Nicholls v. Comm'r

T.C. Memo. 2006-218

UNITED STATES TAX COURT

TIMOTHY NICHOLLS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6897-04. Filed October 17, 2006.

Philip A. Putman, for petitioner.

Charles J. Graves, for respondent.

MEMORANDUM OPINION

HALPERN, Judge: By separate notices of deficiency,

respondent determined deficiencies in, and additions to,

petitioner’s 1998 and 1999 Federal income taxes as follows:
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Additions to Tax
Year1 Deficiency Sec. 6651(a)(1) Sec. 6654

1998 $16,067 $3,550.25 $634.33
1999 3,299 824.75 159.66
1
In an attachment to the notice of deficiency for
1998, respondent notes: “Since this report does not
reflect your prepayment credits of $1,740.00, you may
not owe the total amount shown on the enclosed report.”

Respondent has also moved the Court to impose a penalty on

petitioner on the grounds that petitioner’s position in this case

is frivolous and has been maintained primarily for delay. The

deficiencies, the additions to tax, and the motion remain in

issue.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

Background

For 1998, the principal adjustments giving rise to the

deficiency result from respondent’s inclusion in petitioner’s

gross income of $15,873 of capital gain, $6,034 of wages received

from Oxnard Building Materials, $33,850 and $1,900 of nonemployee

compensation received from Holoworld, Inc., and Flannery, Inc.,

respectively, $67 of interest received from Washington Mutual

Bank, FA, $241 of dividends received from assorted payers, and

the addition of self-employment tax of $5,051. For 1999, the

principal adjustments giving rise to the deficiency result from
 - 3 -

respondent’s inclusion in petitioner’s gross income of $27,795 of

capital gain and $317 of interest received from Washington Mutual

Bank, FA. For both years, respondent describes the section

6651(a)(1) addition to tax as being determined on account of

petitioner’s delinquency in filing his tax return and the section

6654(a) addition to tax as being determined on account of

petitioner’s failure to pay sufficient estimated tax.

Petitioner filed a petition in which he assigned error to

respondent’s determinations of deficiencies of $16,067 and $3,299

for 1998 and 1999, respectively (the deficiencies), claiming: “I

do not owe that to the IRS. The IRS numbers are phony.” The

petition does not set forth any facts on which petitioner bases

his assignment of error. Because of irregularities in the

petition, and because he had failed to pay the required filing

fee, petitioner was ordered to file a proper petition and pay the

required fee. Subsequently, petitioner paid the fee and filed an

amended petition, in which he set forth his prayer for relief as

follows: “The Court decide that the IRS numbers are wrong,

because they are. I don’t know where their numbers come from.”

Like the petition, the amended petition does not set forth any

facts on which petitioner bases his assignment of error. In

neither the petition nor the amended petition (without

distinction, the petition) does petitioner assign error to

respondent’s determinations of the additions to tax for 1998 and
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1999 (the additions to tax) other than any assignment that can be

implied from his objections to respondent’s “numbers”.

Petitioner did not appear in person for the trial of this

case, but he was represented by counsel, who neither called any

witnesses nor otherwise offered admissible evidence on

petitioner’s behalf. Instead, petitioner’s counsel filed

petitioner’s memorandum on burden of proof, setting forth

petitioner’s argument that, since this case involves unreported

income, respondent bears the burden of proving receipt of that

income. Beyond that, petitioner’s counsel did object to exhibits

offered by respondent, which objections, for the most part, were

overruled.1 At the conclusion of the trial, the Court discussed

with petitioner’s counsel the issues that needed to be decided in

this case. In response to the Court’s question as to whether it

would be fair to say that, if the Court were to conclude that

respondent had shown sources for the alleged items of unreported

income, the Court should sustain the determinations of

deficiencies and additions to tax, petitioner’s counsel agreed

that would be a logical conclusion.

