above, petitioner had opened a brokerage account with

Kidder, Peabody & Co., Inc. (Kidder Peabody). He also entered

into an agreement with Kidder Peabody enabling him to deal in

“put” and “call” options. Kidder Peabody agreed to extend credit

to petitioner, enabling him to trade on margin. Pursuant to a

“Customer’s Agreement”, petitioner agreed that Kidder Peabody

could hold the assets in his account as security for all

liabilities that petitioner owed to Kidder Peabody. Under the

agreement, Kidder Peabody had “the right at any time without

notice to apply any cash or credits” in petitioner’s account “to

payment of any * * * debit balances or other obligations” of

petitioner.

In 1986 or 1987, petitioner began to complain that Kidder

Peabody had engaged in unauthorized trades in his account. On

March 20, 1987, George C. Cabell, vice president and associate

general counsel of Kidder Peabody, wrote to petitioner and

explained:

What has occurred is that you have failed to respond to
margin maintenance calls made in connection with
positions in your account with the result that
positions in the account had to be liquidated to
satisfy the maintenance calls. * * *
 - 6 -

The letter concluded: “We do not feel that we can consent to act

on your behalf in the future in connection with this account, and

we respectfully request that you transfer your account to another

firm.”

In reply, petitioner made a handwritten notation on a copy

of Mr. Cabell’s letter to him, stating: “Your statement of the

facts of this case is not correct. As a result, I believe it is

necessary for us to meet to discuss the ‘exact’ nature of my

claims.” Petitioner then wrote the following letter to Mr.

Cabell:

May 12, 1987
Dear Mr. Cabell:

Your failure to respond to my request for an
appointment to reconcile the facts and issues with
respect to my account will only tarnish your defense to
support your position before any impartial tribunal.
In essence your solution is to create a “FORCED”
LIQUIDATION where I must sell out securities regardless
of the market timing. Also, by forcing me to transfer
this account to another Wall Street House, you believe
that you can sweep all of your past improprieties under
the rug with supposedly no trace left for public
scrutiny. The Churning transactions effectuated by
your salesmen are a matter of record. CASE IN POINT: I
have documented all short positions (PUT TRANSACTIONS)
sold and written in my account on a trade date basis
where the WALL STREET JOURNAL and NEW YORK TIMES
FINANCIAL PAGES listed an S or R. Obviously, in such a
case the purchaser had to be KIDDER, PEABODY as
principal. Shortly, thereafter, I was put stock where
the expiration period was greater than six months and
there was a less than 10% decline in the security price
from the trade date market price.

Who put the stock in my account and for what
reason? What other explanation? Why is KIDDER,
 - 7 -

PEABODY acting as an UNDISCLOSED PRINCIPAL? In
February, 1987, I called Paul Tierny and requested that
I be permitted to sell COVERED CALL OPTIONS as a start
to liquidating my account. He refused. Yet you have
the * * * audacity to continue to charge me margin
interest and at the same time create a situation where
you tie my hands and force liquidation? What
securities laws do you follow as general counsel for
KIDDER, PEABODY? Do you wish to test my allegations in
a court of law? Don’t you guys have enough garbage
from the SIEGEL-BOESKY AFFAIR?

Once again I am requesting a meeting with you and
whoever else at KIDDER, PEABODY has the authority to
make the necessary adjustments to correct the wrongs.
I can be reached at the number cited above.

RESPECTFULLY,

J.D. GOLUB

On May 19, 1987, Kidder Peabody’s vice president, Paul T.

Tierney, responded:

I am in receipt of your letter to George Cabell
dated May 12, 1987.

Our position remains the same, as we stated at
previous meetings. In addition, we again ask you to
give us the name of a broker to transfer your account
to as you said you would months ago.

During 1987 and 1988, petitioner continued his complaints

against Kidder Peabody, insisting that Kidder Peabody had ignored

his order to close his account and that Kidder Peabody had

instead taken it over for its own purposes. He filed complaints

against Kidder Peabody with the National Association of

Securities Dealers, Inc. (NASD), the Chicago Board Options

Exchange, and the Office of Attorney General of the State of New
 - 8 -

York. In a letter to the New York attorney general’s office,

petitioner stated:

Kidder, Peabody & Co., by its own action breached
our brokerage agreement and forced a liquidation. I
refused to transfer this account to any other broker.
In my letter of May 12, 1987, I told them that I
desired to liquidate the account. I requested this
orally on several prior occasions. * * *

None of these agencies decided to take action against Kidder

Peabody; the NASD specifically determined that it could not find

that there had been a violation of its rules.

In 1989, petitioner commenced litigation against Kidder

Peabody and some of its employees in the U.S. District Court for

the Southern District of New York. In 1990, the District Court

ordered the parties to arbitrate their differences. Petitioner

sought review of this order in the U.S. Court of Appeals for the

Second Circuit. In January of 1991, the Court of Appeals

dismissed the appeal because the arbitration order was not

appealable.

