T.C. Memo. 2003-315
UNITED STATES TAX COURT
PETER WOOD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14398-02. Filed November 12, 2003.
Peter Wood, pro se.
David L. Zoss, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined the following
deficiencies in, and additions to, petitioner’s Federal income
tax (tax):
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Additions to Tax
Year Deficiency Sec. 6651(a)(1)1 Sec. 6651(a)(2) Sec. 6654(a)
1995 $78,117 $16,573.25 $0 $3,412.62
1996 9,857 642.83 714.25 301.28
1997 41,120 8,802.00 9,780.00 2,091.52
In an amendment to answer (respondent’s amendment to an-
swer), respondent alleged increases of $71.42 and $1,478 in the
additions to tax under section 6651(a)(1) for 1996 and 1997,
respectively.2
The issues remaining for decision are:3
(1) Did petitioner operate during each of the years at issue
a sole proprietorship engaged in the business of selling jewelry
and certain other items? We hold that he did.
(2) Does petitioner have unreported Schedule C net profit
for each of the years at issue in the amount that respondent
determined in the notice? We hold that he does.
(3) Is petitioner’s filing status for each of the years at
issue married filing separately? We hold that it is.
1
All section references are to the Internal Revenue Code
(Code) in effect for the years at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
2
In respondent’s amendment to answer, respondent conceded
the determinations under sec. 6651(a)(2) for 1996 and 1997 that
respondent determined in the notice of deficiency (notice) issued
to petitioner.
3
In addition to the issues remaining for decision listed
below, there are other questions relating to certain determina-
tions in the notice that are computational in that their resolu-
tion flows automatically from our resolution of the remaining
issues that we address herein.
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(4) Is petitioner liable for an addition to tax under
section 6651(a)(1) for each of the years at issue? We hold that
he is.
(5) Is petitioner liable for an addition to tax under
section 6654(a) for each of the years at issue? We hold that he
is.
FINDINGS OF FACT
Most of the facts have been deemed established pursuant to
Rule 90(c) and pursuant to the Court’s Order under Rule 91(f)
dated May 8, 2003.
At the time he filed the petition in this case, petitioner’s
mailing address was in Excelsior, Minnesota.
Beginning in 1990 and continuing throughout each of the
years at issue, petitioner operated a sole proprietorship under
the name Native Skies. (We shall refer to petitioner’s sole
proprietorship Native Skies as petitioner’s sole proprietorship.)
At all relevant times, including during each of the years at
issue, petitioner’s sole proprietorship was engaged in the
business of selling jewelry and certain other items, such as
rugs.
On April 6, 1994, the Secretary of State of Minnesota
(Secretary of State) issued a certificate of incorporation to a
corporation identified in that certificate as “Native Skies Inc.”
During the years at issue, Native Skies, Inc., was inactive.
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During those years, no corporate bylaws for Native Skies, Inc.,
and no minutes of any meetings of Native Skies, Inc., existed.
During 1996 and 1997, Native Skies, Inc., did not file an annual
registration form with the Secretary of State and was not in good
standing in the State of Minnesota.4 Native Skies, Inc., did not
file any Federal income tax return, any Federal employment tax
return, or any information return with the Internal Revenue
Service for any of the years at issue. Nor did Native Skies,
Inc., issue any Form W-2 or any Form 1099 for any of those years.
During each of the years at issue, petitioner maintained a
business bank account in the name of Native Skies, Inc., at First
National Bank of the Lakes (petitioner’s corporate business bank
account). During each such year, petitioner deposited into
petitioner’s corporate business bank account business receipts
from petitioner’s sole proprietorship and withdrew from that
account funds to pay expenses associated with petitioner’s sole
proprietorship.
During each of the years at issue, petitioner and his spouse
maintained two personal joint bank accounts at First National
Bank of the Lakes (petitioner’s personal bank accounts). During
each month of each of the years at issue, between $3,000 and
4
The deemed admissions and matters deemed stipulated indi-
cate that during 1995 Native Skies, Inc., did not file an annual
registration form with the Secretary of State and was not in good
standing in the State of Minn. Respondent acknowledges that that
deemed admission and deemed stipulation is not accurate.
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$3,600 was automatically transferred from petitioner’s corporate
business bank account into one of petitioner’s personal bank
accounts. During each such year, petitioner and his spouse used
petitioner’s personal bank accounts primarily for the payment of
their personal expenses.