1
The Court reserved its ruling on petitioner’s objections
to two exhibits offered by respondent, Exs. 13-R and 19-R, and
ordered petitioner to file a memorandum in support of his
objections within 10 days of the end of the trial. Petitioner
failed to file the ordered memorandum, and the Court interprets
that failure as petitioner’s concession that his objections are
without merit. We shall issue an appropriate order.
 - 5 -

Discussion

I. Deficiencies in Tax

While petitioner has assigned error to respondent’s

determinations of the deficiencies, he does not aver any facts

supporting his assignment, nor does he argue that respondent made

any mistake of law in determining the deficiencies. Petitioner

has ignored the merits of the case in favor of a defense based on

his supposition that it is respondent’s burden to prove that

petitioner had unreported income. Petitioner is wrong in that

supposition. In pertinent part, Rule 142(a)(1) provides that the

burden of proof shall be upon the petitioner, except as otherwise

provided by statute or determined by the Court. Section

7491(a)(1) places the burden of proof on the Commissioner with

respect to any factual issue relevant to determining a taxpayer’s

liability for the income tax, but the provision is of no

application unless the taxpayer first introduces credible

evidence with respect to the issue. Since petitioner has

introduced no evidence, section 7491(a)(1) is of no application

to this case. Petitioner retains the burden of proof under Rule

142(a)(1).

Nevertheless, the venue for appeal of this case is

uncertain. The petition shows petitioner’s mailing address as

being in Albuquerque, New Mexico. Petitioner would not, however,

stipulate that he resided there, agreeing only that, “at the time

he filed the petition, he was located or could be found [there].”
 - 6 -

The address to which the notices of deficiency are addressed is

in California, which may be the State of petitioner’s legal

residence. The place of petitioner’s legal residence is

important for determining the venue for appeal of a decision of

the Tax Court. Sec. 7482(b). California is within the

geographical boundaries of the U.S. Court of Appeals for the

Ninth Circuit, and Weimerskirch v. Commissioner, 596 F.2d 358

(9th Cir. 1979), revg. 67 T.C. 672 (1977), begins a line of cases

of the Court of Appeals for the Ninth Circuit to which we defer

in accordance with the doctrine of Golsen v. Commissioner, 54

T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971). The

general rule established by that line of cases is that, for the

Government to prevail in a case involving unreported income,

there must be some evidentiary foundation linking the taxpayer to

the alleged income-producing activity. See Weimerskirch v.

Commissioner, supra at 362.2 Apparently, however, unless the

2
Although Weimerskirch v. Commissioner, 596 F.2d 358 (9th
Cir. 1979), revg. 67 T.C. 672 (1977), dealt specifically with
illegal unreported income, it is now well established that the
Court of Appeals for the Ninth Circuit applies the Weimerskirch
rule in all cases of unreported income where the taxpayer
challenges the Commissioner’s determination on the merits. E.g.,
Edwards v. Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982) (in
that case, involving unreported income from an income-generating
auto repair business owned by the taxpayer, the court stated:
“We note, however, that the Commissioner’s assertion of
deficiencies are presumptively correct once some substantive
evidence is introduced demonstrating that the taxpayer received
unreported income. Weimerskirch v. Commissioner, 596 F.2d 358,
360 (9th Cir. 1979).”); Petzoldt v. Commissioner, 92 T.C. 661,
689 (1989) (“the Ninth Circuit requires that respondent come
(continued...)
 - 7 -