In October 1991, petitioner sent a letter to the District

Court seeking permission to file a motion for injunctive relief

on the grounds that Kidder Peabody failed to liquidate his

account. Sheila Chervin, an attorney in the general counsel’s

office of Kidder Peabody, responded in a letter to the District

Court dated October 24, 1991, with a copy to petitioner. Ms.

Chervin explained that Kidder Peabody had no letter on file from
 - 9 -

petitioner authorizing the liquidation of his account. She

stated that, if petitioner would provide a letter authorizing

liquidation, Kidder Peabody would comply. Petitioner responded

with a letter asking that Kidder Peabody send him a daily

statement that set forth the net asset value of his account. The

letter also announced petitioner’s plans to seek reconsideration

of, or an appeal from, the District Court’s order. Petitioner

also argued that he had demanded the liquidation of his brokerage

account in August of 1987. Ms. Chervin of Kidder Peabody

replied, on November 11, 1991, informing petitioner that the

current price of the stock in his brokerage account was available

in library copies of the Wall Street Journal. Her letter also

took exception to certain factual representations that petitioner

had made. She concluded:

Moreover, I wish to note for the record that it
has been more than two weeks since I put in writing, in
the October 24, 1991 letter to Judge Haight, that you
could get the proceeds of your account by merely
delivering to me a letter of authorization for its
liquidation. I reiterated the procedure for doing so
on the telephone to you more than one week ago. In the
interim, I have received your November 7, 1991 letter
(delivered by hand), but no letter of authorization.
Please be advised that you can sit on this matter for
as long as you wish, but that Kidder, Peabody takes no
responsibility for your present recalcitrance or for
any recalcitrance you have exhibited in the past.

Petitioner replied with a letter arguing that he had sought

liquidation of his account many times in the past. The letter

concluded:
 - 10 -

CONSIDER THIS LETTER TO BE THE FORMAL
AUTHORIZATION YOU REQUEST. ALL PRIOR LETTERS ARE
INCORPORATED BY REFERENCE. (YOUR STATEMENT ABOUT
RESPONSIBILITY FOR ALLEGED PRESENT RECALCITRANCE IS
IRRELEVANT). I REINSTATE MY DEMAND FOR THE IMMEDIATE
RELEASE OF ALL SEIZED MONIES IN THE KIDDER, PEABODY &
CO., INC. BROKERAGE ACCOUNT.

NOTHING IN THIS LETTER OF DEMAND IS TO BE
CONSTRUED AS SETTLEMENT OF THIS LITIGATION IN ANY FORM,
MANNER OR CONTEXT.

Ms. Chervin, on behalf of Kidder Peabody, responded on

November 22, 1991:

I understand your letter to constitute
authorization by you that your account at Kidder,
Peabody & Co. Incorporated, that is, account number 10U
77727 193, be liquidated and that upon liquidation, the
proceeds of the said account be delivered to you,
mailed to the above address.

We have begun to process the liquidation.

Notwithstanding the District Court’s order that he submit

his claims against Kidder Peabody to arbitration, petitioner did

not do so. He instead filed motions and interlocutory appeals

attempting to overcome the order to arbitrate. On September 29,

1992, the District Court entered an order stating: “Because this

action has been stayed pending that arbitration, plaintiff is

enjoined during that pendency from any further filings in this

Court.”

On February 8, 1993, the District Court denied an attempt by

petitioner to have the arbitration order certified and thus

eligible for appeal. Petitioner apparently sought an appeal of
 - 11 -

this denial, but the Court of Appeals dismissed his appeal for

failure to pay docket fees.

Petitioner’s Income From the Kidder Peabody Account

During 1991, petitioner’s account earned $698.85 in interest

income, $15,882.21 in dividends, and an additional $458.41 in

proceeds from miscellaneous sales of securities. At the time of

the liquidation, in December of 1991, the balance in petitioner’s

account reflected a minus $141,400.64. Kidder Peabody liquidated

petitioner’s account in November and December of 1991. The

subsequent liquidation produced proceeds of $387,686.49. Kidder

Peabody used some of the cash from the proceeds to pay off

petitioner’s negative account liability. It sent the remaining

funds, in five checks totaling $246,976.40, to petitioner.2

On his Federal income tax return for 1991, petitioner failed

to report the dividend income from his account with Kidder

Peabody. On Schedule B of the return, where interest income from

Kidder Peabody should have been reported, petitioner wrote in the

word “LITIGATION”. On Schedule D of his return, in the space for

reporting long-term capital gains, petitioner wrote “NONE”. On

2
This figure includes the net amount of interest income
($192.91) plus dividends received during December 1991 ($674.37)
less accrued interest expense for that month ($176.73). The bulk
of these payments came in the form of a check for $246,332.77,
which petitioner deposited into his bank account on Dec. 6, 1991.
A check for the December dividends in the amount of $565 was
issued to petitioner in January 1992.
 - 12 -

the parts of the schedule reserved for identifying the

transactions, he wrote, “Kidder Peabody & Co. Acct -- Litigation

-- Partial Payment -- Received Escrowed -- Interest Bearing

Acct”.

