CANNON v. COMMISSIONER

T.C. Memo. 2001-292

UNITED STATES TAX COURT

JIMMIE E. CANNON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21241-97. Filed November 5, 2001.

Jimmie E. Cannon, pro se.

Timothy F. Salel, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: Respondent determined deficiencies in and

additions to tax with respect to petitioner’s Federal income

taxes as follows:

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

1982 $79,254 $19,814 $7,716
1983 31,758 7,940 1,943
 - 2 -

The issues for decision are whether petitioner filed Federal

income tax returns for the years in issue; whether respondent

properly determined petitioner’s income from the practice of law;

whether petitioner is entitled to any deductions beyond those

conceded by respondent; and whether petitioner is liable for the

additions to tax determined by respondent. Unless otherwise

indicated, 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.

FINDINGS OF FACT

Petitioner resided in La Mesa, California, when he filed his

petition in this case.

Petitioner was admitted to practice law in California in

June 1976. During 1982 and 1983, petitioner specialized in

immigration law and handled a high volume of amnesty cases,

deportation hearings, asylum applications, and family petitions.

Petitioner’s practice was conducted under the name Santa Ana

Immigration Center (SAIC).

Petitioner maintained bank accounts in the name of SAIC and

held signature authority over the bank accounts.

During 1982, SAIC was operated out of a commercial office

located on North Broadway in Santa Ana, California. In 1983,

SAIC moved to an office on Main Street in Santa Ana.
 - 3 -

During 1982 and 1983, petitioner was married to Crucita

Cannon. Crucita Cannon worked with petitioner at SAIC.

Petitioner also had a secretary named Judy Sanchez.

Hanibal “Mike” Justo (Justo) and his wife, Graciela Justo

(the Justos), were bilingual (English and Spanish) and ran a

small income tax service and wedding chapel in Santa Ana. The

Justos referred some cases to petitioner and assisted petitioner

in dealing with Hispanic clients.

Petitioner and the other persons working in his office

maintained 22 receipt books in which they recorded payments

received from and balances due from clients of SAIC. The

payments included fees earned by petitioner as well as

reimbursements for filing fees and payments for services rendered

by persons other than petitioner.

The money receipt books reflected total payments of

$339,866.54 received during 1982 and $130,710 received during

1983. Petitioner also received fees of $500 from Octovio Molina

and $2,000 from Gerald Scott during 1982 that he did not record

in the money receipt books.

Early in 1983, petitioner’s sister, Sharon Cannon, attempted

to set up books for SAIC for 1982 and 1983. She reviewed the

receipt books, ledger cards, and client files. In 1983, she set

up a client billing system on the computer. She secured from the
 - 4 -

Justos check stubs and miscellaneous receipts for expenses of

SAIC. She concluded her work by October 1983.

Prior to 1985, petitioner commenced an action for

dissolution of his marriage to Crucita Cannon. In a declaration

filed July 17, 1985, in the divorce action, petitioner

represented:

The income records for my immigration law practice
for last years which I have in my possession indicate
that there was in the area of $13,000 or so per month
that was transferred through the business account--
money that * * * [P’s wife, Crucita] took in, deposited
and (I’m sure) transferred out. Without her
cooperation it will be very difficult for me to
determine more about my practices [sic] income. I
should point out that with * * * [Crucita] controlled
the mail at my office and with * * * [Crucita’s] mother
controlling the mail at my residence they were
effectively able to keep me in the dark about the true
extent of income and where the money was being spent.
Based upon what I know now, I believe that * * *
[Crucita] systematically looted income from my
immigration law practice.

In an Income and Expense Declaration filed in the divorce action

on August 30, 1985, petitioner represented that his gross monthly

income, his net monthly disposable income, his other income, and

various other items were “unknown”.

In May 1986, petitioner rented commercial space on South

Broadway in Santa Ana from Jorge Nanni (Nanni). In August 1988,

Nanni commenced eviction proceedings against petitioner. Nanni

delivered two boxes containing 22 money receipt books to an

office of the Internal Revenue Service (IRS).
 - 5 -

In November 1988, agents of the Immigration and

Naturalization Service (INS) executed an arrest warrant for

Crucita Cannon and a search warrant for the premises of SAIC.

