T.C. Memo. 2003-39
UNITED STATES TAX COURT
CLAUDIA J. MINER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8472-01. Filed February 24, 2003.
Claudia J. Miner, pro se.
Scott J. Welch, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined deficiencies in
petitioner’s income tax and additions to tax as follows:
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Additions to tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2)1 Sec.6654(a)
1996 $30,520 $6,867.00 50% of the $1,624.46
interest on
$7,019.60
1997 27,011 6,077.47 50% of the 1,455.14
interest on
$4,591.87
1998 35,140 7,906.50 50% of the 1,594.90
interest on
$3,865.40
1
Respondent concedes that petitioner is not liable for
additions to tax under sec. 6651(a)(2) for 1996-98.
After concessions, the issues for decision are:1
1. Whether petitioner may deduct margin interest of
$1,738.04 in 1996, $1,844.25 in 1997, and $3,764.40 in 1998. We
hold that she may to the extent discussed below.
2. Whether petitioner is liable for the addition to tax for
failure to file under section 6651(a)(1) for the years in issue.
We hold that she is.
3. Whether petitioner is liable for the addition to tax for
failure to pay estimated tax under section 6654(a) for the years
in issue. We hold that she is not.
Section references are to the Internal Revenue Code as
amended. Rule references are to the Tax Court Rules of Practice
and Procedure.
1
The parties settled all issues related to unreported
income for the years in issue.
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FINDINGS OF FACT
A. Petitioner
Petitioner resided in Holden, Louisiana, when she filed the
petition.
B. Petitioner’s Brokerage Account
Petitioner had a brokerage account at Dain Rauscher, Inc.
(Dain Rauscher), in 1996, 1997, and 1998 (1996-98). Predecessor
entities of Dain Rauscher include Everen Clearing Corp., Regional
Operations Group, Interra Clearing Services, and Personal
Retirement Planning Group. We refer to these predecessor
entities as Dain Rauscher.
Petitioner held stocks, bonds, and mutual fund shares in her
account in 1996-98. Her brokers at Dain Rauscher sold stocks,
bonds, and mutual fund shares on her behalf during those years
and reported those sales to respondent on Forms 1099. Petitioner
paid margin interest to Dain Rauscher totaling $1,738.04 in 1996,
$1,844.25 in 1997, and $3,764.40 in 1998. Petitioner received
monthly statements from Dain Rauscher during those years that
showed purchases and sales of stocks, bonds, and mutual fund
shares on her behalf, and the proceeds she received from those
sales, as well as interest, dividends, and capital gain
distributions she received.
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C. Respondent’s Examination
Petitioner did not file Federal income tax returns for 1996-
98. Respondent began the examination of petitioner’s 1996-98 tax
years after July 22, 1998. On April 6, 2001, respondent mailed
notices of deficiency to petitioner in which respondent
determined deficiencies and additions to tax for petitioner’s
1996-98 tax years. Respondent’s determination was based on
information returns received from third-parties reporting that
the following payments had been made to petitioner during the
years in issue:
1996
Amount Payor Description
$39,000 Zelesky, Cornelius, Real estate sales
Hallmark, Roper
26 Zelesky, Cornelius, Buyer real estate
Hallmark, Roper tax
1 Everen Clearing Corp. Stocks/bonds sales
4 Everen Clearing Corp. Stocks/bonds sales
22,769 Regional Operations Stocks/bonds sales
Group
24,803 Regional Operations Stocks/bonds sales
Group
8 Income Fund of Dividends
America
8,214 Regional Operations Capital gains
Group
10,097 Regional Operations Dividends
Group
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2 Washington Mutual Dividends
Investors Fund
14,252 Regional Operations Interest
Group
71 Hibernia National Interest
Bank
12 NationsBank of Texas Interest
1,361 NationsBank of Texas Interest
1997
Amount Payor Description
$25,000 Interra Clearing Services Stocks/bonds sales
8,000 Interra Clearing Services Stocks/bonds sales
35,000 Interra Clearing Services Stocks/bonds sales
17,106 Interra Clearing Services Capital gains
12,265 Interra Clearing Services Dividends
12,497 Interra Clearing Services Interest
147 Hibernia National Bank Interest
40 Hancock Bank Interest
1998
Amount Payor Description
$3,500 Dain Rauscher Stocks/bonds sales
7,000 Dain Rauscher Stocks/bonds sales
2,000 Dain Rauscher Stocks/bonds sales
2,000 Dain Rauscher Stocks/bonds sales
3,500 Dain Rauscher Stocks/bonds sales
10,000 Dain Rauscher Stocks/bonds sales
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15,000 Dain Rauscher Stocks/bonds sales
29,380 Dain Rauscher Stocks/bonds sales
5,000 Dain Rauscher Stocks/bonds sales
10,000 Dain Rauscher Stocks/bonds sales
15,310 Dain Rauscher Stocks/bonds sales
25,000 Dain Rauscher Stocks/bonds sales
887 Dain Rauscher Interest
7,770 Dain Rauscher Savings bond interest
4 Hancock Bank Interest
OPINION
A. Whether Petitioner or Respondent Bears the Burden of Proof
Petitioner contends that respondent bears the burden of
proof relating to the deficiency because section 7491(a) applies
and because the notices of deficiency were arbitrary and
erroneous for each year in issue. We disagree for reasons stated
next.