Petitioner’s 1991 return contained a Schedule C for

reporting profits or losses from business. On that form,

petitioner identified his principal business as real estate

appraisal and financing. He reported income of $790 (in the form

of interest) and expenses of $28,522. The expenses included

“other expenses” of $10,000 for “Telephone, Litigation-

Reputation, Professional Dues, Library-Law Publications”.

Petitioner also claimed a net operating loss carryover deduction

of $11,439.

The State Income Tax Refund

Records of New York State Department of Taxation and Finance

indicate that, in 1990, petitioner paid $1,743.89 in State and

local income taxes. In 1991, the State issued a refund to

petitioner of $743.89 and credited the $1,000 balance of these

taxes to petitioner’s 1991 State and local income tax

liabilities. These transactions were not reflected on

petitioner’s 1991 Federal income tax return.
 - 13 -

Schedule C Deductions and Net Operating Loss Carryovers

Pursuant to an extension of time, petitioner filed his 1992

Federal income tax return on October 15, 1993. Thereon he

reported no salary or wage income. His Schedule C, however,

reported business income of $317 as interest on a money market

account. He also deducted $36,035 in business expenses,

including $15,000 for “Telephone, Litigation Reputation,

Professional Dues, Law Library, Software--Computer Publications”.

On his 1992 return petitioner also claimed a net operating loss

carryover of $34,797.

Proceedings Before This Court

The parties were notified that this case had been set for

trial approximately 5 months before the trial date. In preparing

for trial, respondent repeatedly wrote to petitioner, asking for

records that would demonstrate his bases in the securities that

had been held in the Kidder Peabody account and for records that

would substantiate his deductions. Such records were not

forthcoming. Nor did petitioner participate meaningfully in

developing the case for trial. He delayed in meeting with

respondent concerning the stipulation process and ultimately

contributed efforts that were, at best, negligible. All

evidentiary documents contained in the stipulation were obtained

by respondent from either Kidder Peabody or the U.S. District

Court for the Southern District of New York.
 - 14 -

Approximately 1 week before the trial date, petitioner filed

a motion for continuance,3 asserting that respondent had failed

to comply with the standing pretrial order. Respondent countered

with a motion to dismiss for lack of prosecution. Three days

before trial, petitioner filed a notice indicating that all the

defendants in the University of Chicago litigation and in the

Kidder Peabody litigation would be subject to subpoena in

petitioner’s case before this Court. The Court set a hearing to

consider these motions.

At that hearing, the Court inquired of petitioner what the

University of Chicago had to do with the case at issue.

Petitioner responded:

Because the University of Chicago conspired with
two other employers to discharge me, and then after
those discharges, I was originally hired by Kidder,
Peabody as an employee and then was told, like, that I
couldn’t be an employee, and I should become an
independent contractor with them.

That was basically done because there was pending
litigation against those other employers, past
dischargers, and the University of Chicago, who had
intentionally withheld the issuance of a degree at that
point and conspired with those employers to terminate
me.

3
Rule 133 provides that a motion for continuance filed
less than 30 days before the trial date “ordinarily will be
deemed dilatory and will be denied unless the ground therefor
arose during that period or there was good reason for not making
the motion sooner.”
 - 15 -

This is all related. There is no absolute,
rational basis for holding a person’s assets the way
they [i.e., Kidder Peabody] did * * *

We denied both petitioner’s motion for a continuance and

respondent’s motion to dismiss.

At trial on this matter, petitioner sought to subpoena Ms.

Chervin, who had represented Kidder Peabody in the District Court

proceedings that petitioner had instituted. Ms. Chervin sought

to quash the subpoena, asserting in an affidavit that petitioner

had failed to provide the fees and mileage required by Rule 148,

that she had no personal knowledge of the matters involved and,

further, that petitioner’s attempt to subpoena her was an

apparent attempt to circumvent the District Court’s order barring

petitioner from further filings against Kidder Peabody. We

granted her motion to quash on the basis of petitioner’s failure

to tender witness fees and mileage. Our ruling did not address

the other grounds presented.

At the conclusion of trial, we ordered opening briefs to be

filed in 75 days, with answering briefs to be filed 45 days

later.

On the due date for opening briefs, petitioner submitted a

document which requested, among other things, an interlocutory

appeal and an extension of time to file briefs. We granted

petitioner an additional 6 weeks to file his opening brief but

denied his motion for interlocutory appeal. Petitioner failed to
 - 16 -

file a brief, and instead, at the expiration of the extension

period, filed a document requesting, inter alia, that the Court

vacate several previous orders, stay all proceedings, and further

extend the time for filing briefs. In response, the Court issued

an order denying all of petitioner’s requests except the

extension of time to file an opening brief, for which an

additional 7 weeks was given. In that order, however, we advised

that petitioner would receive no further extensions of time for

filing his opening brief.

