T.C. Memo. 1999-402
UNITED STATES TAX COURT
ESTATE OF BETTY BODWELL, DECEASED, RONALD L. BODWELL, SPECIAL
ADMINISTRATOR, AND RONALD L. BODWELL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19637-95. Filed December 13, 1999.
Ronald L. Bodwell, pro se.
Paul K. Voelker, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARR, Judge: By notices of deficiency, respondent
determined deficiencies in and additions to petitioner Ronald L.
Bodwell’s Federal income taxes for the years 1982 through 1994 as
follows:
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Ronald L. Bodwell (Petitioner)
Additions to tax
Year Deficiency Sec. 6651(a)(1) Sec. 6654
1982 $21,266 $5,121.75 $1,988.90
1983 22,430 5,607.50 1,372.55
1984 23,986 5,996.50 1,508.01
1985 24,944 6,236.00 1,429.38
1986 26,371 6,592.75 1,275.91
1987 24,040 6,010.00 1,290.49
1988 22,607 5,651.75 1,454.16
1989 23,598 5,899.50 1,595.89
1990 24,599 6,149.75 1,610.56
1991 25,633 6,408.25 1,464.94
1992 26,934 6,733.50 1,174.72
1993 28,229 7,057.25 1,182.78
1994 29,680 7,420.00 1,540.15
By separate notices of deficiency, respondent determined
deficiencies in and additions to the Federal income taxes due
from the estate of Betty Bodwell for the years 1982 through 1994
as follows:
Betty Bodwell (Mrs. Bodwell)
Additions to tax
Year Deficiency Sec. 6651(a)(1) Sec. 6654
1982 $6,224 $1,556.00 $605.94
1983 6,637 1,659.25 406.14
1984 6,929 1,732.25 435.65
1985 7,115 1,778.75 407.74
1986 7,444 1,861.00 360.19
1987 6,651 1,662.75 357.03
1988 6,137 1,534.25 394.75
1989 6,353 1,588.25 429.63
1990 6,606 1,651.50 432.50
1991 6,925 1,731.25 395.79
1992 7,298 1,824.50 318.30
1993 7,647 1,911.75 320.41
1994 6,007 1,201.40 311.67
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
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indicated. References to petitioners include both Mr. and Mrs.
Bodwell.1
After concessions,2 the issues for decision are: (1)
Whether petitioners had unreported income from painting services
for the taxable years 1989 through 1994. We hold they did. (2)
Whether petitioner incurred self-employment tax for the taxable
years 1989 through 1994. We hold he did. (3) Whether
petitioners are liable for additions to tax under section 6651(a)
for failure to timely file their tax returns for the taxable
years 1989 through 1994. We hold they are liable. (4) Whether
petitioners are liable for additions to tax under section 6654
for failure to pay estimated tax for the taxable years 1989
through 1994. We hold they are liable.
1
Mrs. Bodwell died on October 25, 1994. On Feb. 22, 1996,
we ordered that Mr. Bodwell, "the surviving spouse of Betty
Bodwell, Deceased, is appointed special administrator of the
estate of Betty Bodwell, solely for the purpose of maintaining
the present proceeding as to the estate of Betty Bodwell,
Deceased."
2
This case originally involved determined deficiencies in
income tax for the years 1982 to 1994, inclusive, totaling
$412,290 and additions to the tax under Secs. 6651(a) and 6654
totaling $102,577.40 and $24,064.18, respectively. By order
dated Mar. 4, 1998, we concluded that respondent’s determinations
of income set forth in the notices of deficiency were arbitrary,
and shifted the burden of proof as to income to respondent. At
trial, respondent presented evidence as to petitioners’ income
only for the years 1989 through 1994. Respondent provided no
arguments on brief that petitioner is liable for tax for the
years 1982 through 1988. Accordingly, we treat the issue of
petitioners’ liability for tax from 1982 through 1988 as conceded
by respondent.
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FINDINGS OF FACT
During 1989 through 1994, petitioner was engaged in business
as a painting contractor, painting new and existing gasoline
service stations. He did business under the name PAINT-SER LTD.,
and he performed the painting services himself. During the years
1989 through 1994, petitioner, d.b.a. PAINT-SER LTD., performed
painting services for Shell Oil Co. (Shell), for which Shell paid
him, as follows:
Year Amount
1989 $51,619.64
1990 84,832.88
1991 35,919.48
1992 63,163.81
1993 64,645.53
1994 46,162.61
During the years 1990 through 1994, petitioner, d.b.a.
PAINT-SER LTD., performed painting services for Town and Country
Contractors, Inc. (Town and Country), for which Town and Country
paid him, as follows:
Year Amount
1990 $27,807.20
1991 49,442.09
1992 17,821.04
1
1993 230.64
1994 8,091.17
1
On brief, respondent states that the amount of petitioners'
income from Town and Country for 1993 is $203.64. However,
respondent's schedules accompanying the brief indicate that
petitioners' income is $230.64. After reviewing the record, it
is apparent that the correct amount of income received from Town
and Country by petitioners in 1993 is $230.64.