1. Whether Respondent Bears the Burden of Proof Under
Section 7491
Petitioner contends that respondent bears the burden of
proof under section 7491(a).2 We disagree.
2
Sec. 7491 provides in pertinent part:
SEC. 7491. BURDEN OF PROOF.
(a) Burden Shifts Where Taxpayer Produces Credible
Evidence.--
(1) General Rule.--If, in any court proceeding, a
taxpayer introduces credible evidence with respect to
(continued...)
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The Commissioner bears the burden of proof under section
7491(a) if, inter alia, the taxpayer has: (1) Complied with
substantiation requirements under the Internal Revenue Code, sec.
7491(a)(2)(A); (2) maintained all records required by the
Internal Revenue Code, sec. 7491(a)(2)(B); and (3) cooperated
with reasonable requests by the Secretary for information,
documents, and meetings, id.
Taxpayers bear the burden of proving that these requirements
are met. H. Conf. Rept. 105-599, at 239 (1998), 1998-3 C.B. 747,
993; S. Rept. 105-174, at 45 (1998), 1998-3 C.B. 537, 581.
Petitioner did not show that she substantiated her deductions,
kept records of her income and expenses, or cooperated with
2
(...continued)
any factual issue relevant to ascertaining the
liability of the taxpayer for any tax imposed by
subtitle A or B, the Secretary shall have the burden of
proof with respect to such issue.
(2) Limitations.--Paragraph (1) shall apply with
respect to an issue only if--
(A) the taxpayer has complied with the
requirements under this title to substantiate any
item;
(B) the taxpayer has maintained all records
required under this title and has cooperated with
reasonable requests by the Secretary for
witnesses, information, documents, meetings, and
interviews; * * *.
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respondent’s agents. Thus, section 7491(a) does not apply.3
Sec. 7491(a); Rule 142(a)(2).
2. Whether the Notices of Deficiency Were Arbitrary
Petitioner contends that the notices of deficiency are not
entitled to the presumption of correctness, and that respondent
bears the burden of going forward to establish the existence and
amounts of the deficiencies because respondent’s determinations
were arbitrary. Helvering v. Taylor, 293 U.S. 507 (1935). We
disagree.
Petitioner contends that the notices of deficiency were
arbitrary because respondent made several concessions and because
respondent did not establish petitioner’s cost bases in the
securities she sold during the years in issue before sending the
notices of deficiency. We disagree. Petitioner did not file
returns for the years in issue. Respondent reasonably determined
petitioner’s income based on information returns received from
third-parties reporting payments made to petitioner during the
years in issue. Respondent’s concessions were based on
substantiation provided by petitioner after respondent sent the
notices of deficiency. Respondent issued the notices of
deficiency without knowing petitioner’s bases in various assets
3
For similar reasons, sec. 6201(d) does not place on
respondent the burden of producing evidence to supplement the
information returns. See McQuatters v. Commissioner, T.C. Memo.
1998-88.
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because she did not file returns for 1996-98. Respondent’s
determination is not made arbitrary or unreasonable because of
respondent’s failure to have all the facts if the failure is
caused by petitioner. Roberts v. Commissioner, 62 T.C. 834, 836-
837 (1974).
Petitioner relies on Portillo v. Commissioner, 932 F.2d 1128
(5th Cir. 1991), affg. and revg. in part and remanding T.C. Memo.