On the final deadline for filing a brief, petitioner

submitted two documents--one entitled “Notice of Interlocutory

Appeal” and the other entitled “Motion to Stay All Tax Court

Proceedings and Postpone Opening Brief”. The document entitled

Notice of Interlocutory Appeal failed to identify a controlling

question of law with respect to which there was a substantial

ground for difference of opinion and for which an immediate

appeal might materially advance the ultimate termination of the

litigation herein, as required by Rule 193. In response, we

ordered that these two documents be filed, and denied both the

motion for leave to file an interlocutory appeal and the motion

to stay further Tax Court proceedings. We also ordered that no

further briefs in this case would be accepted and that the Court

would decide the case on the record presently before it.
 - 17 -

The Court’s records indicate that, in all, petitioner

submitted 18 separate posttrial motions. He also filed two

supplements to one of the motions and a single supplement to

another. His motions generally sought reconsideration of our

previous orders or interlocutory review of those orders. We

denied all of those motions, other than the two seeking

extensions of time to file his brief.

OPINION

I. Unreported Income From Brokerage Account in 1991

In an action challenging a determination of tax deficiency,

a deficiency notice carries a presumption of correctness

requiring the taxpayer to prove by a preponderance of evidence

that the Commissioner’s determination was erroneous. See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).4

A. The Tortious Conversion Claim

For Federal income tax purposes, gain or loss from the sale

or use of property is attributable to the owner of the property.

4
In some instances, a failure by the Commissioner to show
that the taxpayer received alleged unreported income may affect
the burden of proof. Here, however, the evidence sufficiently
connects petitioner to the receipt of the income at issue to
preclude considerations affecting the burden of proof. Cf. sec.
6201(d), as added by the Taxpayer Bill of Rights 2, Pub. L. 104-
168, sec. 602(a), 110 Stat. 1452, 1463 (1996); Schaffer v.
Commissioner, 779 F.2d 849, 857-858 (2d Cir. 1985), affg. in part
and remanding in part Mandina v. Commissioner, T.C. Memo. 1982-
34.
 - 18 -

See Commissioner v. Bollinger, 485 U.S. 340, 344 (1988); see also

Helvering v. Horst, 311 U.S. 112, 116-117 (1940); Blair v.

Commissioner, 300 U.S. 5, 12 (1937). Thus, if a corporation

deals in property as agent for another party, then for tax

purposes the other party, and not the corporate agent, is the

owner. See Commissioner v. Bollinger, supra at 345.

The ordinary relationship of a stockbroker to a customer is

that of an agent to a principal. See Galigher v. Jones, 129 U.S.

193 (1889); 12 Am. Jur. 2d, Brokers, sec. 148 (1997).

Accordingly, a stockbroker is not taxable on the earnings, gains,

or losses generated by transactions in securities it undertakes

for its customer. Rather the customer, as owner of the

securities involved in the transactions, is the taxable party.

The stockbroker nevertheless is required under section 6045 to

file a return setting forth the name and address of each customer

and the gross proceeds of that customer, together with such other

information as may be required by the Secretary. See sec.

6045(a); sec. 1.6045-1(b), Income Tax Regs.

The evidence in this case reveals a straightforward

principal-agent arrangement. Petitioner, as the customer and

principal, engaged Kidder Peabody as his broker and agent to deal

on his behalf with securities he owned. Early in 1991, Kidder
 - 19 -

Peabody credited petitioner with $698.85 in interest income,5

$15,882.21 in dividends, and an additional $458.41 in capital

gains from miscellaneous sales of securities. In November of

1991, after some heated correspondence, petitioner authorized

Kidder Peabody to liquidate the account. Kidder Peabody did so

and, as required by law, furnished the required return to the

IRS, reporting the interest income, dividends, and other

miscellaneous proceeds as well as the gross liquidation proceeds

of $387,686.49 to petitioner. Petitioner, as the owner of the

securities, is taxable on the income earned by the securities and

on the subsequent gain generated by their sale.

We reject petitioner’s contention that Kidder Peabody

engaged in a “tortious conversion” of his account by refusing his

directions in 1987 to close the account.6 Petitioner argues that

Kidder Peabody, having exercised control over his property,

became the owner of that property and is taxable on the gains

realized when it was sold. He concludes that his receipt of the

5
Respondent mistakenly determined that petitioner had
unreported interest income in the amount of $643. At trial,
respondent noted this mistake, and it has not prejudiced
petitioner, who is taxable on the full $698.85.
6
Although petitioner has declined to file a brief, he has
set forth his arguments in a document entitled “Tax Protest”
which he attached to his petition herein and also introduced into
evidence at trial. He has set forth additional arguments in a
trial memorandum and made still others at trial.
 - 20 -

net sale proceeds was not the receipt of taxable income but

rather “a partial restitution by tortfeasor”.

Petitioner is in effect seeking to relitigate in this forum

his claims that Kidder Peabody improperly handled his account.

These are claims that the District Court ordered the parties to

arbitrate, but petitioner has failed to comply with that order.

Petitioner apparently is displeased with the results he obtained

in District Court. Therefore, having made appeals, and otherwise

sought reconsideration, of the District Court’s order until

enjoined from any further filings, petitioner now seeks to bring

Kidder Peabody (as a “hostile witness”) into this Court.

Petitioner, however, has already had ample opportunity to

demonstrate the alleged tortious conversion, but, because he

refuses to obey the District Court’s order, he has failed to do

so.

