BURNETT v. COMMISSIONER

T.C. Memo. 2002-181

UNITED STATES TAX COURT

WESLEY W. BURNETT AND PATSIE BURNETT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3265-01. Filed July 31, 2002.

Wesley W. Burnett, pro se.

James E. Archie, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Respondent issued notices of deficiency to

petitioners on the basis of their failure to file Federal income

tax returns for 1994, 1995, 1996, and 1997.1 Respondent

1
Each petitioner received one notice of deficiency for
1994, 1995, and 1996 and a second notice of deficiency for 1997.
 - 2 -

determined the following deficiencies and additions to tax for

Wesley W. Burnett (Mr. Burnett):2

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

1994 $649 $49 —0- -0-
1995 13,019 -0- $706 $9,764
1996 12,923 —0- 688 9,692
1997 12,778 —0- 684 9,584

Respondent determined the following deficiencies and additions to

tax for Patsie Burnett (Ms. Burnett):3

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

1994 $649 $49 —0- -0-
1995 7,832 -0- $425 $5,874
1996 7,719 —0- 411 5,785
1997 7,591 —0- 406 5,693

In the answer, respondent conceded that neither petitioner

is liable for the additions to tax under section 6651(f) and

alleged that they are liable under section 6651(a) for additions

to their 1995, 1996, and 1997 taxes. Respondent alleged that the

additions to the respective years’ taxes under section 6651(a)

are $3,255, $3,231, and $3,195 for Mr. Burnett and $1,958,

$1,930, and $1,898 for Ms. Burnett.

2
Section references are to applicable versions of the
Internal Revenue Code. Rule references are to the Tax Court
Rules of Practice and Procedure. Dollar amounts are rounded to
the nearest dollar.
3
The difference between the amounts shown for each
petitioner is related to the computation of self-employment tax.
 - 3 -

We must decide:

1 Whether petitioners are liable for the deficiencies

determined by respondent. We hold they are.

2. Whether petitioners are liable for the additions to tax

under section 6651(a)(1). We hold they are.

3. Whether petitioners are liable for the additions to tax

under section 6654. We hold they are.

FINDINGS OF FACT

Some facts were stipulated, and we incorporate by this

reference the parties’ stipulation of facts and the accompanying

exhibits. We find those facts accordingly. Petitioners are

husband and wife, and they resided in Texas, a community property

State, at all relevant times.

During 1994, Mr. Burnett was employed by and received wages

from Lubbock Independent School District (Lubbock). He received

from Lubbock $22,139 of wages in its 1993/1994 school year, of

which $16,177 was received in 1994. He also received wages from

Lubbock in September, October, and November of 1994. The net

(take-home) amount of these wages was $910, $930, and $164,

respectively.

Mr. Burnett is the owner and publisher of a weekly newspaper

(newspaper) named “The Post Dispatch”.4 He had originally sold

4
Petitioner also printed a magazine (magazine) known as the
“Republic of Texas”.
 - 4 -

the newspaper in 1992 but repurchased it in December 1994,

operating it as a sole proprietorship during each subject year.

Among other things, the newspaper published stories on news,

weather, and sports. The newspaper also accepted and published

advertisements. During 1997, the newspaper was 50 cents per

single copy, with a reduced price in the case of annual

subscribers. The annual subscription rate was $16.50 in 1995,

$20 in 1996, and $26 in 1997, and the total number of paid

subscribers in those respective years was 1,505, 1,450, and

1,500. For 1997, the newspaper’s classified advertising rate

(which was payable in advance absent other acceptable credit

arrangements) was 25 cents per word for a private party

advertisement and 50 cents per word for a commercially placed

advertisement. During 1997, its advertising rate (other than in

the classified section) was $4.50 per column square inch, with a

20-percent discount for runs of at least four consecutive issues.

