HORN v. COMMISSIONER

T.C. Memo. 2002-207

UNITED STATES TAX COURT

JAMES D. HORN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18502-99L. Filed August 16, 2002.

P appeals under sec. 6330(d)(1), I.R.C., from R’s
determination to proceed by levy to collect unpaid
Federal assessments of income taxes, failure to pay
additions, and accrued interest for tax years 1990-94
and 1996.

1. Held: P was mentally competent when he signed
Forms 4549-CG, Income Tax Examination Changes, for
1990-93; by signing Forms 4549-CG, P waived his rights
to dispute the tax liabilities for those years prior to
assessment and thereby conclusively acknowledged that
he had an opportunity to dispute those liabilities
within the meaning of sec. 6330(c)(2)(B), I.R.C.

2. Held, further, P was mentally competent when
he signed and filed his 1994 and 1996 income tax
returns.
 - 2 -

3. Held, further, P is not entitled to relief
from collection for any of the years in issue because
he failed to establish his rights to any additional
deductions for any of those years.

James D. Horn, pro se.

John Y. Chinnapongse, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

BEGHE, Judge: Petitioner seeks review under section

6330(d)(1)1 of respondent’s determinations to proceed with levies

to collect unpaid assessments of individual income taxes, failure

to pay additions, and accrued interest for 1990 through 1994 and

1996. The taxable years and amounts of the assessments, as set

forth in respondent’s notices of determination, are as follows:

Taxable Amount of
Year Assessment

1990 $41,031
1991 354,250
1992 213,651
1993 13,550
1994 9,569
1996 33,875
Total 665,926

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
 - 3 -

Petitioner claims that he was mentally incompetent when he

signed his Federal income tax returns for the years in issue,2

and when he signed Forms 4549-CG, Income Tax Examination Changes,

for 1990 and 1991 through 1993, in which he accepted respondent’s

audit changes, agreed to immediate assessment of the

deficiencies, and waived his right to challenge the assessments

in the Tax Court. Petitioner has challenged the proposed levies

on the sole ground that he does not owe the assessments because

respondent failed to allow deductions for worthlessness of his

stock in, or uncollectability of his loans to, his affiliated

corporations, James Horn Construction Co. (Horn Construction) and

Horn Enterprises.

We affirm respondent’s determination to proceed with the

proposed levies. Petitioner has failed to establish that he was

2
Rule 60(c) provides that the “capacity of an individual
* * * to engage in litigation in the Court shall be determined by
the law of the individual’s domicile.” Rule 60(d) provides,
among other things, that if the Court believes there is a serious
question about an individual’s competence to represent himself,
“the Court, if it deems justice so requires, may continue the
case until appropriate steps have been taken to obtain an
adjudication of the question by a court having jurisdiction so to
do, or may take such other action as it deems proper.” Nothing
in petitioner’s statements in telephone conferences or papers
filed during the pretrial phase of this case or in his demeanor
and conduct at trial led the Court to believe that petitioner was
incompetent to represent himself in this proceeding. Although
petitioner had indicated, in a written objection to one of
respondent’s motions, that he wanted a continuance to provide
more time to discover evidence to support his claims, including
evidence he believed was in the possession of the Internal
Revenue Service, petitioner did not move for or even request a
continuance on the ground of incompetence to represent himself.
 - 4 -

incompetent when he executed his income tax returns or the Forms

4549-CG in issue. By signing the Forms 4549-CG for 1990 through

1993, petitioner waived his right to challenge the existence or

amount of his underlying tax liabilities for those years prior to

assessment and thereby conclusively acknowledged that he had an

opportunity to dispute those liabilities within the meaning of

section 6330(c)(2)(B). Even if petitioner were entitled to

dispute his tax liabilities for any of the years in issue,

petitioner would not be entitled to any relief; petitioner failed

to offer credible evidence to substantiate any additional

deductions or even to indicate the taxable year or years in which

they might have been properly allowed.

FINDINGS OF FACT

The parties have stipulated some of the facts, and the

stipulations of facts and the attached exhibits are incorporated

herein. Petitioner resided in Modesto, California, when he filed

his petition.

At least for tax years into or through 1993, petitioner was

the president and shareholder of two corporations that he had

founded: (1) Horn Construction, a real estate developer, and (2)

Horn Enterprises, a retail hardware business.

On October 28, 1992, petitioner filed a joint Form 1040,

U.S. Individual Income Tax Return, with his former spouse, Donna

Kay Horn, for 1990, reporting total taxes due of $13,384 (of
 - 5 -

which $4,328 had been paid by withholding) and an estimated tax

penalty of $565. In or around 1994, petitioner and his former

spouse filed a joint tax return for 1991 reporting total tax due

of $22,828 (of which $522 had been paid by withholding) and an

estimated tax penalty of $1,107.

After examining petitioner’s 1990 return, respondent

proposed to disallow a $50,000 deduction claimed on Schedule E,

Supplemental Income and Loss, of petitioner’s 1990 return for

legal and professional fees, because petitioner could not

substantiate the deduction. On May 23, 1994, petitioner signed a

Form 4549-CG, accepting respondent’s adjustment for 1990 and a

resulting $15,348 deficiency, an addition to tax under section

6651(a)(1) of $3,836.75, and interest through June 15, 1994, of

$5,523.28. Petitioner and his former spouse both signed the

Form’s “Consent to Assessment and Collection”, which reads as

follows:

Consent to Assessment and Collection - I do not
wish to exercise my appeal rights with the Internal
Revenue Service or to contest in United States Tax
Court the findings in this report. Therefore, I give
my consent to the immediate assessment and collection
of any increase in tax and penalties, and accept any
decrease in tax and penalties shown above, plus any
interest as provided by law. * * *

This Form 4549-CG was signed on behalf of respondent by Revenue

Agent Joe Urrutia.