In any event, the evidence before this Court flatly belies

petitioner’s contentions of tortious conversion. The written

agreements between Kidder Peabody and petitioner reveal an agency

relationship between a broker and its customer. Although

disputes clearly arose, we have no reason to find that the agency

relationship ended before November 14, 1991, when petitioner,

after considerable prodding by Kidder Peabody, submitted an

explicit authorization to liquidate his account.
 - 21 -

Petitioner has not shown that Kidder Peabody exercised any

unauthorized dominion and control over his account by refusing to

terminate it earlier. Petitioner misrepresented the facts in a

letter to the Office of the Attorney General of New York, when he

stated: “In my letter of May 12, 1987, I told them [Kidder

Peabody] that I desired to liquidate the account.” In that

letter, however, petitioner only complained that he had been

placed in “a situation where you [Kidder Peabody] tie my hands

and force liquidation”. Petitioner did not indicate any intent

to liquidate his account; instead he merely sought “a meeting

with you and whoever else at KIDDER, PEABODY has the authority to

make the necessary adjustments to correct the wrongs.”

Petitioner also alleges that he tried to terminate his account

orally before 1991. He offers no substantiation for these

claims, however, and we have no more reason to believe them than

we believe his misrepresentations in the letter he sent to the

attorney general of New York.

B. The Open Transaction Claim

Petitioner fares no better with his contention that he

received the income at issue in an “open transaction” which,

presumably because of his litigation against Kidder Peabody, is

too indefinite to be the subject of taxation in 1991. In rare

and exceptional circumstances, when the fair market value of

property received by a stockholder in exchange for his stock
 - 22 -

cannot be ascertained, the original transaction may be considered

open and later payments treated as capital gains, as they would

have been if received at the time of the liquidation. See Waring

v. Commissioner, 412 F.2d 800, 801 (3d Cir. 1969), affg. per

curiam T.C. Memo. 1968-126. In petitioner’s case, however, the

property he received was cash, determined on the basis of prices

of publicly traded stock. There is no reason to treat the sale

of stock as an open transaction. Moreover, petitioner received

the sale proceeds from the stock under a claim of right and

without restriction as to their disposition. He himself chose to

engage in litigation that, however improbably, might affect the

results of the sale. Under these circumstances, his receipt of

income is a fortiori taxable in the year of receipt. See sec.

451(a); Hope v. Commissioner, 471 F.2d 738, 742 (3d Cir. 1973),

affg. 55 T.C. 1020 (1971).

C. Income on Payment of Indebtedness

In general, a payment made in satisfaction of a person’s

debt is income to that person. See Old Colony Trust Co. v.

Commissioner, 279 U.S. 716 (1929). Thus the amounts Kidder

Peabody retained to pay off petitioner’s obligations were income

to petitioner. Here, Kidder Peabody retained $141,577.37

pursuant to its contractual right to offset petitioner’s margin

obligations. These margin obligations were consistently

reflected as a “net debit balance” in Kidder Peabody’s statements
 - 23 -

of petitioner’s account. Petitioner is taxable both on the

$246,976.40 that he received and on the portion of the sale

proceeds retained by Kidder Peabody.

Petitioner also had the burden of proving how much gain or

loss he realized on the sale of stock owned by him; such proof

requires that he establish his basis in the stock. See sec.

1012; Hall v. Commissioner, 92 T.C. 1027, 1038 (1989); sec.

1.1012-1(c), Income Tax Regs. Petitioner is a certified public

accountant, and the record shows that he is aware that gain on

the sale of stock represents the amount received over the basis.7

See sec. 1001(a).

Despite repeated invitations by respondent and by the Court

to prove his basis in the stock sold, petitioner has failed to do

so. He has left the Court with no choice but to hold him liable

on all the proceeds from the sale of the stock. See Rockwell v.

Commissioner, 512 F.2d 882, 887 (9th Cir. 1975), affg. T.C. Memo.

1972-133. Petitioner thus may end up paying more in capital

7
Petitioner knew of the importance of establishing his
basis in the securities sold. In proceedings on his motion to
continue, petitioner explained “if the Tax Court says that, Mr.
Golub, we still believe that this is income to you * * * then
that’s a basis problem * * * then at best there’s a basis
computation problem * * * for me”. Additionally, petitioner’s
pretrial memorandum urges that Kidder Peabody, rather than he
himself, was taxable on the sale proceeds. In so stating, he
contended that Kidder Peabody “SHALL BE MADE TO ANSWER AND PAY
FOR THE TAX ON THE CONVERTED ASSETS, WHILE ASCRIBING A ZERO BASIS
AS THE PENALTY FOR SUCH OUTRAGEOUS, MALICIOUS CONDUCT.”
 - 24 -

gains taxes than he would have if he had provided evidence of

basis. But if so, he has only himself to blame.

II. State Tax Refund Income

Respondent has also determined that petitioner’s 1991

taxable income includes the $1,743.89 that the State of New York

refunded or credited to petitioner in that year as overpaid State

taxes from the previous year.