Petitioners have never filed a 1994, 1995, 1996, or 1997

Federal income tax return. On September 2, 1997, respondent’s

revenue agent (agent) wrote to Mr. Burnett requesting that he

meet with her at a stated time and place on September 12, 1997,

in order to determine his 1993 through 1996 Federal income tax

liability. The letter stated that he should bring with him to

the meeting all of his business records and certain of his

personal records; the letter identified the referenced business
 - 5 -

and personal records by name (e.g., general ledger, cash receipts

and disbursements journal) or by class (e.g., “all Financial

information”). On or about September 4, 1997, Mr. Burnett

responded to the agent asking her to change the scheduled date of

the meeting to September 26, 1997, because, he stated, he had a

long-standing commitment on the scheduled date. The agent

honored that request, writing to Mr. Burnett on September 8,

1997, stating that the meeting had been rescheduled to a stated

time and place on September 26, 1997. That letter also stated

that “If you do not come in for the appointment, I will conduct

the examination and determine your tax liability using sources

available to the IRS.”

On or about September 19, 1997, Mr. Burnett wrote to the

agent stating that he had “carefully consider[ed]” her letters to

him and decided that he would not meet with her because he was

“not one made liable for any tax as defined by the Internal

Revenue Code.” The letter acknowledged the agent’s statement

that she would determine his tax liability on her own, if he

failed to cooperate with her, but claimed that the Internal

Revenue Service lacked the authority to do so because he is not

one “clearly made liable to pay any tax”. Mr. Burnett claimed in

the letter that he had studied the Code and related regulations

and concluded that he was “not one made liable for any [Federal

income] tax as defined by the Internal Revenue Code.” Mr.
 - 6 -

Burnett stated in the letter that he had “made several requests

in the past few years of the Internal Revenue Service, to clearly

state the law or Internal Revenue Code section which makes me one

who is made liable to pay any tax”. Mr. Burnett concluded in the

letter that he had yet to receive an answer from the Internal

Revenue Service as to his requests and that “Naturally, this has

led me to believe that there is no law or code section making me

liable to pay any tax.” The letter included as attachments:

(1) A 3-page May 7, 1996, letter written by Mr. Burnett and

addressed to the Commissioner in Washington, D.C. and (2) a 23-

page October 9, 1995, letter (accompanied by an 11-page

attachment) written by Mr. Burnett and addressed to the Internal

Revenue Service in Austin, Texas. Both letters contained

primarily tax protester rhetoric as to the validity of the

Federal income tax system. On April 22, 1998, the agent wrote

Ms. Burnett a letter offering to meet with her at a stated time

and place in order to determine her Federal income tax liability

for the relevant years. Ms. Burnett also refused to cooperate

with the agent.

Afterwards, following respondent’s expansion of the

examination to include 1997, respondent completed “dummy” returns

for petitioners that included their names, addresses, Social

Security numbers, filing status, and exemptions. These returns

did not include any amounts of income. Subsequently, on
 - 7 -

December 21, 2000, respondent issued the notices of deficiency to

petitioners for 1994, 1995, 1996, and 1997. In connection with

these notices, respondent never issued to petitioners or to a

third party any summons for information concerning petitioners,

with the exception of a summons issued to Lubbock for information

concerning Mr. Burnett’s 1994 wages.

On the basis of an information return master file transcript

for Mr. Burnett that listed that he had received in 1994 taxable

wages totaling $19,913,5 and independent supporting documentation

as to those wages that respondent had requested and received from

Lubbock, respondent determined in the notices of deficiency for

1994 that petitioners had failed to report taxable wages of

$19,913 for that year. As to 1995, 1996, and 1997, respondent

determined in the notices of deficiency for those years that Mr.