Horn Enterprises dissolved at the end of 1993. In 1994,

Horn Construction filed a chapter 11 bankruptcy petition.
 - 6 -

During the period June 11 through July 1, 1993, petitioner

was an admitted patient at the Modesto Psychiatric Center. The

admitting and final diagnosis of the attending physician, John J.

Jacisin, M.D., F.A.P.A., characterized petitioner as suffering

from:

AXIS I: Atypical bipolar disorder, depressed
Delusional disorder [unspecified - admission]
[persecutory type - discharge]

AXIS II: Obsessive compulsive, histrionic traits.

The narrative portion of Dr. Jacisin’s report concludes:

“Throughout hospitalization he was fixated on his business

concerns and becoming bankrupt. Conversation with the family

indicated the situation was not nearly as severe as he proposed.”

The report of an office visit by petitioner to Thomas W.

Luck, M.D., on April 7, 1994, states the following primary

impression: “Major depression and paranoid schizophrenia--

currently well controlled.”

A letter dated August 5, 1994, from Dr. Jacisin to Dr. Luck,

in support of a request for additional insurance coverage for

office visits, states in part:

Since my last letter to you of May 13, 1994, concerning
Mr. Horn’s progress, he has gradually become
increasingly more anxious again, returning to a state
in which he is beginning to tremble over his entire
body. This is correlated with filing of Chapter 11 for
his business. The bank has now taken over the
business, drastically reducing his salary and his
ability to support himself and his family. Other
family members and employees who he felt in the past
were in total denial of what was going on are now
 - 7 -

having to face reality and are extremely angry with
him, something he is having a great deal of difficulty
tolerating. When we saw him on 7/19, he looked like he
had regressed significantly.

* * * * * * *

We are making every effort to try to treat him intensely
on an outpatient basis to prevent further regression,
and unless we do, most likely he will have to be re-
hospitalized.

In or around December 1994, respondent began examining

petitioner’s 1991 Federal income tax return and investigating his

Federal income tax liabilities for 1992 through 1994, for which

he had not yet filed returns. The examination/investigation was

performed by Revenue Agent Joe Urrutia.

In 1995, Horn Construction’s chapter 11 bankruptcy case was

converted to chapter 7. Petitioner filed a personal chapter 11

bankruptcy petition in 1996.

On March 18, 1996, petitioner and his former spouse filed

original joint Forms 1040 for 1992, 1993, and 1994, listing total

income taxes of $62,481, zero, and $22,097, respectively, and a

penalty of $1,106 for failing to pay estimated taxes for 1992.

On March 18, 1996, petitioner and his former spouse also filed

joint Forms 1040X, Amended U.S. Individual Income Tax Return, for

1990 and 1991, seeking refunds of $26,627 and $52,760,

respectively, attributable to carrybacks of a net operating loss

claimed from 1993. Petitioner and his former spouse did not pay
 - 8 -

in full the taxes and penalty shown as owing by their 1992 and

1994 returns.

Shortly after March 18, 1996, Agent Urrutia proposed

substantial adjustments to petitioner’s returns. On the 1991

return, Agent Urrutia found that an exchange of five duplexes and

rental properties owned by petitioner for a turkey ranch owned by

Horn Construction did not qualify for section 1031 exchange

treatment, requiring petitioner to recognize $497,000 in capital

gain. With respect to tax years 1992 and 1993, Agent Urrutia

took the position that $338,163 and $429,000, respectively, of

losses petitioner claimed should be disallowed because they had

been incurred by Horn Enterprises. These adjustments eliminated

the net operating loss carrybacks from 1993 that petitioner and

his former spouse claimed on their 1990 and 1991 amended returns.

Agent Urrutia also proposed late-filing and accuracy-related

penalties for all years in issue. In order to persuade Agent

Urrutia to concede the proposed penalties, petitioner submitted

to Agent Urrutia medical records showing petitioner had been

suffering psychiatric problems that, he argued, prevented him

from timely and correctly preparing and filing his income tax

returns.

On April 24, 1996, Agent Urrutia and his manager, Faith

Priest, met at the Modesto office of the Internal Revenue Service

with petitioner, petitioner’s former spouse, Donna Kay Horn,
 - 9 -

petitioner’s accountant, Philip Kenneth Ware, C.P.A., who had

prepared petitioner’s late-filed 1992, 1993, and 1994 income tax

returns and his 1990 and 1991 amended returns,3 petitioner’s

attorney, James Ganser, and petitioner’s daughter and bookkeeper,

Susan Azevedo, to discuss the audit results and petitioner’s

request that respondent waive the late-filing and accuracy-

related penalties. Agent Urrutia explained his adjustments,

answered questions, and informed those present he would concede

the penalties on the basis of the medical records petitioner had

provided about his psychiatric problems. At the conclusion of

the meeting, petitioner and his former spouse signed a Form 4549-

CG, accepting Agent Urrutia’s adjustments to their 1991 through

1993 returns, accepting disallowance of the carrybacks claimed on

their amended returns for 1990 and 1991, and showing deficiencies

in petitioner’s 1991, 1992, and 1993 income taxes of $146,459,

$108,404, and $15,762, respectively, plus substantial interest

accruals on the unpaid balances. The Form 4549-CG contained the

following waiver:

Consent to Assessment and Collection - I do not
wish to exercise my appeal rights with the Internal
Revenue Service or to contest in United States Tax
Court the findings in this report. Therefore, I give
my consent to the immediate assessment and collection
of any increase in tax and penalties, and accept any
decrease in tax and penalties shown above, plus
additional interest as provided by law. It is

3
Mr. Ware thereafter prepared petitioner’s 1996 return.
 - 10 -

understood that this report is subject to acceptance by
the District Director.