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During the years 1989 through 1994, petitioner and Mrs.
Bodwell resided in the State of California. They did not file
income tax returns for the years 1989 through 1994. During these
years, Mrs. Bodwell did not exercise any management or control
over petitioner's business.
OPINION
Issue 1. Unreported Income From Painting Services
A. Burden of Proof
By order dated March 4, 1998, we ruled that respondent’s
determinations of petitioners’ income were arbitrary because
respondent had not offered any evidence or other basis to support
the determination that petitioners received income. Thus, we
held that respondent may not rely on the presumption that the
determination is correct. See Palmer v. IRS, 116 F.3d 1309, 1312
(9th Cir. 1997); Weimerskirch v. Commissioner, 596 F.2d 358, 360-
361 (9th Cir. 1979), revg. 67 T.C. 672 (1977). Accordingly, we
ruled that respondent bears the burden of proving the amount of
petitioners’ income for the years in issue.
B. Amount of Unreported Income
Respondent presented evidence at trial that petitioner,
d.b.a. PAINT-SER LTD., performed painting services during the
years 1989 through 1994 for Shell and Town and Country.
The manager of Federal income tax audits at Shell, Bruce
Charles Fay (Mr. Fay), stated that petitioner's tax
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identification number (TIN) was associated with two vendor
accounts at Shell. In addition, he provided extracts from
Shell’s accounting system which clearly displayed petitioner's
TIN beside these two vendor accounts. Further, these extracts
showed that Shell paid the following amounts to petitioner for
painting services: $51,619.64 in 1989, $84,832.88 in 1990,
$35,919.48 in 1991, $63,163.81 in 1992, $64,645.53 in 1993, and
$46,162.61 in 1994. Finally, a senior construction engineer at
Shell responsible for construction of new service station and
maintenance of other service stations, Raymond G. Newsome (Mr.
Newsome), testified that he personally observed petitioner
performing painting services for Shell during the years in issue.
The president of Town and Country, Robert Balian (Mr.
Balian), also testified on behalf of respondent. Mr. Balian
identified invoices sent to Town and Country by PAINT-SER LTD.,
and copies of checks sent to PAINT-SER LTD. for payment of those
invoices. The PAINT-SER LTD. invoices represented charges for
materials and labor related to painting new and old service
stations for Town and Country. Mr. Balian also testified that
PAINT-SER LTD. and petitioner were one and the same. On the
basis of the record, we find that Town and Country paid
petitioner, d.b.a. PAINT-SER LTD., $27,807.20 in 1990, $49,442.09
in 1991, $17,821.04 in 1992, $230.64 in 1993, and $8,091.17 in
1994 for painting services.
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Petitioners presented no evidence or argument on brief
contesting these facts.3 When this case was called for trial
there was no appearance by or on behalf of petitioners; however,
respondent went forward with the evidence. At the close of the
trial, respondent moved to have his answer amended to conform to
the proof. This Court granted respondent’s oral motion. The
amended answer asks this Court to find that petitioners had total
income of $51,619.64 in 1989, $112,640.08 in 1990, $85,361.57 in
3
This matter has a long procedural history. In their
petition filed Sept. 29, 1995, petitioners made standard
frivolous arguments. On Nov. 15, 1995, we ordered petitioners to
amend their petition. On Dec. 4, 1995, petitioners filed an
amended petition again making standard frivolous tax-protester
arguments. On Mar. 5, 1996, we ordered petitioners to file a
second amended petition stating:
petitioners have failed to satisfy the requirements of
Rule 34(b). The best that can be said of both the
petition and amended petition is that petitioners have
assigned error in respect of respondent's
determinations. However, neither the petition nor the
amended petition includes any statement of the facts on
which petitioners base the assignments of error. * * *
[Fn. ref. omitted.]
Petitioners filed a second amended petition that continued to
assert frivolous tax-protester arguments. Accordingly, on May
28, 1996, we ordered that, except for matters dealing with the
burden of proof in the second amended petition, "the petition,
amended petition, and second amended petition will be stricken in
their entirety".
This is the second trial of this case. On May 5, 1997, we
held the first trial. On Mar. 4, 1998, we ordered that the
record from the first trial, including the petitioner's answering
brief, "will not be considered in deciding the merits of the case
unless and to the extent that the parties so stipulate". There
have been no stipulations to this effect.
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1991, $80,984.85 in 1992, $64,876.17 in 1993, and $54,253.78 in
1994. Accordingly, on the basis of the record, we hold that Mr.
Bodwell earned total income for painting services from both Shell
and Town and Country as follows: $51,619.64 in 1989, $112,640.08
in 1990, $85,361.57 in 1991, $80,984.85 in 1992, $64,876.17 in
1993, and $54,253.78 in 1994.