Crucita Cannon was subsequently convicted of selling fraudulent

immigration documents.

On December 10, 1990, petitioner was disbarred from the

practice of law in California. In its opinion, Cannon v. State

Bar of Cal., 51 Cal. 3d 1103, 1115 (1990), the Supreme Court of

the State of California found that petitioner had committed

“multiple instances of serious misconduct, many of which involved

moral turpitude.”

The statutory notice in this case was prepared based on the

receipt books delivered to the IRS by Nanni. The notice was sent

to petitioner on July 24, 1997. Respondent determined that

petitioner had Schedule C, Profit or Loss From Business, income

from his law practice of $166,001 in 1982 and $73,837 in 1983.

The explanation of adjustments that was attached to the statutory

notice stated:

a. It is determined that Santa Ana Immigration Center
realized income in the amount of $332,002.00 in the tax
year ending December 31, * * * [1982] and $147,674.00
in the tax year ending December 31, 1983. Under the
community property rules of the State of California,
one-half of this income is taxable to you.
Accordingly, your taxable income is increased by
$166,001.00 for 1982 and $73,837.00 in 1983.
 - 6 -

Respondent also determined that petitioner was liable for self-

employment tax and for additions to tax for failure to file tax

returns and for failure to pay estimated tax.

In the petition filed October 27, 1997, petitioner’s

disagreement with the adjustments was stated as follows:

I received no taxable income during the tax years
of 1982 and 1983 from Santa Ana Immigration Center or
any other source; therefore there is no responsibility
for paying taxes in this matter because no income was
personally collected, earned or received.

At no time did petitioner amend the petition to allege that he

filed returns or to state any other special matter.

The case was first set for trial on June 7, 1999, by notice

served December 31, 1998. On May 26, 1999, petitioner filed a

petition with the U.S. Bankruptcy Court for the Southern District

of California under 11 U.S.C. chapter 7. On June 9, 1999,

petitioner filed an adversary proceeding in the bankruptcy court

against the United States of America. The gist of petitioner’s

complaint was that his books and records used by the IRS in

making the determinations at issue in this case were wrongfully

seized by the INS in 1988. Pursuant to stipulation, on August 4,

1999, petitioner’s action against the United States of America

was dismissed.

On June 16, 1999, petitioner also filed an adversary

proceeding in the bankruptcy court against a former employee of

the INS and against Nanni. The gist of the complaint in this
 - 7 -

action was also that petitioner’s records had been wrongfully

seized. On October 20, 1999, the bankruptcy court granted a

motion for summary judgment in favor of the former employee of

the INS. The bankruptcy court ruled that petitioner’s

“constitutional tort claim” would not stand because petitioner

(plaintiff in the bankruptcy adversary proceeding):

plainly had available the remedies afforded in Rule 41
of the Federal Rules of Criminal Procedure by which he
could have challenged the search of the subject offices
and sought return of his property. Plaintiff clearly
knew the search occurred in 1988, because he was at the
site when it took place, and it would be inappropriate
11 years after the fact to imply a private cause of
action against Defendant when Plaintiff could have
availed himself of the Rule 41 remedy at the time of
the search.

The bankruptcy court further held that the action was barred by

the statute of limitations and that the former INS employee

should prevail on his claim of qualified immunity, stating: “No

evidence was adduced in response to * * * [the former employee’s]

assertion that he did not provide any documents to the I.R.S.”

On June 26, 2000, petitioner’s adversary complaint against Nanni

was dismissed and closed.

OPINION

Prior to trial of this case, petitioner’s strategy was to

refuse to cooperate with respondent and instead to pursue

arguments, not raised in the pleadings, that respondent was

somehow precluded from pursuing this case because of misconduct

in relation to the seizure of petitioner’s records in 1988.
 - 8 -

During trial, while asserting the same claims, petitioner

successfully showed errors in respondent’s schedules summarizing

the 22 receipt books. Those records, as explained in

petitioner’s testimony, also reflected nontaxable reimbursements

and deductible expenses. Petitioner did not present any

additional evidence of deductions. In his opening brief,

respondent corrected the errors and made appropriate concessions

based on the receipt books received in evidence. Petitioner has

not made any further attempt to show errors in respondent’s

revised computations. Instead, he pursues a hodgepodge of

nonmeritorious contentions.