Petitioner understood the significance of the Form 4549-CG

he signed. He understood the specific tax issues raised by

respondent, disagreed with some of respondent’s conclusions, and

discussed with his attorney and accountant the relevant benefits

and burdens of accepting the adjustments. Ultimately, petitioner

accepted the recommendation of his advisers and signed the Form

4549-CG containing a waiver of his right to challenge the

adjustments prior to assessment and collection. Petitioner has

not paid the liabilities shown by the Forms 4549-CG he signed.

Respondent accepted petitioner’s 1994 return as filed.

Petitioner has not paid the tax liability shown on his 1994

return.

On or about November 24, 1997, petitioner filed his 1996

Federal income tax return. Petitioner reported total tax due of

$40,192. On May 5, 1998, respondent accepted petitioner’s 1996

return as filed. Petitioner did not pay in full the tax

liability shown on his 1996 return.

Respondent assessed the amounts determined on the Forms

4549-CG for 1990 through 1993, as well as the amounts shown on

petitioner’s returns for 1994 and 1996.

On February 9, 1999, respondent sent petitioner, by

certified mail, two notices of intent to levy and petitioner’s

right to request a hearing, both containing the language required
 - 11 -

by sections 6330 and 6331. One of the notices was for tax years

1991 through 1994; the other notice was for tax years 1990 and

1996.

Petitioner timely filed two requests, corresponding to the

two notices, for a section 6330 hearing. In his requests for

hearing, in response to the portion of the form asking why the

taxpayer does not agree with the proposed levy, petitioner

stated: “I was absent for three years due to illness and am in

the process of restructuring a stockholders note that will have a

significant effect on my tax consequences I request a personal

interview.”

Respondent’s Appeals officer held a hearing with petitioner

by telephone. Petitioner did not provide any documentary or

other evidence to the Appeals officer that he was medically

incapable of filing returns and waiving his rights to contest his

tax obligations prior to assessment. Petitioner was unable to

make the Appeals officer understand how the current restructuring

of a stockholder note would have any effect on his prior years’

tax liabilities, nor did he present any evidence to support any

reduction in those liabilities. Instead of responding to the

Appeals officer’s questions, petitioner talked about a perceived

conspiracy involving the vice president of Horn Construction, the

CIA, the FBI, the IRS, and the “Iranian Mafia”. The Appeals

officer also spoke on the telephone with petitioner’s accountant,
 - 12 -

who agreed with respondent’s Appeals officer that petitioner

should submit an offer in compromise. The accountant later

informed the Appeals officer that petitioner was not interested

in pursuing an offer in compromise. Respondent’s Appeals officer

concluded that respondent should proceed with collection because

petitioner failed to raise any legitimate defenses or

alternatives.

On November 10, 1999, respondent issued petitioner Notices

of Determination Concerning Collection Actions under section 6320

and/or 6330, under which he determined to proceed with collection

by levy.

Petitioner timely filed a petition with this Court pursuant

to section 6330(d)(1), appealing respondent’s determinations to

proceed with collection by levy, alleging the “the deficiency (or

liabilities) as determined by the Commissioner are in income

taxes for the years 1990 through 1996”. In the petition,

petitioner claimed as follows:

Taxpayer was mentally ill from 1993 to 1996 and
unable to make rational decisions. The service [sic]
is aware of the illness.

The taxpayer entered the year 1990 with a Net Fair
Market Value of Assets over Liabilities of $22,000,000.

The taxpayer currently has no assets, only
liabilities.

Real estate values have increased since 1990.

The IRS has in examinations of several of the
years, added tax and the taxpayer has never seen or
 - 13 -

does not remember seeing any support for the
adjustments in question.

Records and working papers have never been made
available to the taxpayer or the taxpayer is unaware
that records and or working papers were provided to the
taxpayer from the agents to support the adjustments.

Sale of assets, settlements, and foreclosures has
occurred at substantially less than fair market value
without the taxpayer’s knowledge.

Expenses paid by the taxpayer for the taxpayer’s
corporation Horn Construction were never allowed and
loans made to the corporation by Mr. Horn as an
individual were never allowed as a deduction on the
individual return.

The case was originally set for trial on the Court’s October

2000 San Francisco trial session. On July 27, 2000, the Court

granted respondent’s uncontested motion for continuance, which

was based on respondent’s then stated intention to file a motion

for partial summary judgment contesting petitioner’s right to

dispute the tax liabilities for 1990 through 1993. The case was

thereafter reset for trial on the Court’s March 2001 San

Francisco trial session.

Respondent, in due course, filed a motion to dismiss for

lack of jurisdiction and to strike as to 1995. The ground for

respondent’s motion was that respondent had not sent petitioner a

notice of lien or levy with respect to 1995. The Court granted

respondent’s motion. The record in this case contains no

evidence regarding petitioner’s Federal income tax return,

payments, examination or determinations by respondent, or any
 - 14 -

other matter concerning petitioner’s 1995 Federal income tax

liability.