Burnett had received unreported income in those years

attributable to his ownership of the newspaper (newspaper

income). The agent determined the amount of newspaper income by

way of a four-step process, bearing in mind the fact that

(1) petitioners had reported on their 1992 Federal income tax

return (the last Federal income tax return that they had filed as

owners of the newspaper) that the newspaper’s gross receipts for

that year were $100,736 and (2) Mr. Burnett had received during

5
The transcript referenced that these wages had been
reported to Mr. Burnett and the Commissioner on a Form W-2, Wage
and Tax Statement. That W-2 is not in the record.
 - 8 -

some or all of the subject years Forms 1099-MISC, Miscellaneous

Income, which appeared to have been for printing jobs performed

for third parties. First, after driving by the headquarters of

the newspaper, she purchased a recent (October 23, 1997) edition

of the newspaper which she determined was representative of an

entire year. Second, as to that edition, she measured the

dimensions of all of the advertisements, counted all of the words

in the classifieds, and applied the appropriate classified and

advertising rates stated therein to calculate the newspaper’s

total advertising revenue for a single weekly edition. Third,

she multiplied that amount by 52 (weeks) to arrive at an annual

gross revenue of $178,230 for the newspaper. The agent did not

include in her gross revenue calculation any other income

realized by the newspaper such as subscription income. The

annual subscription rate multiplied by the number of paid

subscribers would have resulted in additional income of $24,833

in 1995, $29,000 in 1996, and $39,000 in 1997.

Fourth, in an effort to calculate petitioners’ expenses

relating to the annual gross revenue, the agent reviewed the

expenses which petitioners had claimed for the newspaper on their

1992 tax return. She reduced the total amount of the 1992

expenses shown on the return by the wages and employment taxes

included therein after determining that petitioners had not paid

any wages or employment tax in 1995, 1996, or 1997. She
 - 9 -

calculated the percentage of total expenses for each of the

subject years to the corresponding annual gross revenue as 52

percent and determined that petitioners were allowed to deduct as

business expenses for each year 52 percent of the year’s annual

gross revenue (i.e., 52 percent x $178,230 of annual gross

revenue = $92,680 of allowable expenses). She concluded and

determined that Mr. Burnett, as the sole proprietor of the

newspaper, had received from the newspaper in each year

unreported income of $85,550 ($178,230 - $92,680 = $85,550). She

determined that both petitioners, by virtue of the fact that they

lived in Texas, a community property State, were taxable on equal

shares of that income. She determined that Mr. Burnett, by

virtue of the fact that he was the newspaper’s sole proprietor

and publisher and that Ms. Burnett did not seem to be an active

participant in that business, was liable for self-employment tax

on his portion of the self-employment income.

OPINION6

Petitioners alleged in their petition that the notices of

deficiency were invalid because respondent failed to execute an

involuntary return that met the definition of section 6020(b).

Petitioners also alleged in their petition, and have argued

6
Sec. 7491(a)(1) does not apply in this case. In addition
to the fact that respondent’s examination of petitioners’ 1994,
1995, and 1996 taxable years commenced before July 23, 1998, the
effective date of the section, petitioners have failed to
cooperate with respondent as required by sec. 7491(a)(2)(B).
 - 10 -

primarily through this proceeding, that they did not realize for

the subject years the amount of taxable income determined in the

notices of deficiency. As to this allegation, petitioners have

never denied during this proceeding that they had taxable income

in those years but have simply argued that respondent has not

proven the amounts of income. Petitioners also alleged in their

petition that they are entitled to personal exemptions,

deductions, and business-related expense deductions not reflected

in the notices of deficiency. Petitioners called no witnesses at

trial, opting instead to submit their case to the Court on the

basis of the stipulated facts and exhibits and their limited

cross-examination of the agent, the only witness who did testify

at trial.

I. Use of Dummy Returns

Petitioners alleged in their petition that respondent’s

notices of deficiency are invalid because they were not based

upon a “return” within the meaning of section 6020(b).7

7
Section 6020(b) provides:

SEC. 6020(b). Execution of Return by Secretary.--

(1) Authority of Secretary to execute return.--If
any person fails to make any return required by any
internal revenue law or regulation made thereunder at
the time prescribed therefor, or makes, willfully or
otherwise, a false or fraudulent return, the Secretary
shall make such return from his own knowledge and from
such information as he can obtain through testimony or
otherwise.
(continued...)
 - 11 -

According to petitioners, respondent must “make, execute, and

file an involuntary return before there is a deficiency as

defined by Congress”. Here, petitioners allege, respondent has

prepared only “dummy” returns as to the subject years.