1990-68, and Senter v. Commissioner, T.C. Memo. 1995-311, for the
proposition that respondent’s determination is not presumed to be
correct unless respondent provides some evidence showing that
petitioner received unreported income. Petitioner’s reliance on
Portillo and Senter is misplaced. In those cases, the
Commissioner’s determination was held to be arbitrary because the
Commissioner produced no reliable evidence that the taxpayer
received unreported income for the years at issue. In contrast,
respondent’s determination in the instant case was based on
third-party reports, the accuracy of which petitioner does not
dispute.
Petitioner contends that respondent’s determination is not
supported by any evidence. We disagree. Respondent’s
determination was based on information reports from third-party
payors. The Commissioner may properly determine a deficiency
based on Forms 1099. Parker v. Commissioner, 117 F.3d 785, 787
(5th Cir. 1997). In Parker, the U.S. Court of Appeals for the
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Fifth Circuit held that the Commissioner has no duty to
investigate reports by third-party payors that are not disputed
by the taxpayer. The Parkers did not dispute their receipt of
the payments in question. Like the taxpayers in Parker,
petitioner failed to file income tax returns and does not deny
that she received unreported income in the years in issue.
3. Conclusion as to Burden of Proof
We conclude that respondent’s determination is presumed to
be correct, and petitioner bears the burden of proof. Rule
142(a)(1); Parker v. Commissioner, supra.
B. Whether Petitioner May Deduct Margin Interest
The parties dispute whether petitioner may deduct margin
interest that she paid to Dain Rauscher totaling $1,738.04 in
1996, $1,844.25 in 1997, and $3,764.40 in 1998. Respondent
contends that petitioner may not deduct margin interest in the
years in issue because she was an investor and not a trader.
1. Whether Petitioner’s Status as an Investor or Trader
Controls Whether She May Deduct Margin Interest
Respondent contends that petitioner may not deduct margin
interest in 1996-98 because she is an investor and not a trader,
and thus the margin interest is not properly allocable to a trade
or business. We disagree that petitioner’s status as an investor
or trader determines whether she may deduct margin interest.
Generally, an individual taxpayer may not deduct personal
interest. Sec. 163(h)(1). However, investment interest is not
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personal interest, sec. 163(h)(2)(B), and may be deducted to the
extent of the taxpayer’s net investment income.4 Sec. 163(d).
Investment interest includes interest which is paid or accrued on
indebtedness properly allocable to property held for investment.
Sec. 163(d)(3)(A).
2. Whether Margin Interest Is Investment Interest
Margin interest is interest charged to customers on margin
debt incurred in connection with purchases of stock or
securities. In re Olympia Brewing Co. Sec. Litig., 612 F. Supp.
1370, 1374 (N.D. Ill. 1985). Margin interest generally is
investment interest. See, e.g., Estate of Yeager v.
Commissioner, 889 F.2d 29 (2d Cir. 1989), revg. on another issue,
4
Neither party discussed whether petitioner’s margin
interest is deductible under sec. 163(d). Sec. 163(d) provides
in pertinent part:
SEC. 163(d). Limitations on Investment Interest.–-
(1) In General.--In the case of a taxpayer other
than a corporation, the amount allowed as a deduction
under this chapter for investment interest for any
taxable year shall not exceed the net investment income
of the taxpayer for the taxable year.
* * * * * * *
(3) Investment Interest.--For purposes of this
subsection--
(A) In general.--The term “investment interest”
means any interest allowable as a deduction under this
chapter (determined without regard to paragraph (1))
which is paid or accrued on indebtedness properly
allocable to property held for investment.
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affg. in part, and remanding T.C. Memo. 1988-264; Gundotra v.
Commissioner, T.C. Memo. 1995-303, affd. 149 F.3d 1168 (4th Cir.
1998).
3. Conclusion
Petitioner invested in securities in 1996-98. The margin
interest she paid to Dain Rauscher is investment interest which
she may deduct under section 163(h)(2)(B) for 1996-98 to the
extent of her net investment income for those years. Sec.
163(d).
C. Whether Petitioner Is Liable for Additions to Tax for
1996-98
1. Failure To File Returns
A taxpayer is liable for an addition to tax of up to 25
percent for failure to file a Federal income tax return unless
the failure was due to reasonable cause and not willful neglect.
Sec. 6651(a)(1); United States v. Boyle, 469 U.S. 241, 245
(1985).