By January 12, 2001, respondent had responded to

petitioner’s document requests for copies of returns and amended

returns of Horn Construction and Horn Enterprises for 1990

through 1995, documents in respondent’s examination files for

petitioner for 1990 through 1993 and for petitioner’s

corporations and a sole proprietorship for 1990 through 1995, and

documents in respondent’s files regarding the bankruptcy filings

of petitioner and Horn Construction.

Respondent never filed a motion for partial summary judgment

in this case. However, respondent did file a motion to sever and

try separately the threshold issue of whether petitioner’s income

tax liabilities for 1990 through 1993 were properly before the

Court. On January 25, 2001, petitioner filed his opposition to

respondent’s motion to sever: Petitioner opposed the severance

on the following grounds:

there may be some overlapping testimony on both his
[mental] condition and the underlying tax issues * * *.
HORN has not received from the IRS the documents he
needs to prove his case and will probably need
additional time beyond March 5, 2001 to adequately
prepare for trial.

* * * * * * *

Wherefore, HORN requests that the Court not grant
this motion but that the court grant a continuance so
that HORN can file the appropriate motion to force the
IRS to provide the information he needs to prepare his
case. Numerous records, including bank statements,
 - 15 -

were given to the IRS during the audit; and HORN has
been requesting these records for over two years, and
the IRS failed and continues to fail to produce them.

The informal request for continuance mentioned in

petitioner’s objection to respondent’s motion was not couched in

a motion; the Court did not grant the request. The case was

tried at the Court’s March 2001 San Francisco trial session. On

March 15, 2001, at the beginning of the trial, the Court granted

respondent’s oral motion to withdraw respondent’s motion to

sever.

Petitioner failed to comply with the Court’s orders that he

respond properly to respondent’s requests for admissions and to

respondent’s written interrogatories and document requests.

Respondent’s discovery requests reflected, among other things,

respondent’s efforts to bring out all evidence regarding

petitioner’s mental condition during all relevant periods,

including medical records, and any evidence petitioner might have

to support his claims of unreported losses and the tax years in

which they had occurred. At the trial, petitioner offered no

documentary evidence regarding his mental condition in addition

to the reports previously referred to, other than records of

petitioner’s receipt of psychotherapy services at least once in

1999 and at least 9 times in August through November 2000.

Petitioner offered no evidence to support any additional

deductions or to indicate the taxable year or years in which they
 - 16 -

properly might be allowed. Petitioner failed to file a brief in

accordance with the Court-ordered briefing schedule.

OPINION

This is an appeal under section 6330(d)(1) from respondent’s

determinations to proceed with proposed levies against

petitioner’s property to collect unpaid Federal income taxes,

failure to pay additions, and accrued interest for 1990 through

1994 and 1996. Section 6331(a) allows the Commissioner to

collect by levy any tax not paid within 10 days after the

Commissioner provides the taxpayer with notice and demand for

payment. With certain exceptions not relevant here, the

Commissioner is obliged to provide the taxpayer with notice

before proceeding with collection by levy on the taxpayer's

property, including notice of the administrative appeals

available to the taxpayer. Sec. 6331(d).

As part of the Internal Revenue Service Restructuring and

Reform Act of 1998 (RRA 1998), Pub. L. 105-206, sec. 3401, 112

Stat. 685, 746, Congress enacted section 6330, which generally

provides that the Commissioner may not proceed with collection by

levy on a taxpayer's property until the taxpayer has received

notice of and the opportunity for an Appeals Office hearing to

review the proposed levy. Sec. 6330(a)(1); Pierson v.

Commissioner, 115 T.C. 576 (2000); Sego v. Commissioner, 114 T.C.

604, 608 (2000). If the taxpayer is dissatisfied with the
 - 17 -

Appeals officer’s determination, the taxpayer may appeal the

determination to the Tax Court. Sec. 6330(d)(1).

Petitioner has asked us to prevent respondent from

proceeding to collect the assessments by levy because respondent

failed to allow petitioner alleged deductions, even though

petitioner (1) never claimed the deductions in a tax return,4 and

(2) apparently agreed, in the Forms 4549-CG that he signed, that

respondent could disallow the deductions and assess the resulting

deficiencies without allowing petitioner an opportunity to

dispute the assessments in this Court.

Notwithstanding his failure to claim the deductions in a

return for any year before the Court and his explicit waivers of

the right to challenge respondent’s determinations for the years

1990 through 1993, petitioner has sought to challenge the

4
As best we can discern against the background of
respondent’s disallowances of losses petitioner claimed on his
1992 and 1993 returns that respondent determined had been
incurred by Horn Enterprises, petitioner now wishes to claim
losses for some year or years from worthlessness of his stock and
debt interests in Horn Construction and Horn Enterprises.
Insofar as petitioner wishes to claim deductions for “Expenses
paid by the taxpayer for the taxpayer’s corporation Horn
Construction [that] were never allowed”, petitioner’s payments of
such expenses would be disallowed as deductions and treated as
capital contributions or loans that he only could recover as
worthless stock or debt losses, see, e.g., Betson v.
Commissioner, 802 F.2d 365, 368-371 (9th Cir. 1986), affg. on
this issue T.C. Memo. 1984-264; Gantner v. Commissioner, 91 T.C.
713, 725 (1988), unless he showed he had paid such expenses to
protect his own trade or business, see, e.g., Gould v.
Commissioner, 64 T.C. 132, 134-135 (1975); Jenkins v.
Commissioner, T.C. Memo. 1983-667.
 - 18 -

existence or amount of his underlying tax liabilities in this

proceeding. Petitioner did not raise any other relevant issues,

such as “appropriate spousal defenses, challenges to the

appropriateness of collection actions, and offers of collection

alternatives”, see sec. 6330(c)(2)(A), in his request for a

section 6330 hearing, at the hearing before respondent’s Appeals

officer, or in his petition to this Court.