In order to calculate the gross receipts that petitioner
derived from petitioner’s sole proprietorship during each of the
years at issue, respondent used the bank deposits method with
respect to petitioner’s corporate business bank account and
petitioner’s personal bank accounts. According to the bank
deposits method, petitioner had the following gross deposits,
nontaxable deposits, and gross receipts derived from petitioner’s
sole proprietorship for each of the years at issue:
Year Gross Deposits Nontaxable Deposits Gross Receipts
1995 $481,365.17 $47,058.58 $434,306.59
1996 341,029.75 31,000.00 310,029.75
1997 490,908.45 151,000.00 339,908.45
In addition to using the bank deposits method in order to
calculate the gross receipts that petitioner derived from peti-
tioner’s sole proprietorship during each of the years at issue,
respondent used billing invoices and/or purchase orders generated
by that business (petitioner’s billing invoices and/or purchase
orders) in order to calculate such gross receipts. According to
petitioner’s billing invoices and/or purchase orders, petitioner
had the following gross receipts derived from petitioner’s sole
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proprietorship for each of the years at issue:
Year Gross Receipts
1995 $449,283.08
1996 330,646.69
1997 339,646.51
On January 9, 1996, respondent sent petitioner a letter
(respondent’s first notice of inadequate records) notifying him
that he was not keeping adequate records with respect to peti-
tioner’s sole proprietorship, as required by the Code, which
would enable him to report accurately, and respondent to verify
accurately, petitioner’s tax liability.5 Respondent’s first
notice of inadequate records directed petitioner to send respon-
dent within six months an explanation (required explanation) of
how petitioner had corrected his recordkeeping in order to meet
the requirements of the Code.
On July 22, 1996, respondent sent petitioner a letter
(respondent’s second notice of inadequate records) informing
petitioner that respondent had not received from him the required
explanation.6 Respondent’s second notice of inadequate records
directed petitioner to notify respondent within 15 days about the
steps that he had taken to correct the recordkeeping problems
described in respondent’s first notice of inadequate records.
5
Respondent’s first notice of inadequate records did not
indicate the year or years to which that notice pertained.
6
Respondent’s second notice of inadequate records indicated
that it pertained to petitioner’s taxable years 1991, 1992, and
1993.
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Petitioner did not file a tax return for any of his taxable
years 1995, 1996, or 1997.7 Petitioner made estimated tax pay-
ments in the amounts of $11,824, $3,500, and $2,000 for those
respective years.
On June 4, 2002, respondent issued a notice to petitioner
with respect to his taxable years 1995, 1996, and 1997. In that
notice, respondent determined, inter alia, that petitioner had
the following unreported Schedule C net profit8 for the years at
issue:
7
In February 1998, petitioner and his spouse filed an appli-
cation for a mortgage (petitioner’s mortgage application) on
their secondary residence in Deerwood, Minn. As noted above,
petitioner did not file a tax return for any of the years at
issue. However, attached to petitioner’s mortgage application
were copies of unfiled returns (petitioner’s unfiled returns) for
those respective years. Schedule C, Profit or Loss From Business
(Schedule C), of each of petitioner’s unfiled returns for the
years at issue reflected that petitioner operated a sole propri-
etorship which was engaged in the business of selling jewelry and
gift items. Those respective Schedules C claimed net profit of
$142,056.13, $132,793.19, and $102,107.20, respectively.
8
In determining in the notice petitioner’s Schedule C net
profit for each of the taxable years 1995, 1996, and 1997,
respondent accepted as substantiated by petitioner the following
amounts of cost of sales incurred by petitioner’s sole propri-
etorship:
Year Cost of Sales
1995 $244,521.55
1996 274,883.38
1997 223,597.37
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Year Schedule C Net Profit1
1995 $204,761.53
1996 35,146.37
1997 116,049.14
1
The Schedule C net profit that respondent determined in the
notice for each of the years 1995 and 1997 is equal to peti-
tioner’s gross receipts calculated in accordance with peti-
tioner’s billing invoices and/or purchase orders minus the cost
of sales that respondent accepted in the notice as substantiated
by petitioner. With respect to 1995, petitioner’s gross receipts
calculated in accordance with petitioner’s billing invoices
and/or purchase orders (i.e., $449,283.08) was larger than
petitioner’s gross receipts calculated under the bank deposits
method (i.e., $434,306.59). With respect to 1997, petitioner’s
gross receipts calculated in accordance with petitioner’s billing
invoices and/or purchase orders (i.e., $339,646.51) was smaller
than petitioner’s gross receipts calculated under the bank
deposits method (i.e., $339,908.45). The Schedule C net profit
that respondent determined in the notice for 1996 is equal to
petitioner’s gross receipts calculated under the bank deposits
method minus the cost of sales that respondent accepted in the
notice as substantiated by petitioner. With respect to 1996,
petitioner’s gross receipts calculated under the bank deposits
method (i.e., $310,029.75) was smaller than petitioner’s gross
receipts calculated in accordance with petitioner’s billing
invoices and/or purchase orders (i.e., $330,646.69). The record
does not disclose the reasons for the foregoing actions of
respondent.
Respondent further determined in the notice that petitioner was
liable for each of the years at issue for additions to tax under
sections 6651(a)(1) and 6654(a).