Section 111(a) provides that income recovered during the

taxable year is excluded from gross income for that year but only

to the extent that the amount of the recovery did not reduce

prior Federal income taxes. The amount excluded is called the

“recovery exclusion”. Accordingly, if a taxpayer would not have

positive taxable income in a given year regardless of whether he

or she deducted State income taxes for that year, then the

taxpayer’s recovery of those taxes in a subsequent year will be

excluded from gross income in that subsequent year. See sec.

1.111-1(b)(2), Income Tax Regs.

The evidence shows that, in 1991, the State sent $743.89 of

previously overpaid income taxes directly to petitioner, and it

credited the $1,000 balance of these overpaid taxes to

petitioner’s 1991 State income tax liabilities. Petitioner
 - 25 -

reported none of this refund on his Federal income tax return for

1991.8

In this case, petitioner’s 1990 return indicates taxable

income of a minus $13,489. Included in the amounts deducted for

that year on Schedule C under “Taxes and licenses” was the amount

of $1,099,9 which petitioner labeled “State and local”. It is

obvious that the deduction of State income taxes produced no tax

benefit to petitioner for 1990; he would have had a negative

amount for taxable income in any event. Accordingly, under the

regulations promulgated pursuant to section 111, the $1,743.89 in

State taxes refunded to petitioner in 1991 constitute a “recovery

exclusion” and need not be included in gross income for that

year.10

8
Under sec. 451, the full $1,743.89 would ordinarily be
included in income. The $743.89 would be included because it was
actually received by petitioner, and the $1,000 which he directed
be credited against his 1991 State income tax liabilities would
be included in his gross income as “constructively received”
insofar as it is credited to petitioner’s account, or set apart
for him, or otherwise made available to him. Sec. 1.451-2(a),
Income Tax Regs.
9
Petitioner has not explained the apparent discrepancy
between his 1990 deduction of $1,099 for “State and local” taxes
and the return in 1991 of $1,743.89 of such taxes.
10
The regulations under sec. 111 also provide that “the
aggregate of the section 111 items [e.g., the State income taxes
paid for a prior year] must be further decreased by the portion
thereof which caused a reduction in tax in preceding or
succeeding taxable years through any net operating loss
carryovers or carrybacks * * * affected by such items.” Sec.
(continued...)
 - 26 -

III. Schedule C Deductions

Income tax deductions are a matter of legislative grace, and

the burden of clearly showing the right to the claimed deduction

is on the taxpayer. See INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992). Moreover, deductions are strictly construed and

allowed only “‘as there is a clear provision therefor.’” Id.

(quoting New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934)). Taxpayers must substantiate any deductions claimed.

See Hradesky v. Commissioner, 65 T.C. 87 (1975), affd. per curiam

540 F.2d 821 (5th Cir. 1976). Section 6001 provides that a

taxpayer must keep records that suffice to establish the amount

of the claimed deductions.

Section 162(a) allows a deduction for all ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on a trade or business. In the instant case,

petitioner claimed Schedule C deductions of $27,732 and $35,718,

respectively, on his 1991 and 1992 Federal income tax returns.

At trial, however, he failed to produce any records to support

these deductions. Moreover, his income tax returns give us ample

10
(...continued)
1.111-1(b)(2)(ii)(b), Income Tax Regs. Under these regulations,
the $1,753 recovery exclusion might have been reduced for 1991 if
carryovers from 1989 and 1990 had been given effect. However, we
have sustained respondent’s disallowance of such carryovers and
thus they do not affect the amount of the recovery exclusion in
this instance.
 - 27 -

reason to be skeptical about the accuracy of the claimed

deductions. For example, in 1991, the largest item deducted was

a round figure of $10,000 as “other expenses” for “Telephone,

Litigation-Reputation, Professional Dues, Library-Law

Publications”. For 1992, petitioner claimed, as “other

expenses”, $15,000 for “Telephone, Litigation Reputation,

Professional Dues, Law Library, Software--Computer Publications”.

The size of these amounts when compared to the purposes for which

they were allegedly spent causes us to doubt their accuracy.

Having reviewed petitioner’s pleadings in this and other cases,

we cannot accept the assertion that he expended these amounts of

money for the purposes set forth.

In any event, it was his obligation to demonstrate the facts

establishing the amount and nature of deductible expenses, and he

has failed to do so. 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, see Cohan v.

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

on which an estimate may be made, see Williams v. United States,

245 F.2d 559, 560 (5th Cir. 1957). Because the record contains

no evidence upon which we might base such an estimate, we find

that petitioner has failed to prove that he is entitled to claim

any deductions under section 162(a). See Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985).
 - 28 -

IV. Net Operating Loss Carryovers

Section 172(a) authorizes a net operating loss deduction.

In general, a net operating loss is the excess of a taxpayer’s

deductions over his gross income, with certain modifications.

The modifications include eliminating from the computations the

net operating loss deductions, capital gains and losses of

taxpayers other than corporations, the deduction of personal

exemptions, and nonbusiness deductions. Section 172(b) permits a

net operating loss to be carried back and applied against taxable

income for the preceding 3 taxable years and the succeeding 15

years. In the case of net operating loss deductions, as in the

case of other deductions, the taxpayer bears the burden of

proving the facts and the amount of the loss. See Rule 142(a);

Ocean Sands Holding Corp. v. Commissioner, T.C. Memo. 1980-423,

affd. without published opinion 701 F.2d 167 (4th Cir. 1983).