taxpayer challenges the Commissioner’s determination of a

deficiency in tax on the merits, the Commissioner need not

provide any such foundation. See Roat v. Commissioner, 847 F.2d

1379, 1383 (9th Cir. 1988) (sustaining order of Tax Court

dismissing taxpayers’ case for failure to prosecute). While we

believe that petitioner has forgone a challenge to the merits of

respondent’s determinations of deficiencies, see id. (no

challenge to merits of the Commissioner’s deficiency

determination where taxpayer did not argue merits, did not seek

information about merits, and relied solely on motion to dismiss

for lack of jurisdiction), we need not decide that issue because,

in apparent anticipation of the application of the Weimerskirch

line of cases, respondent has provided a satisfactory evidentiary

foundation linking petitioner to both employment-type and

investment-type income-producing activities during the years in

question. That foundation consists of certified Internal Revenue

Service (IRS) records, payer-provided information returns (such

as IRS Forms 1099-DIV and W-2),3 and bank records (including

2
(...continued)
forward with substantive evidence establishing a ‘minimal
evidentiary foundation’ in all cases involving the receipt of
unreported income to preserve the statutory notice's presumption
of correctness.”). Although appeal of this case may lie to a
Court of Appeals other than the Court of Appeals for the Ninth
Circuit, Weimerskirch imposes as high a hurdle as respondent may
face.
3
Though respondent has provided verification of some of
the items of income reported in those information returns,
(continued...)
 - 8 -

copies of paychecks endorsed and deposited by petitioner), as

well as declarations under penalties of perjury and supporting

business records from petitioner’s previous employers and other

payers. Respondent has met any burden that he has under the

Weimerskirch line of cases, and we are left with petitioner’s

having failed to substantiate his assignment of error, which, in

the usual case, would allow us to decide the issue in

respondent’s favor. See, e.g., Funk v. Commissioner, 123 T.C.

213, 215-216 (2004).

That does not conclude the matter of the deficiencies,

however, since in his posttrial memorandum, respondent states

that documents subpoenaed for purposes of the trial show that

petitioner wrote checks in 1998 totaling $25,000 that would give

him bases to be applied against amounts realized in 1999 on the

liquidation of certain investment accounts. Respondent concedes

that, as a consequence of that application of basis, respondent

must reduce his adjustment on account of capital gain income for

1999 by an equal amount. Respondent asks us to sustain his

determination of a deficiency for 1999, nevertheless, on the

3
(...continued)
respondent had no obligation to do so, since petitioner has
asserted no reasonable dispute with respect to those items nor
has petitioner fully cooperated with respondent. See sec.
6201(d) (describing the Secretary’s burden to produce reasonable
and probative information in addition to the information reported
in the information returns when the taxpayer asserts a reasonable
dispute with that information and has cooperated with the
Secretary).
 - 9 -

ground that copies of petitioner’s bank records obtained by

subpoena from petitioner’s bank, Bank of America NA, show

deposits in 1999 of $31,007.15 and $3,084.51, from Icon Trading,

Inc., and with respect to petitioner’s golf instruction business,

Count Yogi Co., respectively. Respondent did not take those

deposits into account in his adjustments to petitioner’s income

for 1999. Respondent correctly argues that, nevertheless, bank

deposits are prima facie evidence of income. Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986); see also Factor v.

Commissioner, 281 F.2d 100, 116, n.28 (9th Cir. 1960), affg. T.C.

Memo. 1958-94. Respondent asks for no increased deficiency for

1999 but only that we sustain the deficiency of $3,299 that he

determined. Petitioner made no objection to the Bank of America

NA records on the grounds of relevance when they were proffered

by respondent, and we interpret that failure as implying

petitioner’s consent to try the issue of his unreported income

from bank deposits described in those records. See Rule

41(b)(1). We find that, for 1999, petitioner failed to report

items of income of $31,007.15 and $3,084.51, as evidenced by

respondent’s exhibits showing bank deposits in those amounts.

Respondent did not err in determining the deficiencies.

II. Additions to Tax

A. Introduction

Section 6651(a)(1) provides for an addition to tax in the

event a taxpayer fails to file a timely return (determined with
 - 10 -

regard to any extension of time for filing) unless it is shown

that such failure is due to reasonable cause and not due to

willful neglect. The amount of the addition is equal to 5

percent of the amount required to be shown as tax on the

delinquent return for each month or fraction thereof during which

the return remains delinquent, up to a maximum addition of 25

percent for returns more than 4 months delinquent.

