SUNIK v. COMMISSIONER

T.C. Memo. 2001-195

UNITED STATES TAX COURT

MARK SUNIK AND TAMARA SUNIK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9941-99. Filed July 27, 2001.

Jay J. Freireich, Harvey R. Poe, and Michael J. Sullivan,

for petitioners.

Keith V. Doce and Diane R. Mirabito, for respondent.

MEMORANDUM OPINION

WELLS, Chief Judge: Respondent determined a deficiency in

petitioners' 1995 Federal income tax in the amount of $70,783 and

a section 6662 accuracy-related penalty of $14,157. Unless

otherwise indicated, all section references are to the Internal
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Revenue Code in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

The issues we must decide in the instant case are: (1)

Whether the notice of deficiency is invalid on the ground that

respondent failed to make a proper determination of a deficiency;

(2) whether the respondent has the burden of going forward with

the evidence because the notice of deficiency lacks predicate

evidence or is arbitrary; and (3) whether the Court properly

excluded testimony of petitioners' witness.

Background

The parties submitted the instant case fully stipulated

pursuant to Rule 122. The stipulated facts are incorporated

herein by reference and are found as facts in the instant case.

Petitioners resided in Forest Hills Gardens, New York, when they

filed their petition.

On their timely filed Federal income tax return for taxable
year 1995, petitioners reported $13,072 of taxable interest

income, $58,566 of taxable dividend income, and $21,872 of

taxable Schedule C business income. Respondent issued an

examination report proposing an additional Federal income tax

liability of $3,195.70 for petitioners' 1995 taxable year based

upon the disallowances of various deductions that they reported

on Schedules C, Profit or Loss From Business, and E, Supplemental

Income and Loss. Petitioners consented to the
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assessment and collection of the additional tax liability

proposed by the report.

Subsequently, petitioners consented and agreed to the

finding of the State of New York Department of Taxation and

Finance that they owed an additional tax liability for their 1995

taxable year. The consent form prepared by the Department of

Taxation and Finance and signed by petitioners (New York consent

form) stated: "Net Adjustments to N.Y. State Income" of

$178,034. The document stated "Audit Increases to N.Y. State

Income" of $178,034 based on a "Difference in 'T' account". The

document further stated an amount of $0 for "Other Taxes or

Disallowed Credits".

Respondent timely issued a statutory notice of deficiency to

petitioners for their 1995 taxable year. Respondent determined

that petitioners failed to report Schedule C income in the amount

of $178,034. The notice of deficiency stated in pertinent part:

"Information on which we based our adjustment was derived from

your state's taxing agency."

Petitioners filed a timely petition contesting the notice of

deficiency. Subsequently, the Court issued a notice to the

parties setting the instant case for trial, along with a Standing

Pre-Trial Order which required the submission of Trial Memoranda

to the Court and opposing counsel at least 15 days before the

first day of the trial session. The Standing Pre-Trial Order

further required identification of witnesses in the Trial
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Memoranda and specified "that witnesses who are not identified

will not be permitted to testify at the trial without leave of

the Court upon sufficient showing of cause". Petitioners failed

to timely submit a Trial Memorandum to the Court.

When the instant case was called for trial, counsel for

petitioners appeared and requested leave to call as a witness

Harvey R. Poe, co-counsel for petitioners. Counsel for

respondent moved to exclude such testimony based upon

petitioners' failure to comply with the Court's Standing Pre-

Trial Order. The Court granted respondent's motion. Following

granting of the motion, the parties agreed to submit the case

fully stipulated.

Discussion

I. Validity of Notice of Deficiency

Petitioners contend that the notice of deficiency is invalid

on the grounds that respondent failed to make a valid

determination insofar as the notice of deficiency reveals that

the deficiency was based solely upon petitioners' consent to an

increased State income tax liability.

Petitioners' assertion that respondent failed to make a

valid determination within the meaning of section 6212(a)1 is

misplaced. Petitioners, citing Scar v. Commissioner, 814 F.2d

1363 (9th Cir. 1987), revg. 81 T.C. 855 (1983), contend that

1
Sec. 6212(a) provides in pertinent part: "If the
Secretary determines that there is a deficiency in respect of any
tax * * *, he is authorized to send notice of such deficiency to
the taxpayer."
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respondent did not give sufficient thought and consideration to

the notice, rendering it invalid as a "naked assessment".