On his 1991 Federal income tax return, petitioner claimed a

net operating loss carryover of $11,439 from his 1989 and 1990

taxable years. On his 1992 Federal income tax return, petitioner

claimed a net operating loss carryover of $34,797 from his 1989,

1990, and 1991 taxable years. Respondent’s notice of deficiency

disallowed these net operating loss carryovers. In the

substantive part of his petition, which petitioner denominated

“Tax Protest Letter”, he did not contest the disallowance of the

net operating loss carryovers, nor did he otherwise address their
 - 29 -

disallowance at trial or in his numerous filings. We treat his

failure to address these issues as, in effect, a concession. See

Rules 34(b)(4), 151(e)(4) and (5); Sundstrand Corp. v.

Commissioner, 96 T.C. 226, 344 (1991); Money v. Commissioner, 89

T.C. 46, 48 (1987); Grossman v. Commissioner, T.C. Memo. 1996-

452, supplemented by T.C. Memo. 1997-451, affd. ___ F.3d ___(4th

Cir., June 28, 1999).

Even if petitioner had not conceded the net operating loss

issue, he nevertheless failed to present evidence that would

overcome respondent’s determination to disallow the net operating

loss carryovers. Under these circumstances, we sustain

respondent’s determination and hold that petitioner is not

entitled to deduct the net operating loss carryovers at issue.

See Head v. Commissioner, T.C. Memo. 1997-270.

V. Procedural Issues

A. Validity of Deficiency Notice

Petitioner, relying upon Portillo v. Commissioner, 932 F.2d

1128 (5th Cir. 1991), affg. in part, revg. in part and remanding

T.C. Memo. 1990-68, contends that respondent’s notice of

deficiency was “arbitrary, frivolous, and capricious” and thus

that the determination that he received unreported income was

fatally flawed. We disagree. In Portillo, the Commissioner

issued a notice of deficiency in reliance upon a third party’s

Form 1099 filed with the Commissioner. The U.S. Court of Appeals
 - 30 -

for the Fifth Circuit held that the notice was arbitrary because

it lacked any “ligaments of fact”. The court noted that the

notice of deficiency would have been sufficient to entitle the

Commissioner to a presumption of correctness if the Commissioner

had demonstrated unreported income through “some * * * means,

such as by showing the taxpayer’s * * * bank deposits”. Id. at

1134.

Petitioner’s situation is significantly different from that

of the taxpayer in Portillo. Here petitioner concedes that he

received the proceeds of the sale of his stock--although, in his

pretrial memorandum, he calls those proceeds a “partial

restitution”. Petitioner’s bank statement reflects a deposit of

$246,332.77 in December 1991. Moreover, Kidder Peabody’s records

indicate that petitioner is chargeable with other income from

dividends and prior sales of stock, including the income used to

pay his contractual account obligations to Kidder Peabody. These

are sufficient ligaments of fact to connect petitioner to the

income at issue. We hold that the notice of deficiency issued to

petitioner was valid.11

B. Pretrial Proceedings

Petitioner contends that respondent failed to comply with

the pretrial order and prejudiced his case. Petitioner urges

11
See supra note 4.
 - 31 -

that we consider dismissal an appropriate sanction. The pretrial

order stated:

If any unexcused failure to comply with this Order
adversely affects the timing or conduct of the trial,
the Court may impose appropriate sanctions, including
dismissal, to prevent prejudice to the other party or
imposition on the Court. * * *

Before the trial of this case, we examined petitioner’s

complaints about pretrial proceedings in a lengthy hearing on his

motion for continuance. There petitioner demonstrated that, 2

months before trial, he may have encountered some difficulty in

determining which attorney would handle the case for respondent.

This difficulty, however, did not prejudice his preparation of

the case. Petitioner has also contended that his preparation was

impaired by having to receive physical therapy twice a week

before the trial of this matter. Again, we determined that he

has shown no prejudice to his preparation of his case because of

these treatments.

We reaffirm our conclusion to that effect.

C. Quashing the Subpoena

Petitioner has also questioned the Court’s granting of the

motion to quash his subpoena issued to Ms. Chervin, counsel for

Kidder Peabody in the District Court proceedings that petitioner

instituted. Ms. Chervin sought to quash the subpoena, asserting

in an affidavit that petitioner had failed to provide the fees

and mileage required by Rule 148. She further averred that she
 - 32 -

had no personal knowledge of the matters involved. Finally, she

contended that petitioner’s attempt to subpoena her in this

proceeding was an effort to circumvent the order of the U.S.

District Court for the Eastern District barring petitioner from

making further filings in his case against Kidder Peabody. We

granted the motion to quash because petitioner had failed to

furnish fees and mileage. We did not reach the other bases to

quash asserted by Ms. Chervin.