C. Community Property
During the years in issue, petitioner and Mrs. Bodwell
resided in California, a community property State. Married
persons who reside in a community property State are generally
each required to report one-half of their community income for
Federal income tax purposes. See United States v. Mitchell, 403
U.S. 190 (1971); Drummer v. Commissioner, T.C. Memo. 1994-214,
affd. without published opinion 68 F.3d 472 (5th Cir. 1995).
Therefore, the income earned by petitioner for painting services
must be divided equally between petitioners during the years in
issue.
D. Deductions
Where taxpayers have trade or business income, they
ordinarily have business and other deductions. Deductions are
strictly a matter of legislative grace; however, petitioners bear
the burden of providing evidence to substantiate the claimed
deductions. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503
U.S. 79, 84 (1992). A taxpayer must keep sufficient records to
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establish their amount. See sec. 6001. Except in the case of
expenses subject to section 274, if the taxpayer's records are
inadequate or there are no records, we may still allow a
deduction based on a reasonable estimate. See Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However, the
taxpayer must present evidence sufficient to provide some
rational basis upon which estimates of deductible expenses may be
made. See Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
In this case, petitioners provided no evidence at trial or
argument on brief that they are entitled to deductions from their
income. Accordingly, we cannot estimate petitioners' deductions
under the Cohan rule.
Issue 2. Self-Employment Tax
On brief, respondent contends that petitioner "is liable for
self-employment tax on all of the income he earned." Section
1401 imposes a tax on the self-employment income of every
individual. An individual's self-employment income depends on
his "net earnings from self-employment". Sec. 1402(b). In
relevant part, the term "net earnings from self-employment" means
the gross income derived by an individual from any trade or
business carried on by such individual less allowable deductions
attributable to such trade or business. See sec. 1402(a).
Under section 1402(a)(5), where the income from a trade or
business is community income, as in this case, all the gross
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income and deductions attributable to such trade or business
shall be treated, for purposes of self-employment tax, as the
gross income and deductions of the husband, unless the wife
exercises substantially all of the management and control of such
trade or business, in which case all such gross income and
deductions shall be treated as hers. Accordingly, under section
1401, the spouse deemed to have management and control of the
business activity is subject to self-employment tax, and the tax
is computed on the total gross income less the total deductions
of the business, notwithstanding the attribution of one-half of
the income to the other spouse for income tax purposes.
It is uncontested that petitioner, d.b.a. PAINT-SER LTD.,
managed and controlled the performance of the painting services
associated with PAINT-SER LTD. On the basis of the record and
sections 1401 and 1402(a)(5), we find that all the self-
employment tax liability for the years 1989 through 1994 is
attributable to the business managed and controlled by
petitioner, and that he is liable for self-employment tax during
the years in issue on the income earned from these services.
Issue 3. Failure To File Timely Tax Return or To Pay Tax
Respondent determined that the addition to tax for failure
to file timely a tax return was applicable for each of the years
in issue. It is uncontested that petitioners did not file tax
returns for any of the years in issue. An income tax return must
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be filed by all individuals receiving gross income in excess of
certain minimum amounts. See sec. 6012; sec. 1.6012-1(a), Income
Tax Regs. For the years 1989 through 1994, petitioners' gross
income, as defined in section 61(a), was well in excess of the
minimum amounts specified in section 6012. Therefore,
petitioners were required to file Federal income tax returns for
the years 1989 through 1994. See secs. 6011, 6012(a)(1)(A),
7701(a)(1); sec. 1.6012-1(a), Income Tax Regs.
Section 6651(a) imposes an addition to tax for failure to
file timely a return, unless the taxpayer establishes: (1) The
failure did not result from willful neglect, and (2) the failure
was due to reasonable cause. See United States v. Boyle, 469
U.S. 241, 245-246 (1985). Petitioners bear the burden of proof
on this issue. See Rule 142(a); Baldwin v. Commissioner, 84 T.C.
859, 870 (1985). Petitioners failed to prove reasonable cause
for their failure to file. Accordingly, petitioners are liable
for additions to tax for failure to file returns under section
6651(a) for the years 1989 through 1994.
Issue 4. Failure To Pay Estimated Income Tax
Respondent determined that petitioners were liable for the
addition to tax under section 6654(a) for failure to pay
estimated tax for the years 1989 through 1994. Where payments of
tax, either through withholding or by making estimated quarterly
tax payments during the course of the year, do not equal the
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percentage of total liability required under the statute,
imposition of the addition to tax under section 6654(a) is
automatic, unless petitioners show that one of the statutory
exceptions applies. See Niedringhaus v. Commissioner, 99 T.C.
202, 222 (1992); Habersham-Bey v. Commissioner, 78 T.C. 304, 319-
320 (1982); Grosshandler v. Commissioner, 75 T.C. 1, 20-21
(1980). Petitioners have provided no evidence that any of these
exceptions apply. Therefore, we sustain respondent on this
issue. The correct amounts of underpayment and additions to tax
under sections 6651(a) and 6654 will be determined under Rule
155.
To reflect the foregoing,
Decision will be entered
under Rule 155.