We disagree with petitioners’ allegation that the notices of

deficiency are invalid for lack of a section 6020(b) “return”.

In accordance with firmly established law, respondent need not

actually prepare a return in order to determine a deficiency in

the tax of a taxpayer who has never filed a return for that year.

Roat v. Commissioner, 847 F.2d 1379, 1381 (9th Cir. 1988);

Hartman v. Commissioner, 65 T.C. 542, 545 (1975); see also Schott

v. Commissioner, T.C. Memo. 1991-457. The mere fact that

respondent may not have based petitioners’ deficiency notices

upon a return within the meaning of section 6020(b) does not for

any year invalidate any of those notices.

II. Deficiency Determination

Respondent determined that petitioners were liable for taxes

on the amount of income reconstructed by the agent. Petitioners

argue that respondent’s determination is arbitrary and erroneous.

As to the wage income, petitioners argue, respondent failed to

establish the correct amount of wages that Mr. Burnett received

7
(...continued)
(2) Status of returns.--Any return so made and
subscribed by the Secretary shall be prima facie good
and sufficient for all legal purposes.
 - 12 -

from Lubbock. As to the newspaper income, petitioners argue,

respondent failed to prove: (1) That the newspaper was an

income-producing activity that was engaged in by petitioners and

(2) that petitioners actually received income from the newspaper.

On the basis of the facts at hand, we agree with respondent

that petitioners are liable for Federal income tax on the amount

of reconstructed income. As to the burden of proof, the Supreme

Court has held that a notice of deficiency “has the support of a

presumption of correctness, and the petitioner has the burden of

proving it to be wrong.” Welch v. Helvering, 290 U.S. 111, 115

(1933); see also United States v. Janis, 428 U.S. 433, 441

(1976); Helvering v. Taylor, 293 U.S. 507, 515 (1935). This

presumption “is not evidence itself and disappears upon the

introduction of evidence to overcome it.” Pizzarello v. United

States, 408 F.2d 579, 583 (2d Cir. 1969); see Compton v. United

States, 334 F.2d 212, 216 (4th Cir. 1964); Ky. Trust Co. v.

Glenn, 217 F.2d 462, 465 (6th Cir. 1954). “If the taxpayer

rebuts the presumption by showing that it is arbitrary and

erroneous, the presumption disappears.” Anastasato v.

Commissioner, 794 F.2d 884, 887 (3d Cir. 1986), vacating and

remanding T.C. Memo. 1985-101; see Helvering v. Taylor, supra at

515. Whereas the Courts of Appeals may vary on the effect upon

the burden of proof when the presumption does disappear, United

States v. Janis, supra at 441, the law of the Fifth Circuit, the
 - 13 -

circuit to which an appeal of this case lies, provides that “the

burden [in such a case] shifts to the government to prove the

correct amount of any taxes owed.” Portillo v. Commissioner,

932 F.2d 1128, 1133 (5th Cir. 1991), affg. in part, revg. in

part, and remanding T.C. Memo. 1990-68; Carson v. United States,

560 F.2d 693, 696 (5th Cir. 1977).

As to the wage income, we believe that respondent’s

calculation of Mr. Burnett’s wage income for 1994 stands on solid

ground and is neither arbitrary nor erroneous. First, the

parties have stipulated (and we have found as a fact) that Mr.

Burnett was employed by and received wages from Lubbock during

1994. Second, respondent derived the $19,913 from his master

file transcript that indicated that Lubbock had issued to Mr.