Congress, in section 7453, has provided that proceedings

before this Court are to be conducted according to such rules of

practice and procedure as this Court shall prescribe. This

Court’s Rule 148 provides as follows:

(a) Amount: Any witness summoned to a hearing or
trial * * * shall receive the same fees and mileage as
witnesses in the United States District Courts. * * *

(b) Tender: No witness, other than one for the
Commissioner, shall be required to testify until the witness
shall have been tendered the fees and mileage to which the
witness is entitled according to law. * * *

Petitioner did not follow our Rules. He has given no reason

for his failure to do so. The record in this case indicates that

petitioner is a person of ample means, and, further, that he is

familiar with the Rules of this Court. There was no impediment

to his furnishing the fees and mileage prescribed in our Rules.

In this instance, however, as in many others, he has failed to

follow those Rules. The Court is entitled to enforce its Rules.
 - 33 -

We did so properly in this case when, in accordance with Rule

148(b), we did not require the witness to testify in the absence

of a tender of fees and mileage. We decline to reconsider that

action.

VI. Accuracy-Related Penalties

We must also decide whether petitioner is liable for

accuracy-related penalties for 1991 and 1992. Section 6662(a)

imposes an accuracy-related penalty in the amount of 20 percent

of the portion of an underpayment of tax attributable to

negligence or disregard of rules or regulations. See sec.

6662(a) and (b)(1). Negligence is any failure to make a

reasonable attempt to comply with the provisions of the internal

revenue laws. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax

Regs. Negligence has been further defined as the failure to

exercise due care or the failure to do what a reasonable and

prudent person would do under the circumstances. See Neely v.

Commissioner, 85 T.C. 934, 947 (1985). Disregard includes any

careless, reckless, or intentional disregard of rules or

regulations. See sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax

Regs. No penalty will be imposed with respect to any portion of

any underpayment if it is shown that there was a reasonable cause

for such portion and that the taxpayer acted in good faith with

respect to such portion. See sec. 6664(c).
 - 34 -

On the basis of this record, we conclude that petitioner is

liable for accuracy-related penalties under section 6662(a). In

1991, he failed to report substantial amounts of income. In 1991

and 1992, he claimed deductions to which he was not entitled. He

failed to provide any reasonable explanation or any credible

evidence to substantiate his entitlement to the deductions. He

has not shown that there was reasonable cause for any portion of

the resulting underpayment, or that he acted in good faith.

Petitioner’s actions were not those of a reasonable and prudent

person under the circumstances. Accordingly, petitioner is

liable for accuracy-related penalties under section 6662(a) for

1991 and 1992.

VII. Penalty Under Section 6673

Respondent seeks imposition of a penalty under section 6673.

Section 6673(a)(1) allows this Court to award a penalty not in

excess of $25,000 when proceedings have been instituted or

maintained primarily for delay, or where the taxpayer’s position

is frivolous or groundless or if it is contrary to established

law and unsupported by a reasoned, colorable argument for a

change in the law. See Coleman v. Commissioner, 791 F.2d 68, 71

(7th Cir. 1986); Kish v. Commissioner, T.C. Memo. 1998-16;

Talmage v. Commissioner, T.C. Memo. 1996-114, affd. without

published opinion 101 F.3d 695 (4th Cir. 1996). In our opinion,
 - 35 -

such is the case here, and we believe that a penalty is

appropriate.

Petitioner is a certified public accountant. From his

appearances before us, we know that he is sufficiently conversant

with tax law to understand the issues presented in this case. He

knew of his obligation to present facts concerning his bases in

his securities and the nature of his claimed business expenses.

Nevertheless, for reasons of his own, he has chosen not to do so.

Instead, he has advanced the baseless notion that his receipt of

hundreds of thousands of dollars from liquidation of his account

is not income, but rather a “a partial restitution by

tortfeasor”.

Petitioner’s conduct of this case makes it plain that he has

instituted this action in a renewed attempt to argue that Kidder

Peabody, the University of Chicago, and others, named as

defendants in his previous lawsuits, have wronged him. Two U.S.

District Courts have forbidden petitioner from using their

resources to attack these defendants, and the U.S. Court of

Appeals for the Second Circuit has issued a similar order and

levied sanctions against him. Petitioner has now sought to use

this Court for the same ends, but he may not do so.

Our function is to provide a forum for deciding issues

regarding liability for Federal taxes. Petitioner has interfered

with that function, to the detriment of parties wishing to
 - 36 -

present legitimate cases. Petitioner has also caused needless

expense and wasted resources for respondent, respondent’s

counsel, the proposed witness, and this Court. We do not, and

should not, countenance the use of this Court as a vehicle for a

disgruntled litigant to proclaim the alleged wrongdoing of

others, especially when that litigant has refused to obey an

appropriate court’s order to arbitrate his grievances.

In this case, petitioner received substantial amounts of

income in 1991, but he failed to pay income taxes on those

amounts. His defense to that failure is frivolous and wholly

without merit. We will require petitioner to pay a $10,000

penalty under section 6673(a).

Petitioner has advanced many other arguments in his

submissions to this Court. They appear to be variations of the

contentions we have addressed herein. We have considered all

those arguments, and, to the extent not specifically addressed

herein, we find them to be without merit.

In view of the foregoing,

Decision will be entered

under Rule 155.