Section 6330(c)(2)(B) provides:

(B) Underlying liability.--The person may also
raise at the hearing challenges to the existence or
amount of the underlying tax liability for any tax
period if the person did not receive any statutory
notice of deficiency for such tax liability or did not
otherwise have an opportunity to dispute such tax
liability. [Emphasis added.]

Petitioner did not receive a notice of deficiency for any of

the years in issue. Petitioner has claimed that he may challenge

the existence or amount of his underlying tax liabilities in this

proceeding because he did not “otherwise have an opportunity to

dispute * * * [his] tax liability” within the meaning of section

6330(c)(2)(B). We must therefore address whether the validity of

the underlying tax liability is properly in issue for any of the

tax years before us.

Petitioner’s Challenges to His 1990 and 1991-1993 Tax Liabilities

Respondent claims that petitioner, by signing Forms 4549-CG

for 1990 through 1993, waived his right to challenge the proposed

assessments and should be deemed to have had an opportunity to
 - 19 -

dispute his tax liabilities. We agree. In Aguirre v.

Commissioner, 117 T.C. 324, 327 (2001), we specifically held that

a taxpayer who had signed a Form 4549-CG could not challenge the

underlying tax liability stated on the Form:

By signing the Form 4549, petitioners explicitly waived
the right to contest in the Tax Court their tax
liability for the years included in the Form 4549.
* * * The fact that section 6330 now provides an
opportunity to contest tax liability for taxpayers who
did not receive a notice of deficiency, sec.
6330(c)(2)(B), provides no consolation to petitioners
who themselves made the choice not to receive such
notice, see Sego v. Commissioner, 114 T.C. 604, 611
(2000) (taxpayers who deliberately refused to accept
delivery of the notices of deficiency repudiated the
opportunity to contest the notices of deficiency in Tax
Court).

Petitioner has alleged that his waivers were ineffective

because he was mentally incompetent when he signed the Forms

4549-CG.5 In his request to respondent for a section 6330

5
Respondent argued in a prehearing motion that petitioner is
estopped to challenge, on grounds of incompetence, the validity
of the Forms 4549-CG that he signed. Respondent argues that he
relied on the Forms in proceeding to assess the taxes rather than
first issuing a notice of deficiency (as would have been required
prior to assessment under sec. 6213(a)). If the Forms 4549-CG
are held to be entirely invalid and ineffective, then the time to
issue a notice of deficiency and assess the resulting tax may
have expired. Respondent argued that because he would be
prejudiced by the expiration of the period of limitations,
petitioner is estopped to deny the validity of the Forms 4549-CG
on the grounds that he was incompetent when he signed them. In
support of his argument, respondent cited Hollman v.
Commissioner, 38 T.C. 251, 260 (1962) (citing Stearns Co. v.
United States, 291 U.S. 54, 61 (1934)); Halper v. Commissioner,
T.C. Memo. 1997-58; Dale v. Commissioner, T.C. Memo. 1982-654.
We need not decide whether and to what extent estoppel might
apply. Expiration of the period of limitations is an affirmative
(continued...)
 - 20 -

hearing, petitioner alleged: “I was absent for three years due

to illness”. In his petition to this Court for review of

respondent’s determination that collection should proceed,

petitioner alleged: “Taxpayer was mentally ill from 1993 to 1996

and unable to make rational decisions. The service [sic] is

aware of the illness.”

In assessing petitioner’s mental competence at the various

relevant points in time, we look to State law for guidance, as

Federal courts generally do when, as here, there is no

established body of Federal common law in point. See, e.g.,

Harrell v. United States, 13 F.3d 232, 235 (7th Cir. 1993);

Powers v. U.S. Postal Serv., 671 F.2d 1041, 1045 (7th Cir. 1982);

Furnish v. Commissioner, 262 F.2d 727, 733-734 (9th Cir. 1958),

affg. in part and remanding in part Funk v. Commissioner, 29 T.C.

279 (1957); see also Berger v. Commissioner, T.C. Memo. 1996-76.

Cognitive capacity is the standard generally used for

determining ability to enter into an enforceable contract,6 both

5
(...continued)
defense that must be pleaded or it is waived, Robinson v.
Commissioner, 117 T.C. 308, 312 (2001), and petitioner did not so
plead.

Even if we were to assume for purposes of argument that
estoppel does not apply, petitioner remains unable to prevail
because of our holding that he was competent to sign the Forms
4549-CG.
6
We apply contract principles in interpreting, applying, and
determining the enforceability of waiver documents. Mecom v.
(continued...)
 - 21 -

in California, petitioner’s residence,7 see Smalley v. Baker, 69

Cal. Rptr. 521, 527 (Ct. App. 1968); Cal. Prob. Code sec. 812

(West Supp. 2002), and in most other States, see 1 Restatement,

Contracts 2d, sec. 15 (1981), although a “compulsion” or

“irresistible impulse” standard has been applied on occasion, see

Faber v. Sweet Style Manufacturing Corp., 242 N.Y.S.2d 763 (Sup.