Respondent’s Position

In respondent’s brief, respondent tabulated the various

receipt books and derived new totals of gross receipts for

petitioner for 1982 and 1983. Respondent’s revised totals are

$339,866.54 for 1982 and $130,710 for 1983. In recomputing the

gross receipts, respondent omitted items identified in the

receipt books as reimbursement of expenses, a loan from

petitioner’s father, and receipts marked “VOID”. Respondent

concedes that petitioner paid wages of $10,901.53 in 1982 and

$24,216 in 1983. Respondent also concedes that petitioner paid

filing fees of $210 in 1982 and $175 in 1983, paid for services

rendered by Justo in the amount of $1,907.50 in 1982, and paid

bail bond expenses of $500 in 1982. Respondent also concedes
 - 9 -

that petitioner is entitled to deduct $1,356.94 as rental

expenses in 1983. Finally, respondent concedes that petitioner

is entitled to deduct one-half of the self-employment tax imposed

for 1982 and 1983 as recalculated. With respect to the items of

income and deductions, respondent computed petitioner’s tax

liability on one-half of the net income determined, pursuant to

California community property law.

Petitioner’s Contentions

Petitioner contends that respondent has the burden of proof,

by clear and convincing evidence, in this case. He equates

respondent’s determination that he failed to file tax returns as

fraud under section 7454(a) and Rule 142(b). Respondent,

however, has not determined the applicability of a civil fraud

penalty in this case. The addition to tax for failure to file,

section 6651(a), and not the addition to tax for fraud, (former)

section 6653(b), is an issue. Failure to file tax returns is not

the equivalent of fraud for purposes of civil tax penalties.

See, e.g., Kotmair v. Commissioner, 86 T.C. 1253, 1261-1262

(1986); Koeneman v. Commissioner, T.C. Memo. 1958-186; cf.

current secs. 6651(f), 6663. The clear and convincing standard

is not applicable in this case. The preponderance of the

evidence supports respondent’s position on each of the issues.

Petitioner argues that he did file tax returns and that the

statute of limitations bars the deficiency notice in this case.
 - 10 -

He claims that he testified that he filed the required returns.

However, neither the transcript pages that he cites nor any other

pages of the transcript contain such testimony. His contention

throughout this case, beginning with the petition, was that he

did not have taxable income for 1982 or 1983. He never stated

specifically that he prepared or filed Federal income tax returns

for 1982 or 1983. He did not plead the bar of the statute of

limitations in the petition. He never provided copies of any

returns, details concerning the time or manner of preparation of

returns, or any other credible evidence that supports his belated

assertion in the briefs that he filed returns for the years in

issue. The official IRS transcripts of his account received in

evidence as stipulated exhibits show that there were no returns

filed prior to the substitutes for returns filed in 1995. We do

not believe that petitioner filed Federal income tax returns for

the years in issue.

Petitioner argues that his inability to produce records of

his income and deductions is attributable to the Government’s

seizure of his records in 1988 and failure to return those

records to him. Again, we do not believe petitioner’s

assertions. Petitioner called as a witness his sister, who

testified that she worked on the books of SAIC in 1983. In

response to petitioner’s questions, his sister indicated that “it

was kind of hard to discern” whether Justo or petitioner made a
 - 11 -

profit. Petitioner presented no evidence of preparation of tax

returns or schedules showing his income for 1982 or 1983.

During his divorce proceedings in 1985, petitioner

represented that he did not know what his income was, allegedly

because of actions by his then wife. Based on his sister’s

description of the efforts she made in 1983 to reconstruct the

business income and his own assertions in 1985, we do not believe

that any seizure of records in 1988 was the cause of petitioner’s

inability and failure to report correctly his income and expenses

for 1982 or 1983.

During the years in issue and in his proposed findings of

fact in his brief, petitioner has represented that he conducted

SAIC as sole practitioner. Petitioner now contends that the

notice of deficiency “is invalid on its face because * * * [he]

was not named as a partner in the notice of deficiency”.