The Court of Appeals for the Ninth Circuit and this Court

have limited the holding in Scar to the narrow circumstances

where the notice of deficiency reveals on its face that no

determination was made. See Kantor v. Commissioner, 998 F.2d

1514, 1521-1522 (9th Cir. 1993), affg. in part and revg. in part

on another ground T.C. Memo. 1990-380; Clapp v. Commissioner, 875

F.2d 1396, 1402 (9th Cir. 1989), affg. an unreported Order of

this Court; Campbell v. Commissioner, 90 T.C. 110 (1988). The

facts in the instant case are readily distinguishable from those

in Scar. The notice does not reveal on its face that respondent

failed to adequately determine a deficiency. In the instant

case, the notice indicated the information examined by respondent

was taxpayer specific because it stated: "Information on which

we based our adjustment was derived from your state's taxing

agency." Because the face of the notice does not reveal that the

Commissioner failed to make a determination, we hold that the

notice is valid.

II. Presumption of Correctness

Petitioners next contend that respondent should bear the

burden of proof in the instant case because respondent has failed

to produce predicate evidence linking petitioners to the

unreported income determined in the notice of deficiency. It is

well settled that taxpayers generally bear the burden of proving
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that the Commissioner's determination is incorrect.2 Rule

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

Petitioners rely on Portillo v. Commissioner, 932 F.2d 1128

(5th Cir. 1991), affg. in part and revg. in part T.C. Memo. 1990-

68, which held that the Commissioner had a duty to investigate

the "bald assertion" contained in a Form 1099 received from a

third party to confirm whether it was supported by other

financial records, and the Commissioner's failure to do so

rendered the notice of deficiency arbitrary and erroneous. Id.

at 1134. The Court of Appeals for the Fifth Circuit, however,

has narrowed the holding in Portillo by declining to apply it

where the Commissioner does not rely on a statement of a third

party to determine that a deficiency exists. See Woodall v.

Commissioner, 964 F.2d 361, 363 (5th Cir. 1992), affg. T.C. Memo.

1991-15. In the instant case, respondent based the determination

in the notice of deficiency on petitioners' agreement in the New

York consent form to an increase in their New York State income

for 1995. See Sealy Power, Ltd. v. Commissioner, 46 F.3d 382,

386 (5th Cir. 1995), affg. in part, revg. in part on other

grounds, and remanding in part T.C. Memo. 1992-168.

2
Internal Revenue Service Restructuring & Reform Act of
1998 (RRA 1998), Pub. L. 105-206, sec. 3001, 112 Stat. 685, 726-
727, added sec. 7491, which places the burden of proof on the
Commissioner in certain circumstances. Sec. 7491 is applicable
to court proceedings arising in connection with examinations
commencing after July 22, 1998. See RRA 1998 sec. 3001(c), 112
Stat. 727; Higbee v. Commissioner, 116 T.C. 438, 440 (2001). The
examination in the instant case commenced on Nov. 12, 1997.
Accordingly, sec. 7491 is inapplicable.
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The Court of Appeals for the Second Circuit, the circuit to

which venue for appeal of the instant case, if any, would lie,

has recognized an exception to the presumption of correctness by

requiring the Commissioner in unreported income cases to provide

evidence linking the taxpayer with some tax-generating acts. See

Llorente v. Commissioner, 649 F.2d 152, 156 (2d Cir. 1981), affg.

in part, revg. in part and remanding 74 T.C. 260 (1980). The

exception to the presumption of correctness, however, applies

only where the Commissioner has failed to provide any evidentiary

foundation. Hardy v. Commissioner, 181 F.3d 1002, 1005 (9th Cir.

1999), affg. T.C. Memo. 1997-97.

The Commissioner may satisfy the predicate evidence

requirement in unreported income cases by introducing evidence

linking the taxpayer to tax-generating acts. See Llorente v.