Ct. 1963). Undue influence, taking advantage of a contracting

party’s impaired ability to make rational decisions, may provide

a ground for rescission if the other party had actual knowledge,

see Smalley v. Baker, supra, or reason to know, see 1

Restatement, Contracts 2d, supra, of the putative incompetent’s

vulnerability.

Under all formulations of the standard, the person seeking

to avoid the contract has the burden of proving his incompetence.

See Cal. Prob. Code sec. 810(a) (West Supp. 2002); Holman v.

Stockton Savs. & Loan Bank, 122 P.2d 120 (Cal. Ct. App. 1942);

Faber v. Sweet Style Manufacturing Corp., supra at 766; 1

Restatement, Contracts 2d, supra, Illustration 1(c) (1981). In

6
(...continued)
Commissioner, 101 T.C. 374, 384 (1993) (Form 872-A), affd.
without published opinion 40 F.3d 385 (5th Cir. 1994); Schulman
v. Commissioner, 93 T.C. 623, 639 (1989) (Form 872-A); Korff v.
Commissioner, T.C. Memo. 1993-33 (Form 870-P).
7
We note that, on the arguably related issue of an
individual’s competence to litigate in this Court, the Court’s
Rule 60, which is patterned on Fed. R. Civ. P. 17 and was adopted
in its present form in 1973, looks to the law of the individual’s
domicile. 60 T.C. 1094; see supra note 2.
 - 22 -

any event, without reference to State law on the subject of

incompetence, petitioner bears the burden of proof on this

subject in this Court. Rule 142; see Ravetti v. Commissioner,

T.C. Memo. 1993-343, affd. without published opinion 38 F.3d 1218

(9th Cir. 1994).

Petitioner has failed to offer any credible evidence8 to

show: (1) That he lacked capacity to understand the tax returns

and Forms 4549-CG that he signed, (2) that respondent knew or

should have known of his alleged incapacity, or even (3) that he

signed the Forms 4549-CG under compulsion of mental disease or

disorder. Moreover, the evidence persuades us that petitioner

understood the documents he signed and that his decisions to

sign were entirely rational.

In May 1994, when petitioner signed Form 4549-CG for the

1990 tax year, he was being treated for his psychiatric problems

8
The only evidence petitioner offered, other than his
testimonial assertions regarding his mental problems, were copies
of medical records showing that in 1993 he had been hospitalized
3 weeks for depression and schizophrenia and was treated on an
outpatient basis for these conditions around the time in 1994 he
signed the first Form 4549-CG for 1990, and again at least once
in 1999 and 9 times in August through November 2000. These
medical records do not show that petitioner lacked the cognitive
ability to understand what he signed or that he signed under
“compulsion”. The records also do not cover the times when
petitioner signed the returns and the second Form 4549-CG.
Respondent objected to admissibility of the records on relevance,
hearsay, and authentication grounds. The records and
petitioner’s testimony do not establish that petitioner lacked
cognitive capacity to understand the documents he signed or that
he signed under “compulsion”.
 - 23 -

on an outpatient basis. However, nothing in the medical records

offered by petitioner indicates he lacked the cognitive ability

to understand what he was signing. Indeed, the records indicate

petitioner had a better grasp of reality about his business

situation than his family and employees.

With respect to petitioner’s signing of Form 4549-CG for

1991, 1992, and 1993, the uncontradicted evidence establishes

that respondent’s agents believed petitioner was competent, and

petitioner offered no evidence that their belief was

unreasonable. Petitioner signed the Form 4549-CG for those years

at a meeting attended by Agent Urrutia and his manager, Faith

Priest, on behalf of respondent. Both Agent Urrutia and Ms.

Priest testified credibly they believed petitioner understood the

terms of the Forms 4549-CG that he signed. Both testified they

would not have accepted the Forms 4549-CG from petitioner if they

believed he lacked the mental capacity to sign them. Even

against the background of their acceptance for settlement

purposes that petitioner’s past psychiatric difficulties excused

his late filings and return inaccuracies, petitioner offered no

credible evidence to show that Agent Urrutia and Ms. Priest were

or should have been aware of any lack of mental capacity or

presence of vulnerability.

Petitioner was represented at the meeting by legal counsel

and a certified public accountant, and was accompanied by his
 - 24 -

former spouse and his daughter (who also maintained his books and

records). That petitioner’s interests were represented at the

meeting by his own lawyer and accountant, that he was supported

at the meeting by family members, that the terms of the

settlement were fair and reasonable to petitioner, and that

petitioner’s former spouse also signed the agreements, dispel any

notion of overreaching or undue influence by or on behalf of

respondent.

Finally, petitioner’s statements at trial in this case

convince us he fully understood the Form 4549-CG when he signed

it. At trial, petitioner asked the following questions of, and

received the following responses from, Agent Urrutia:

Q. In the ‘96 meeting when Mrs. Horn, and myself,
and my attorney representing me, and Mr. Ken Ware, did
not the meeting continue to go on and on with breaks
being called because I refused to sign the forms, and
my attorney kept telling me repeatedly, if you don’t
sign these, you’re going to be out in the streets with
no money because of the relationship between the
lawsuit between Horn Construction, which was in
bankruptcy and personal? All income would stop, and
they kept pressuring me, and I kept saying these
returns are not correct.

[following objections to the form of the question]

* * * * * * *

Q. Did I not protest that I did not want to sign
the forms at that meeting, because I did not believe
that they were accurate, and my stockholders note was
missing.