In court proceedings arising in connection with examinations
beginning after July 22, 1998, section 7491(c) places on the
Commissioner the burden of producing evidence showing that it is
appropriate to impose the addition to tax under section
6651(a)(1). Petitioner did not file returns for 1996-98. Thus,
respondent has shown that the section 6651(a)(1) addition to tax
applies, unless petitioner proves that her failure to file was
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due to reasonable cause. Higbee v. Commissioner, 116 T.C. 438,
446-447 (2001); see Joye v. Commissioner, T.C. Memo. 2002-14.
Petitioner bears the burden of proving that her failure is
due to reasonable cause and not willful neglect. See United
States v. Boyle, supra; Higbee v. Commissioner, supra at 447.
Petitioner did not offer evidence showing that she had reasonable
cause for not filing returns for 1996-98 or address this issue on
brief. A taxpayer may be deemed to concede an issue that was
raised in the petition if he or she makes no argument at trial or
on brief relating to that issue. Levin v. Commissioner, 87 T.C.
698, 722-723 (1986), affd. 832 F.2d 403 (7th Cir. 1987);
Zimmerman v. Commissioner, 67 T.C. 94, 104 n.7 (1976). We
conclude that petitioner is liable for the addition to tax under
section 6651(a)(1) for failure to file her 1996-98 income tax
returns.
2. Failure To Pay Estimated Tax
We have jurisdiction to decide whether petitioner is liable
for the addition to tax under section 6654(a) because she did not
file an income tax return for the years in issue. Sec.
6665(b)(2); see Meyer v. Commissioner, 97 T.C. 555, 562 (1991).
Respondent determined that petitioner is liable for the
addition to tax under section 6654 for failure to pay estimated
tax for 1996-98. Petitioner alleged in the petition that she is
not liable for the addition to tax under section 6654(a).
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To meet the burden of production under section 7491(c),
respondent must produce evidence showing that it is appropriate
to impose the addition to tax under section 6654 in this case;
i.e., that petitioner underpaid or did not pay estimated tax for
1996-98. To be liable for the addition to tax under section 6654
for a year in issue, petitioner must have underpaid or failed to
pay estimated tax for that year. Sec. 6654(a). To satisfy the
burden of production, respondent must produce evidence showing
that petitioner underpaid or failed to pay estimated tax for each
year in issue.
Forms 1099 show that Dain Rauscher did not withhold any tax
for petitioner for 1996-98. This suggests petitioner may have
been required to make estimated tax payments, but it does not
speak to whether she did so.
Respondent relies on the notices of deficiency as support
for the proposition that petitioner made no estimated tax
payments for 1996-98. The workpapers attached to the notices of
deficiency for 1996-98 show no tax credits, withholdings, or
estimated tax payments for petitioner for those years.
Calculations attached to a notice of deficiency are not evidence
of the truth of the matters alleged therein. Blanco v.
Commissioner, 56 T.C. 512, 515 (1971); Fitzner v. Commissioner,
31 T.C. 1252, 1255 (1959); Blundon v. Commissioner, 32 B.T.A.
285, 288-289 (1935). It is especially appropriate in the context
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of section 7491(c), which requires respondent to meet the burden
of production, not to treat notices of deficiency as self-
proving. Respondent produced no other evidence of petitioner’s
tax payment history for 1996-98.5
We conclude that respondent did not meet the burden of
production under section 7491(c) and therefore hold that
petitioner is not liable for, as to, the addition to tax under
section 6654. To reflect the foregoing and concessions of the
parties,
Decision will be
entered under Rule 155.
5
In contrast, in Patton v. Commissioner, T.C. Memo. 2001-
256, the Commissioner submitted the taxpayer’s Forms W-2, the
taxpayer’s transcript of account listing Forms 1099B, 1099S,
1099DIV, and 1099INT received by the IRS for the years in issue
(which indicated that no Federal income tax was withheld), and
the declaration of the revenue agent made under penalties of
perjury in which he swore that the taxpayer did not pay tax
during the years in issue. We held that the Commissioner met the
burden of production as to the addition to tax under sec. 6654
for failure to pay estimated tax. See also Motley v.
Commissioner, T.C. Memo. 2001-257 (Commissioner produced
transcripts of account and the Appeals officer’s testimony that
the IRS had no record of the taxpayer’s making estimated tax
payments). In accord, Dimon v. Commissioner, T.C. Memo. 2002-105
(the record established that the taxpayers made no estimated tax
payments, except for a nominal amount withheld from wages, for
the year in issue); Howard v. Commissioner, T.C. Memo. 2002-85
(the record established that the taxpayer underpaid the estimated
tax due for the year in issue).