Burnett a Form W-2, Wage and Tax Statement, reporting that it had

paid to him during 1994 wages of that amount. Third, respondent

requested and received supporting documentation from Lubbock

which indicated that it had paid to Mr. Burnett during 1994 that

amount of wages. Whereas petitioners ask the Court to find that

Lubbock paid Mr. Burnett only $16,177 of wages during 1994, i.e.,

the amount that he received during the 1993/1994 school year, the

record disproves such a finding. The record indicates (and we

have found as a fact) that Lubbock paid to Mr. Burnett wages

after the 1993/1994 school year. We sustain respondent’s

determination as to the unreported wages. In so doing, we note
 - 14 -

that respondent apportioned one-half of these wages to each

petitioner to reflect the community property law of Texas and

that petitioners have made no objection to this apportionment.

As to the newspaper income, petitioners’ sole argument is

that respondent has neither connected them to the receipt of

income from the newspaper nor established the amount of any such

income. Petitioners assert primarily that respondent’s

determination of this unreported income was not the product of a

thorough and complete examination but rested on a naked

assessment. In this regard, petitioners observe, respondent’s

income calculation stemmed solely from one edition of the

newspaper, and respondent never attempted to verify his income

recalculation by using another method such as the net worth

method. Petitioners assert secondly that respondent never

investigated whether the calculated amount of advertising income

should have been reduced by virtue of, for example, the four

consecutive issue discount or a complimentary (free) placement.

On the basis of the facts herein, we are satisfied with

respondent’s reconstruction of petitioners’ unreported income

from the newspaper. Mr. Burnett was the sole proprietor and

publisher of the newspaper, which both on its face (the listing

of subscription, advertising, and classified rates) and on the

basis of history (the 1992 tax return), was easily seen to be an

income-producing activity. Because petitioners did not file
 - 15 -

Federal income tax returns reporting any income from that

activity, nor any income at all, respondent was forced to

reconstruct their income for the subject years. With a proper

determination of petitioners’ income in sight, the agent invited

petitioners to meet with her and bring with them their primary

financial records so that such a proper determination of

petitioners’ income could be made directly from those records.

When petitioners chose not to cooperate with the agent, she was

forced to determine their income by reconstructing it indirectly

through secondary records. Congress has given respondent broad

discretion to use any method that he believes clearly reflects

income when he is forced to reconstruct a taxpayer’s income. See

Estate of Bernstein v. Commissioner, T.C. Memo. 1956-260, affd.

267 F.2d 879 (5th Cir. 1959).

Here, the method of reconstruction utilized by the agent was

reasonable. The agent followed the four-step approach described

above and arrived at numbers, which, although not precise, were

to our minds a sufficient estimation of petitioners’ income from

the newspaper. Whereas respondent’s determination of the

newspaper’s annual gross revenue did not directly reflect any

discounted or complimentary advertisements placed in the October

23, 1997, edition, petitioners, to the extent they believed they

were entitled to any such discount, could have provided (either

during the examination or during this proceeding) documentation
 - 16 -

or testimony to support an alleged discount. We note, however,

that even if they did, the agent’s determination of annual gross

revenue was, by her own admission, consciously and conservatively

drawn low by omitting income such as the subscription revenue so

as to negate any claim that the determined revenue was

overestimated.8 Given the additional fact that the burden of

demonstrating any unfairness or inadequacy in a method used to

reconstruct income is upon the taxpayer, e.g., Woodall v.

Commissioner, 964 F.2d 361, 364 (5th Cir. 1992), affg. T.C. Memo.

1991-15, and that petitioners have to our minds failed to carry

this burden, we sustain respondent’s determination as to this

issue. In so doing, we are mindful of Webb v. Commissioner,

394 F.2d 366, 373 (5th Cir. 1968), affg. T.C. Memo. 1966-81,

wherein the court stated:

We recognize that the absence of adequate tax
records does not give the Commissioner carte blanche
for imposing Draconian absolutes. But such absence
does weaken any critique of the Commissioner's
methodology.

Arithmetic precision was originally and
exclusively in * * * [the taxpayer’s] hands, and he had
a statutory duty to provide it. He did not have to add
or subtract; rather, he had simply to keep papers and
data for others to mathematicize. Having defaulted in
his duty, he cannot frustrate the Commissioner’s
reasonable attempts by compelling investigation and
recomputation under every means of income
determination. Nor should he be overly chagrined at

8
The agent was also mindful that her calculation of gross
revenue did not take into account any revenue that petitioner may
have received from the magazine.
 - 17 -

* * * [a] Court’s reluctance to credit every word of
his negative wails. [Citations omitted.]