A. I don’t recall you mentioning that at all.

Q. Okay.
 - 25 -

A. I do recall, and I will say that we did stop a
few times for you to converse with your attorney --

Q. Yes.

A. -- and your accountant, and that those -- if
that was discussed then, I wasn’t there, present.

Q. Okay. Did we -- I finally not give up and
sign because Faith Priest said that she would give me
consideration about my concerns with the stockholders
note being missing, and that if I could prove to her at
a later date, she would consider my concerns about the
stockholders notes, and all the debts being missing?

A. I don’t recall that being said.

Thus, even at the time of trial, petitioner recalled

expressing at the meeting (at least to his attorney) misgivings

about accepting the Form 4549-CG because he thought he should be

entitled to additional deductions. He recalled being convinced

by his lawyer and accountant to accept the changes and proceed

with the Form 4549-CG. Presumably, petitioner’s lawyer and

accountant recommended that he accept the agreement because of

the significant concessions offered by respondent (waiver of the

penalties). Petitioner’s own words at trial show he had a full

recollection of the agreement he signed and a full understanding

of its significance at the time he signed it.

We find that petitioner was competent to understand the

Forms 4549-CG that he signed, and we hold that the Forms 4549-CG

are binding on him. By signing the Forms 4549-CG, petitioner

waived his rights to dispute in the Tax Court his tax liabilities

for the tax years 1990 through 1993 prior to assessment; he
 - 26 -

thereby conclusively acknowledged that he had an opportunity to

dispute the liabilities. As a result of the waivers contained in

the Forms 4549-CG, petitioner is barred by section 6330(c)(2)(B)

from challenging in this proceeding the existence or amount of

his underlying tax liabilities for those years.

Petitioner’s Challenge to His 1994 and 1996 Tax Liabilities

Petitioner argues he was incompetent when he signed his 1994

and 1996 returns and should be allowed in this proceeding to

challenge the validity or amount of the underlying tax

liabilities shown due on those returns because he previously had

no opportunity to dispute the liabilities. Because petitioner

did not pay the tax liabilities shown on these returns, the

assessments for 1994 and 1996 were based on the amounts set forth

on those returns, rather than on adjustments made by respondent.9

Petitioner did not file or attempt to file amended returns for

these years. Nor did petitioner otherwise inform respondent

before initiation of collection action that petitioner disputed

the liabilities shown on those returns.

9
The Commissioner is required to assess the tax shown on a
taxpayer’s return. Sec. 6201(a)(1). The amount shown as the tax
by a taxpayer upon his return does not, by definition, constitute
a “deficiency”. Sec. 6211(a); see also Wilson v. Commissioner,
118 T.C. 537 (2002). The restrictions on assessment of
deficiencies (requiring in general that a notice of deficiency be
sent to the taxpayer, and that the taxpayer be given an
opportunity to petition this Court) do not apply to the amount
shown as the tax by the taxpayer on his own return. See sec.
6213(a).
 - 27 -

Petitioner has not offered any credible evidence to persuade

us he was mentally incompetent when he signed the returns for the

later years 1994 and 1996. Insofar as petitioner challenges the

assessments for 1994 and 1996 on the ground he was incompetent

when he signed and filed the returns, we reject petitioner’s

challenge on the same grounds on which we have upheld the

validity of the Forms 4549-CG for 1990 and 1991, 1992, and 1993.

In so doing, we do no more than assume without deciding that the

assessments could be invalidated if petitioner had been

incompetent when he signed and filed the returns.

We now turn to petitioner’s contention that section

6330(c)(2)(B) entitles him to challenge respondent’s assessments

of the tax liabilities shown on his 1994 and 1996 returns because

he received no statutory notice of deficiency for such

liabilities and did not otherwise have an opportunity to dispute

them. Respondent contends petitioner cannot challenge the

validity or amount of the underlying tax liabilities he reported

for 1994 and 1996 because the assessments were based on

petitioner’s own returns.10 The only legal argument respondent

10
We note that, after respondent’s brief was filed, the
Internal Revenue Service published additions to the Internal
Revenue Manual instructions to Appeals officers in section 6330
collection proceedings that would appear to contradict
respondent’s litigation position in this case with respect to
1994 and 1996. 4 Administration, Internal Revenue Manual (CCH),
sec. 8.7.2.3.8, at 27,286 provides in part:

(continued...)
 - 28 -

offers in support of his contention is the recital that tax

return positions are treated as admissions unless overcome with

cogent evidence they are wrong. See, e.g., Waring v.

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

T.C. Memo. 1968-26; Lare v. Commissioner, 62 T.C. 739, 750

(1974), affd. without published opinion 521 F.2d 1399 (3d Cir.

1975).

This is the first case in which the Commissioner and a

taxpayer have asked us to address the taxpayer’s ability to

challenge collection of the tax assessed on the basis of his own

10
(...continued)
(6) Appeals’ interpretation of have [sic] an
opportunity to dispute such tax liability is that the
taxpayer must be ADVISED, in writing of the opportunity
to dispute whatever the issue is by going to Appeals,
for example, in some letter, publication or similar
correspondence. We do not assume that taxpayers are
aware of their legal rights unless they have been
advised.

a. Having an opportunity to pay the tax and file a
claim for refund, and not having done so, does not
constitute an opportunity to dispute the liability.

b. Also, not having filed an amended return during the
applicable time period does not constitute an
opportunity to dispute the liability.

c. Having an opportunity to dispute the liability
means an opportunity occurring before the claim period,
(in most cases, this means before assessment, but in
all cases it means before payment). This may be the
chance to go to Tax Court, or otherwise having the
chance to go to Appeals (whether deficiency or non-
deficiency cases.)
 - 29 -

return on the ground he “did not otherwise have an opportunity to

dispute such tax liability” within the meaning of section

6330(c)(2)(B).