Section 6654 provides for an addition to tax in the event of

an underpayment of a required installment of individual estimated

tax. Sec. 6654(a) and (b). As relevant to this case, each

required installment of estimated tax is equal to 25 percent of

the “required annual payment”, which in turn is equal to the

lesser of (1) 90 percent of the tax shown on the individual's

return for that year (or, if no return is filed, 90 percent of

his or her tax for such year), or (2) if the individual filed a

return for the immediately preceding taxable year, 100 percent of

the tax shown on that return. Sec. 6654(d)(1)(A) and (B)(i) and

(ii). The due dates of the required installments for a calendar

taxable year are April 15, June 15, and September 15 of that year

and January 15 of the following year. Sec. 6654(c)(2).

B. Burden of Production

In pertinent part, section 7491(c) provides: “[T]he

Secretary shall have the burden of production in any court

proceeding with respect to the liability of any individual for

any * * * addition to tax”. The Commissioner’s burden of
 - 11 -

production under section 7491(c) is to produce evidence that it

is appropriate to impose the relevant addition to tax. Swain v.

Commissioner, 118 T.C. 358, 363 (2002). Unless the taxpayer puts

the addition to tax into play, however (by assigning error to the

Commissioner’s determination of an addition to tax), the

Commissioner need not produce evidence that the addition to tax

is appropriate, since the taxpayer is deemed to have conceded the

addition to tax. Id.

We can discern from the petition no assignment of error with

respect to the additions to tax other than with respect to their

calculation should we determine deficiencies different from those

respondent determined. Moreover, at the conclusion of the trial,

petitioner’s counsel as much as conceded that, if the Court were

to conclude that respondent had shown sources for the alleged

items of unreported income, the Court should sustain the

determinations of deficiencies and additions to tax. We could,

therefore, without further discussion, sustain the additions to

tax. Respondent, however, has introduced evidence sufficient to

show that it is appropriate to impose both the section 6651(a)(1)

and 6654 additions to tax. We shall sustain the additions to tax

on the basis of the evidence in the record.

C. Discussion

1. Section 6651(a)(1)

Respondent’s evidence shows that petitioner did not file a

Federal income tax return for either 1998 or 1999, and we so
 - 12 -

find. Respondent’s evidence also shows that, for each of those

years, petitioner had sufficient income (above the exemption

amount) that he was required to file a return, and we so find.4

Petitioner’s only defense to the section 6651(a)(1) additions to

tax is that he was not required to file returns because his

income did not exceed the exemption amounts. We have found that,

for each year, petitioner’s income did exceed the year’s

exemption amount. Nor has petitioner introduced any evidence to

show that his mistaken beliefs were reasonable and free from

willful neglect. Petitioner is liable for the section 6651(a)(1)

additions to tax as computed by respondent.

2. Section 6654

Respondent’s evidence shows the following, which we find

accordingly: Petitioner filed a Federal income tax return for

1997 showing a liability of $3,803; he made no return for 1998;

his tax liability for 1998 is $16,067; he made two payments of

estimated tax for 1998, one on June 4, 1998, and the other on

September 24, 1998, each in the amount of $870; $126 was withheld

from his wages in 1998. Since 90 percent of petitioner’s tax

liability for 1998 ($14,460) is greater than his reported tax

liability for 1997 ($3,803), which is $1,937 greater than the sum

4
Sec. 6012(a) requires every individual having gross
income exceeding a certain minimum amount to file an income tax
return. Petitioner’s gross income exceeded the exemption amounts
of $2,700 and $2,750 for 1998 and 1999, respectively. See sec.
151(d); Rev. Proc. 97-57, sec. 3.08, 1997-2 C.B. 584, 586; Rev.
Proc. 98-61, sec. 3.08, 1998-2 C.B. 811, 815.
 - 13 -

of his estimated tax payments and withholding for 1998 ($1,866),

respondent has shown that it is appropriate to determine a

section 6654 addition to tax with respect to petitioner for 1998,

and we so find.5

With respect to 1999, respondent’s evidence also shows the

following, which we find accordingly: Petitioner filed no return

for 1998; his tax liability for 1999 is $3,299; he made no

payments of estimated tax for 1999; he had no withholdings in

1999. Where, as here, no return is filed for the immediately

preceding taxable year, the estimated tax payment is computed as

90 percent of the taxpayer’s tax for the year at issue. Since 90

percent of petitioner’s tax liability for 1999 is $2,969, and

petitioner had no estimated tax payments or withholding for 1999,

respondent has shown that it is appropriate to determine a

section 6654 addition to tax with respect to petitioner for 1999,

and we so find.