OPINION
Respondent concedes that section 7491 is applicable in the
instant case. With respect to section 7491(a), respondent
maintains that petitioner has not introduced credible evidence
under section 7491(a)(1) or complied with section 7491(a)(2) and
that therefore the burden of proof with respect to respondent’s
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deficiency determinations for the years at issue does not shift
to respondent. On the instant record, we agree with respondent.
We conclude that petitioner has the burden of proving that
respondent’s deficiency determinations are wrong. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Respondent,
however, has the burden of proof with respect to the increase in
the addition to tax under section 6651(a)(1) for each of the
years 1996 and 1997 that respondent alleged in respondent’s
amendment to answer. Rule 142(a)(1).
At trial, the only issue about which petitioner testified
related to whether during each of the years at issue petitioner’s
sole proprietorship or Native Skies, Inc., operated a business
engaged in selling jewelry and certain other items.9 Petitioner
testified that Native Skies, Inc., and not petitioner’s sole
proprietorship, operated that business. Petitioner’s testimony
is contrary to the matters deemed established in the instant
case. We are unwilling to rely on that testimony. The matters
deemed established show that during each of the years at issue
petitioner’s sole proprietorship, and not Native Skies, Inc.,
operated a business engaged in selling jewelry and certain other
items, such as rugs. On the record before us, we find that
petitioner has failed to carry his burden of showing that during
each of the years at issue petitioner’s sole proprietorship did
9
Although the Court provided petitioner an opportunity to
file a brief in this case, petitioner declined to do so.
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not operate a business engaged in selling jewelry and certain
other items.
We turn now to the determinations in the notice. With
respect to the determinations regarding petitioner’s Schedule C
net profit, petitioner proffered certain documentary evidence at
trial, presumably in support of his position that he does not
have the Schedule C net profit for each of the years at issue
that respondent determined in the notice. The Court allowed that
documentary evidence into the record as nothing more than peti-
tioner’s self-serving, uncorroborated, and unsubstantiated
summaries of the gross receipts and the expenses that he claims
he has for each of the years at issue. We are unwilling to rely
on those summaries. On the record before us, we find that
petitioner has failed to carry his burden of showing that respon-
dent was wrong in determining that petitioner has Schedule C net
profit for each of the years at issue in the amount that respon-
dent determined in the notice.
With respect to the determinations regarding petitioner’s
filing status, petitioner has failed to carry his burden of
showing that respondent was wrong in determining that peti-
tioner’s filing status for each of the years at issue is married
filing separately.
With respect to the determinations under section 6651(a)(1),
the matters deemed established show that petitioner did not file
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a tax return for any of the years at issue. On the record before
us, we find that respondent has carried respondent’s burden of
production under section 7491(c) with respect to the addition to
tax under section 6651(a)(1) for each of the years at issue that
respondent determined in the notice. On that record, we further
find that petitioner has failed to carry his burden of showing
that respondent was wrong in determining that petitioner is
liable for each such year for such addition to tax.
With respect to the increase in the addition to tax under
section 6651(a)(1) for each of the years 1996 and 1997 which
respondent alleged in respondent’s amendment to answer and on
which respondent has the burden of proof, respondent claims that
such an increase for each such year is appropriate for the
following reasons. As discussed above, in respondent’s amendment
to answer respondent conceded the respective determinations in
the notice under section 6651(a)(2) for the years 1996 and 1997.
According to respondent, respondent’s concession requires that
the amount of the addition to tax under section 6651(a)(1) be
calculated under that section without regard to section
6651(c)(1). We agree. On the record before us, we find that
respondent has carried respondent’s burden of showing that the
amount of the addition to tax under section 6651(a)(1) that
respondent determined in the notice for each of the years 1996
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and 1997 should be increased.10
With respect to the determinations under section 6654(a),
the matters deemed established show that petitioner did not file
a tax return for any of the years at issue. Those matters also
show that petitioner made an estimated tax payment for each of
the years at issue in an amount significantly less than the
amount of the deficiency in tax that respondent determined, and
that we have sustained, for each such year. On the record before
us, we find that respondent has satisfied respondent’s burden of
production with respect to the addition to tax under section
6654(a) for each of the years at issue. On that record, we
further find that petitioner has failed to establish that any of
the exceptions in section 6654(e) apply in the instant case. On
the record before us, we find that petitioner has failed to carry
his burden of showing that respondent was wrong in determining
that petitioner is liable for each such year for such addition to
tax.
10
It appears that respondent may have made an error in
respondent’s amendment to answer in computing the increase in the
addition to tax under sec. 6651(a)(1) for 1997. It appears that
in that computation respondent failed to credit petitioner with
petitioner’s $2,000 estimated tax payment with respect to 1997.
See sec. 6651(b). Any such computational error shall be taken
into account by the parties in the computations under Rule 155.
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To reflect the foregoing and the concessions of respondent
under section 6651(a)(2),
Decision will be entered
under Rule 155.