We also note that respondent apportioned one-half of the

newspaper income to each petitioner to reflect the community

property laws of Texas and that petitioners state no objection to

this apportionment. Nor have petitioners ever objected to

respondent’s determination that the newspaper income attributable

to Mr. Burnett was self-employment income for which he was liable

for self-employment tax.9 We sustain that determination as

well.10

III. Sec. 6651 – Failure To File

Respondent alleged in answer (and argues herein) that

petitioners are liable for additions to tax under section 6651(a)

9
Mr. Burnett was actually liable for self-employment tax on
all of the newspaper income. Although one-half of an
individual’s self-employment income may be attributed to his or
her spouse under community property law, sec. 1402(a)(5) requires
that any self-employment tax payable on that income be computed
by treating all of the income as that of the husband “unless the
wife exercises substantially all of the management and control of
* * * [the underlying] trade or business”, in which case all of
the income is treated as that of the wife. See Charlton v.
Commissioner, 114 T.C. 333, 337 (2000). Because respondent has
not made any claim to more self-employment tax than determined in
the notices of deficiency, we do not redetermine the greater
amount. Sec. 6214(a).
10
We also reject petitioners’ allegation that they are
entitled to personal exemptions, deductions, and business-related
expense deductions not reflected in the notices of deficiency.
Rule 142(a)(1); see also Ryback v. Commissioner, 91 T.C. 524, 566
(1988) (issue not argued on brief, as was the case here with
respect to petitioners and their claim to these items, is
considered conceded).
 - 18 -

for 1995, 1996, and 1997. Section 6651(a)(1) imposes an addition

to tax for failure to file a return timely unless the taxpayer

shows that the failure was due to reasonable cause and not

willful neglect. Respondent determined in the notices of

deficiency for 1995, 1996, and 1997 that petitioners were liable

for additions to taxes under section 6651(f). Section 6651(f)

applies when a failure to file a return is fraudulent.

The parties dispute who has the burden of proof as to this

issue. We may assume arguendo that the burden lies with

respondent, on the grounds that respondent’s allegation in answer

that petitioners are liable under section 6651(a) is a “new

matter” within the meaning of Rule 142(a)(1).

We are persuaded by the record that respondent has met his

burden of proof. Petitioners have never filed a 1995, 1996, or

1997 tax return, and their sole reason for not filing those

returns is that they are not individuals subject to tax. We

sustain respondent’s determination on this issue.11

IV. Section 6654 – Failure To Pay Estimated Income Tax

Respondent determined that petitioners underpaid their

estimated Federal income taxes and are liable for additions to

tax under section 6654. Section 6654 automatically applies to

11
Respondent also determined that petitioners are liable
for additions to their 1994 tax under sec. 6651(a). As to these
additions, for which petitioners have the burden of proof, we
also sustain respondent’s determination for reasons similar to
those just stated as to the other years.
 - 19 -

any underpayment of estimated taxes, unless petitioners can prove

that they meet one of the exceptions set forth in section

6654(e). See Recklitis v. Commissioner, 91 T.C. 874, 913 (1988);

Reichenbach v. Commissioner, T.C. Memo. 1998-42; Tillman v.

Commissioner, T.C. Memo. 1996-8. Because petitioners have not

shown that any one of these exceptions applies, we sustain

respondent’s determination on this issue.

All arguments made by petitioners but not discussed herein

have been rejected as without merit.12 Accordingly,

Decision will be entered

for respondent.

12
Many of petitioners’ submissions to this Court contain
frivolous and groundless tax protestor rhetoric that has been
rejected repeatedly by this and every other Court that has
considered it. We admonish petitioners that advancing similar
arguments in this Court in the future may subject them to a
penalty under sec. 6673(a) of up to $25,000.