III. Penalty

Section 6673(a)(1) provides that the Court may impose a

penalty not in excess of $25,000 where, among other things, a

5
We question whether, in computing petitioner’s sec. 6654
addition to tax for 1998, respondent determined that addition to
tax on the proper basis. From the notice of deficiency, it
appears to the Court that respondent ignored the computation for
the previous year’s tax liability, which was the lesser of the
two computations. However, petitioner has not challenged that
computation, nor has respondent justified it. We assume that, in
the Rule 155 computation, the parties will compute the correct
amount of the addition to tax.
 - 14 -

taxpayer takes positions that are frivolous or groundless or has

instituted or maintained proceedings primarily for delay. A

taxpayer’s position is frivolous if it is contrary to established

law and unsupported by a reasoned, colorable argument for change

in the law. Takaba v. Commissioner, 119 T.C. 285, 287 (2002).

The inquiry is objective; if a person should have known that his

position is groundless, a court may and should impose sanctions.

Id. Furthermore, a taxpayer’s failure to provide the

Commissioner with requested information and his failure to offer

evidence at trial pertaining to the substantive issues raised in

the notice of deficiency are evidence that a suit in this Court

was instituted primarily for delay. Stamos v. Commissioner, 95

T.C. 624, 638 (1990), affd. without published opinion 956 F.2d

1168 (9th Cir. 1992).

Respondent asks that we impose a penalty on petitioner

pursuant to section 6673(a)(1). Respondent argues that, by his

conduct, it is evident that petitioner instituted and maintained

these proceedings for delay, as well as to advance frivolous

arguments. Respondent asks us to consider the following.

Petitioner never substantively addressed the pertinent issues in

this case, which relate to the correct determination of tax and

various additions to tax for the years in issue. In

contravention of the Court’s Rules on assigning errors with

specificity, petitioner’s petition and amended petition averred

no particular facts with respect to respondent’s numerous
 - 15 -

adjustments. Petitioner was ordered to show cause why the

proposed facts in the stipulation should not be admitted as true,

whereupon petitioner made directly contradictory statements under

oath. Petitioner asserted a jurisdictional challenge to the

notices of deficiency, premised on the shopworn argument that the

notices were void because they were not issued by an authorized

individual with either statutory or delegated authority to do so.

That argument is without merit, see Nestor v. Commissioner, 118

T.C. 162, 165 (2002), and we denied that motion.

Petitioner’s intention to institute and maintain this

proceeding for delay is also indicated by his failure to file a

pretrial memorandum, as required by the Court’s pretrial order.

Moreover, at the trial, the Court ordered petitioner to file a

memorandum in support of his objections to two of respondent’s

exhibits, but petitioner failed to do so.

In sum, petitioner failed to file Federal income tax returns

for the years at issue and offered no credible justification for

that failure. He instituted a proceeding in this Court without

assigning any specific errors to respondent’s determinations. He

failed to cooperate with respondent in preparing this case for

trial, and essentially failed to produce any evidence whatsoever

to justify his blanket rejection of respondent’s deficiency

determinations. We interpret those actions as evidence of his

intent to delay this proceeding; he has also advanced frivolous

arguments. He has caused both the Court and respondent to expend
 - 16 -

valuable time and resources to respond to his groundless filings

and other actions, and to conduct a trial at which he failed to

present any evidence whatsoever to prove that respondent’s

deficiency determinations were in error. We will grant

respondent’s motion for sanctions, and we will require petitioner

to pay a penalty to the United States of $2,500.

IV. Conclusion

To reflect the foregoing,

An appropriate order will

be issued, and decision will

be entered under Rule 155.