T.C. Memo. 2006-57
UNITED STATES TAX COURT
KAREN McMANUS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13540-04. Filed March 27, 2006.
Philip A. Putman, for petitioner.
Monica Gingras, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined a deficiency in
petitioner’s Federal income tax for 1996 of $3,548 as well as
additions to tax under section 6651(a)(1) of $887 and section
6654 of $189.1
1
Unless otherwise indicated, all section references are to
(continued...)
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The issues for decision are: (1) Whether petitioner
received $15,800 of unreported income in 1996 as respondent
determined; and (2) whether petitioner is liable for additions to
tax under sections 6651(a)(1) and 6654.
FINDINGS OF FACT
Petitioner resided in La Habra, California, when she filed
the petition.
Petitioner failed to file a Federal income tax return and
failed to pay Federal income taxes for the 1996 tax year. On the
basis of third-party information, on April 28, 2004, respondent
issued a notice of deficiency to petitioner for the 1996 tax year
setting forth unreported non-employee income of $15,800.
Petitioner timely filed a petition with the Court on July
29, 2004, disputing that she received unreported nonemployee
income in 1996. Trial was held on this matter on March 17, 2005.
Although petitioner did not appear, her counsel did.
Petitioner’s counsel did not introduce witnesses nor provide
documentary evidence to support petitioner’s position. However,
petitioner’s counsel did cross-examine respondent’s sole witness.
During trial, respondent called one witness, Pam Wong, a tax
compliance officer employed by respondent. Ms. Wong’s testimony
was based solely upon her memory of reviewing petitioner’s
1
(...continued)
the Internal Revenue Code, as amended. Amounts are rounded to
the nearest dollar.
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Internal Revenue Service administrative file, but the
administrative file was not introduced into evidence.
According to the version of events presented by respondent
at trial, Ms. Wong had no involvement in or knowledge of this
case outside of reviewing petitioner’s administrative file for
the purpose of testifying. On the basis of this review, Ms. Wong
testified respondent began investigating petitioner when Heath &
Associates reported it paid petitioner non-employee compensation
of $15,800 in 1996 and no corresponding return was filed by
petitioner in 1996. To determine whether petitioner filed a
return under another name, respondent sent petitioner an initial
contact letter, to which petitioner failed to respond.
Ms. Wong further testified respondent prepared a substitute
for return and sent a 30-day letter and a no-response report to
petitioner, to which she did not respond. Next, respondent
issued a statutory notice of deficiency for tax year 1996 to
petitioner based upon the compensation paid to her by Heath &
Associates.
During cross-examination as well as direct, Ms. Wong’s
responses appeared evasive. It was also readily apparent she was
unfamiliar with the case and unprepared to provide any insight
outside of what she could recall from reading the file.
Furthermore, respondent did not provide documentary evidence
to support Ms. Wong’s testimony or to show compensation was paid
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to petitioner by Heath & Associates. At one point during cross-
examination, Ms. Wong admitted she had no documentary evidence to
support her statements.
Finally, respondent informed the court he was unable to
obtain the third-party records from Heath & Associates because
the company had ceased to exist. Thus, any evidence concerning
moneys paid by Heath & Associates to petitioner was based solely
upon the notice of deficiency and the memory and credibility of
Ms. Wong.
OPINION
Petitioner asserts she is not liable for the deficiency and
the additions to tax respondent determined because: (1)
Respondent failed to meet the burden of producing evidence that
petitioner earned unreported income of $15,800 in 1996; (2)
respondent failed to meet the burden of producing evidence that
petitioner is liable for additions to tax.
The Court of Appeals for the Ninth Circuit has determined
that in order for the presumption of correctness to attach to the
deficiency determination in unreported income cases, the
Commissioner must establish “some evidentiary foundation”
connecting the taxpayer with the income-producing activity,
Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir.
1979), revg. 67 T.C. 672 (1977), or demonstrate the taxpayer
received unreported income, Edwards v. Commissioner, 680 F.2d
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1268, 1270 (9th Cir. 1982); Malfatti v. Commissioner, T.C. Memo.
2005-19. A deficiency determination which is not supported by
some evidentiary foundation is arbitrary and erroneous.
Weimerskirch v. Commissioner, supra at 362. Under such
circumstances, the Commissioner has the burden of coming forward
with evidence to establish the existence and amount of any
deficiency. Jackson v. Commissioner, 73 T.C. 394, 401 (1979).
Respondent incorrectly relies upon Hardy v. Commissioner,
181 F.3d 1002 (9th Cir. 1999), affg. T.C. Memo. 1997-97, for the
proposition that a revenue agent’s testimony, based upon a review
of a taxpayer’s administrative file, and a copy of the taxpayer’s
notice of deficiency, identifying the third-party payor, satisfy
the needed evidentiary foundation demonstrating that the taxpayer
received unreported income.
In Hardy v. Commissioner, supra at 1005, the Court of
Appeals for the Ninth Circuit found the Commissioner was relieved
from producing third-party income statements to prove a
taxpayer’s receipt of income because the taxpayer stipulated the
Commissioner received the statements. Therefore, the evidentiary
foundation requirement was satisfied when the Commissioner
introduced worksheets showing tax owed on the basis of third-
party information and bank statements, in combination with the
parties’ stipulating the Commissioner’s receipt of the
third-party information. Id.
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Petitioner did not stipulate respondent’s receipt of
third-party information from Heath & Associates. In addition,
the respondent was unable to provide any documentary evidence
from Heath & Associates establishing that income, of any amount,
was paid to petitioner. Outside of Ms. Wong’s unconvincing
testimony, respondent presented no evidence proving petitioner
received any income in 1996.
Although the Court of Appeals for the Ninth Circuit has not
defined “some evidentiary foundation”, this Court finds that the
notice of deficiency and the revenue agent’s testimony, based
upon review of the administrative file for the purpose of
testifying, without simultaneously providing the administrative
file to the Court, is an insufficient foundation. Respondent
failed to provide adequate evidence linking petitioner with the
receipt of income from Heath & Associates. Therefore, the Court
concludes petitioner is not liable for a deficiency of $3,548 for
1996. On the basis of the foregoing, petitioner is not liable
for additions to tax under sections 6651(a)(1) and 6654.
The Court, in reaching its holding, has considered all
arguments made and concludes that any arguments not mentioned
above are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered for
petitioner.