Commissioner, supra at 156; Shriver v. Commissioner, 85 T.C. 1, 4

(1985). Courts have allowed the Commissioner to offer a variety

of forms of evidence linking the taxpayer to tax-generating acts.

See Hardy v. Commissioner, supra at 1005 (income statements from

taxpayer's spouse's employer and bank); Delaney v. Commissioner,

743 F.2d 670 (9th Cir. 1984) (taxpayer's admission of ownership

of more than $40,000 of Swiss gold coins), affg. T.C. Memo. 1982-

666; Johnston v. Commissioner, T.C. Memo. 2000-315 (income

received by a trust of which the taxpayer was an original capital

holder for services performed by the taxpayer); Smith v.

Commissioner, T.C. Memo. 2000-43 (taxpayer's employment

questionnaire identifying jobs for which IRS had no record).
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Assuming, as other courts have required,3 that the

Commissioner must provide an evidentiary foundation for the

determination that a taxpayer has received unreported income, we

are satisfied that the New York consent form reflecting an

increase to petitioners' State taxable income for 1995

constitutes predicate evidence in the instant case for

respondent's determination in the notice of deficiency.

Petitioners' admission to an additional State income tax

liability due to unreported income provides a sufficient link to

their income-generating acts. Petitioners argue that the New

York consent form is ambiguous and could stem from disallowed

deductions. To the contrary, we note that the language of the

New York consent form states that the State audit disclosed an

increase in petitioners' income and shows no disallowed

deductions. Such evidence is sufficient to satisfy any predicate

evidence requirement. Accordingly, we hold that the notice of

deficiency in the instant case is presumed correct and the burden

of proof is on petitioners.

III. Exclusion of Testimony of Petitioners' Witness

Before agreeing to submit the case to the Court as fully

stipulated, petitioners argued that they agreed to a settlement

with the State of New York Department of Taxation and Finance to

3
See Portillo v. Commissioner, 932 F.2d 1128, 1134 (5th
Cir. 1991), affg. in part and revg. in part T.C. Memo. 1990-68;
Anastasato v. Commissioner, 794 F.2d 884, 887 (3d Cir. 1986),
vacating and remanding T.C. Memo. 1985-101; Rapp v. Commissioner,
774 F.2d 932, 935 (9th Cir. 1985), affg. an unreported Order of
this Court.
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avoid the nuisance of further litigation. Petitioners proposed

calling their co-counsel, Harvey R. Poe, to testify regarding his

meeting with New York State auditors. Respondent moved to

exclude Mr. Poe's testimony, and the Court granted respondent's

motion.

Rule 131(b) specifies that a party may be subject to

sanctions for unexcused failure to comply with the Standing Pre-

Trial Order. The Court's Standing Pre-Trial Order is intended to

promote the orderly and fair presentation of evidence in Tax

Court trials. See Barkley Co. v. Commissioner, 89 T.C. 66, 70

(1987). The Standing Pre-Trial Order states in pertinent part:

Each party shall prepare a Trial Memorandum * * * and shall
submit it directly to the undersigned and to the opposing
party not less than 15 days before the first day of the
trial session.

* * * Witnesses who are not identified [in the Trial
Memorandum] will not permitted to testify at the trial
without leave of the Court upon sufficient showing of
cause.

Petitioners, after failing to comply with the Standing Pre-Trial

Order by failing to submit a Trial Memorandum to the Court 15

days before the trial session, failed to show cause why Mr. Poe

should be allowed to testify. Accordingly, the Court properly

granted respondent's motion to exclude his testimony, and we see

no need to further revisit the issue.

Conclusion

Petitioners offered no other evidence to rebut respondent's

determinations in the notice of deficiency. Consequently, we

sustain respondent's determinations that petitioners are liable
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for a deficiency in the amount of $70,783 and an accuracy-related

penalty in the amount of $14,157.

We have carefully considered all of the remaining arguments

that have been made by petitioners for a result contrary to that

expressed herein, and, to the extent not discussed above, we find

that such arguments are irrelevant or without merit.

To reflect the foregoing,

Decision will be entered for
respondent.