We need not and do not answer this question posed by the

parties in this proceeding for the tax years 1994 and 1996.

Because petitioner failed to take advantage of any of the

numerous opportunities he was afforded to specify his alleged

losses and the years in which they occurred and to introduce

evidence in support of them, we leave the resolution of this

question to another day.

Petitioner Failed To Show His Right to Deductions

Petitioner failed to state and quantify his claims for loss

deductions in either his request for a section 6330 hearing or in

his petition to this Court. He was unable to make the Appeals

officer understand his claims for any of the years in issue, and

he failed to introduce any evidence in support of his claims at

the section 6330 hearing. Petitioner failed to file a brief in

answer to respondent’s opening brief, as he had been ordered to

do in the Court-ordered briefing schedule.11 However, we need

not reject petitioner’s contention on any of the foregoing

grounds. Cf. Aguirre v. Commissioner, 117 T.C. 324, 327 (2001).

11
Petitioner’s failure to file a brief would suffice to
reject petitioner’s contention. See Rule 123; Stringer v.
Commissioner, 84 T.C. 693, 704-705 (1985), affd. 789 F.2d 917
(4th Cir. 1986); see also Petzoldt v. Commissioner, 92 T.C. 661,
603 (1989); Money v. Commissioner, 89 T.C. 46, 48 (1987).
 - 30 -

It suffices that petitioner failed to produce any evidence

in this proceeding to support his claims of unreported losses for

any of the years in issue. See Rule 149(b). Petitioner failed

to comply with the Court’s orders compelling him to respond

properly to respondent’s requests for admissions and to

respondent’s discovery requests relating to his claims of

unreported losses. At trial, petitioner had no evidence to

present to show his entitlement to additional deductions. As in

Smith v. Commissioner, T.C. Memo. 2002-59, in which we recently

sustained the Commissioner’s determination to proceed with

collection, “petitioner did not provide at trial any evidence, in

the form of either testimony or documentation, to support his

claim to any additional deduction.” In attempted aid of his

effort to compel respondent to help petitioner uncover evidence

that would substantiate his claims, petitioner has instead made

unsubstantiated assertions that his alleged losses were caused by

a conspiracy in which respondent was a participant.

Taxpayers who dispute the Commissioner’s disallowance of

deductions claimed on their returns must show that they satisfied

the specific statutory requirements entitling them to the claimed

deductions. New Colonial Ice Co. v. Helvering, 292 U.S. 435

(1934); Davis v. Commissioner, 81 T.C. 806, 815 (1983), affd.

without published opinion 767 F.2d 931 (9th Cir. 1985). While

the Court may estimate the amount of allowable deductions where a
 - 31 -

taxpayer establishes his entitlement to, but not the amount of,

the deductions, Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930), any such estimate must have a reasonable evidentiary

basis, Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

Without a reasonable evidentiary basis, the Court’s allowance of

deductions would amount to unguided largesse. Williams v. United

States, 245 F.2d 559, 560 (5th Cir. 1957).

In the case at hand, petitioner argued that once upon a time

his shares in Horn Construction and Horn Enterprises were worth

millions of dollars, and that now they are worthless. A

taxpayer’s loss, however, is limited to his adjusted basis in the

property, not the property’s highest fair market value. Sec.

165(b). In general, a loss resulting from worthless stock is

deductible only in the year the stock becomes worthless,12 see

sec. 165(g)(1), and does not enter into the computation of net

operating loss carrybacks and carryforwards, sec. 172. Even if

we accepted petitioner’s vague and unsupported allegations of

value, petitioner offered no evidence to show his adjusted basis

in the stock, or when the stock became worthless. Likewise,

there is no evidence in the record of a stockholder note and its

12
It is noteworthy that petitioner’s taxable year 1995, the
year in which Horn Construction’s chapter 11 bankruptcy case was
converted to chapter 7, is not before the Court in this
proceeding. On neither his 1994 return nor his 1996 return did
petitioner claim any loss with respect to his stock or debt
interest in Horn Construction.
 - 32 -

worthlessness. See sec. 166(a). Thus, petitioner presented no

evidence to support a deductible loss in any of the years in

issue. Had he done so, we would also have to consider whether

any of the loss-limitation provisions contained in the Code

apply. See, e.g., secs. 165(c), (g), 166(d), 267(a), 1211(b),

1212(b). Petitioner did not address any of these issues.

Petitioner argued in his request for continuance and at

trial that he needed more time to locate records to support his

alleged deductions. We shall not overturn and delay giving

effect to respondent’s determinations to proceed with collection

on the ground that petitioner should have another opportunity to

dispute the liabilities. The collection actions in the case at

hand relate to taxes due more than 5 to 10 years ago. We shall

not allow respondent’s collection actions to be held hostage to

petitioner’s allegations of possible deductions while he tries to

dragoon respondent into providing the evidence to support them.

Petitioner has failed to establish grounds for enjoining

respondent from proceeding by levy to collect the assessments at

issue. We therefore sustain respondent’s determinations to

proceed with collection.
 - 33 -

To give effect to the foregoing,

Decision will be entered

for respondent.