Petitioner’s argument is based on the alleged treatment of

petitioner and Justo as partners for employment tax purposes by

the IRS. He contends that the Court does not have jurisdiction

because the Commissioner did not issue a notice of final

partnership administrative adjustment under section 6226.

Regardless of the lack of factual support for petitioner’s

argument, section 6226 applies only to partnerships having more

than 10 partners. Sec. 6231(a)(1)(B).
 - 12 -

Petitioner claims that any 1982 and 1983 income tax

liabilities were discharged as a result of the bankruptcy

proceedings. Whether a discharge applies to a taxpayer’s income

tax deficiencies must be determined by the bankruptcy court. See

Neilson v. Commissioner, 94 T.C. 1, 8-9 (1990); Graham v.

Commissioner, 75 T.C. 389, 399 (1980). Petitioner’s other

contentions regarding the effect of the bankruptcy are predicated

on his erroneous assumption that respondent has the burden of

proof that the taxes were not discharged or on legal arguments

not properly pleaded in this case.

Petitioner’s recurrent theme is that some misconduct on the

part of the Federal Government should inure to his benefit in

this case. We are not persuaded by petitioner’s claims of

malfeasance and misconduct. Neither, apparently, was the

bankruptcy court. Even in cases where questionable conduct is

attributable to IRS agents, however, suppression of evidence

generally is not a suitable sanction in a civil tax case. Weiss

v. Commissioner, 919 F.2d 115, 118-119 (9th Cir. 1990), affg.

T.C. Memo. 1988-586; Jones v. Commissioner, 97 T.C. 7, 27 (1991);

Miller v. Commissioner, T.C. Memo. 1998-72. We do not think any

sanction is appropriate here.

The remainder of petitioner’s contentions, to the extent

that they are intelligible, are so patently lacking in merit that

they do not require a response.
 - 13 -

Summary and Conclusions

Petitioner blames his present situation on the U.S.

Government, the Justos, his former wife, his former landlord, and

unidentified others. We are satisfied that petitioner’s

predicament is of his own making. Respondent has, by the receipt

books in evidence and petitioner’s testimony, presented

substantive evidence that petitioner received unreported income.

See Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985);

Petzoldt v. Commissioner, 92 T.C. 661, 687-690 (1989); Tokarski

v. Commissioner, 87 T.C. 74 (1986). Petitioner has shown no

error in respondent’s corrected schedules of income set forth in

respondent’s opening brief. Petitioner has not identified any

deductions to which he is entitled beyond those conceded by

respondent based on the records in evidence. Petitioner’s burden

with respect to deductions is well established. See, e.g.,

Rockwell v. Commissioner, 512 F.2d 882 (9th Cir. 1975), affg.

T.C. Memo. 1972-133. As explained above, we do not believe

petitioner’s claims that respondent is responsible for his

inability to substantiate deductions. Even if the records had

been lost or destroyed while in respondent’s hands, however,

petitioner would not be relieved of his burden with respect to

deductions. See Foster v. Commissioner, 756 F.2d 1430, 1439 (9th

Cir. 1985) (taxpayers’ “self-certification of their record-

keeping system is not a substitute for proof of their
 - 14 -

deductions”), affg. and vacating on another issue 80 T.C. 34

(1983); Malinowski v. Commissioner, 71 T.C. 1120, 1124-1125

(1979); Sentinel Fin. Servs. v. Commissioner, T.C. Memo. 1992-

733, affd. without published opinion 39 F.3d 1188 (9th Cir.

1994).

Section 6651(a)(1) provides for an addition to tax for

failure to file Federal income tax returns. As discussed above,

we do not believe petitioner’s belated claim that he filed timely

returns. He has shown no reasonable cause for failure to file

the returns, and the section 6651(a)(1) addition to tax is

sustained.

The addition to tax for failure to make estimated tax

payments under section 6654 is imposed in the absence of special

exceptions not applicable here. See generally Grosshandler v.

Commissioner, 75 T.C. 1, 20-21 (1980).

To reflect respondent’s concessions,

Decision will be entered

under Rule 155.