T.C. Memo. 2010-62
UNITED STATES TAX COURT
C. GARY EVANS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26655-06. Filed March 30, 2010.
C. Gary Evans, pro se.
Jennifer K. Martwick, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined a deficiency of
$1,211,748 in petitioner’s 2002 Federal income tax, a failure to
file addition to tax pursuant to section 6651(a)(1) of $272,643,
a failure to pay addition to tax pursuant to section 6651(a)(2)
in an amount to be computed at a later date, and a failure to pay
estimated tax addition to tax pursuant to section 6654(a) of
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$40,493.1 The following issues remain for decision:2 (1)
Whether respondent may raise the issue of whether petitioner’s
gross income should be increased by bank deposit income of
$178,110, an increase not determined in the notice of deficiency;
(2) whether petitioner’s gross income should be increased by
certain ordinary income of $4,479; (3) whether petitioner’s gross
income should be increased by interest income of $86; (4) whether
petitioner is subject to the failure to file addition to tax
pursuant to section 6651(a)(1); (5) whether petitioner is liable
for the failure to pay addition to tax pursuant to section
6651(a)(2); and (6) whether petitioner is liable for the failure
to pay estimated tax addition to tax pursuant to section 6654.
FINDINGS OF FACT
Petitioner refused to stipulate any of the facts. On
October 14, 2008, respondent filed a motion pursuant to Rule
91(f) requesting the Court to order petitioner to show cause why
the facts and evidence set forth in respondent’s proposed
stipulation of facts should not be deemed established. On
1
Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code, as amended, for the
year in issue. Amounts are rounded to the nearest dollar.
2
On the basis of a settlement by the parties, respondent has
conceded the determination in the notice of deficiency that
petitioner’s gross income should be increased by income from the
sale of stocks and bonds. Respondent also has conceded that
petitioner is entitled to a capital loss of $3,000 pursuant to
sec. 1211(b).
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October 17, 2008, the Court ordered petitioner to show cause why
respondent’s proposed stipulation of facts and evidence should
not be deemed established. Petitioner failed to file a timely
response. On November 20, 2008, we granted respondent’s motion
and deemed established respondent’s proposed stipulation of facts
and evidence.3 The facts deemed established by the Court’s order
are incorporated in this opinion by reference and are found
accordingly.
At the time the petition was filed, petitioner resided in
Georgia. Petitioner is a certified public accountant and worked
for Coopers & Lybrand for 4 years.
Petitioner did not file any Federal income tax returns after
1994 and did not file a Federal income tax return for his 2002
tax year.
Petitioner did not make any estimated tax payments, and no
Federal income taxes were withheld from his wages for his 2002
tax year.
During 2002, petitioner received from Hickory Valley
Retirement, Inc., ordinary flowthrough income of $4,533 and
interest income of $86.
3
Petitioner attempted to file a response to respondent’s
Rule 91(f) motion after the time specified in the Court’s Oct.
17, 2008, order. Petitioner’s motion was not filed because he
did not seek leave to file his response late. Even if he had
filed a timely response, petitioner failed to show why
respondent’s facts and evidence should not be deemed established.
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For his 2002 tax year petitioner is entitled to an ordinary
flowthrough loss of $54 from Decubitus, Inc.
During 2002, petitioner deposited $210,304 into his SunTrust
Bank account. Of that $210,304, at least $178,110 is includable
in petitioner’s gross income.4 Included within that $178,110 is
rental income from two properties. The first property, at 6420
Roswell Rd. N.E., Atlanta, Georgia, was owned by petitioner
during 2002 and rented for annual rent of $106,726 to “Flashers”,
an establishment that operates as a strip club. Petitioner
deposited the rent from Flashers into his SunTrust Bank account.
The other property, at 4075 Buford Highway, Atlanta, Georgia, was
owned by petitioner during 2002 and rented for annual rent of
$29,872 to “Follies”, an establishment that operates as a strip
club. Petitioner deposited the rent from Follies into his
SunTrust Bank account.
On September 26, 2006, respondent sent petitioner a notice
of deficiency. In the notice of deficiency respondent determined
a deficiency in petitioner’s Federal income tax on the basis of
his receipt of proceeds of $3,176,465 from the sale of certain
stocks and bonds (stocks and bonds sale issue). Petitioner
timely filed a petition in this Court for redetermination of the
4
While we make the recitations above in conformity with the
deemed stipulations of fact, we consider infra petitioner’s
argument that the amounts deposited in his SunTrust Bank account
may not be included in gross income for his 2002 tax year because
they were not included in the notice of deficiency.
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deficiency. As noted above, the stocks and bonds sale issue was
settled by the parties. However, respondent now asserts a
deficiency in petitioner’s Federal income tax on the basis of
bank deposits of $178,110 made to petitioner’s SunTrust Bank
account (bank deposit issue). The bank deposit issue was first
set forth in respondent’s pretrial memorandum submitted 2 weeks
before January 14, 2008 (first pretrial memorandum), when the
instant case was first set for trial but continued on the
parties’ joint motion and was set forth again in respondent’s
pretrial memorandum submitted for trial on the Court’s December
2, 2008, Atlanta, Georgia, trial session (second pretrial
memorandum). Respondent has not amended his answer.
OPINION
We first address the issue of whether respondent may raise
the bank deposit issue, a new issue not raised in the notice of
deficiency. Petitioner objected at trial to respondent’s raising
of the bank deposit issue because it was not included in the
notice of deficiency. Respondent contends that the bank deposit
issue is properly before the Court and that petitioner was not
prejudiced because he had notice of the bank deposit issue when
the case was originally set for trial on January 14, 2008.
Generally, the Commissioner’s determination of a deficiency
is presumed correct, and the taxpayer has the burden of proving
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it incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933).5
An exception to the general rule exists when the
Commissioner raises a new matter. Rule 142(a); Shea v.
Commissioner, 112 T.C. 183 (1999); Tabrezi v. Commissioner, T.C.
Memo. 2006-61. Generally, the Commissioner has raised a new
matter when the Commissioner “attempts to rely on a basis that is
beyond the scope of the original determination”. Shea v.
Commissioner, supra at 191. In particular, a new matter is
raised when the Commissioner’s new theory “‘either alters the
original deficiency or requires the presentation of different
evidence.’” Id. (quoting Wayne Bolt & Nut Co. v. Commissioner,
93 T.C. 500, 507 (1989)). The Commissioner generally must bear
the burden of proof on a new matter. Rule 142(a); Shea v.
Commissioner, supra at 191.
Respondent’s assertion of the bank deposit issue is a new
matter. Respondent argues that petitioner remains liable for a
portion of the deficiency determined in the notice of deficiency
but that there is a new source for that portion; i.e., the income
from the SunTrust bank deposits of $178,110 rather than the
$3,176,465 of income from petitioner’s sale of stocks and bonds.
The bank deposit issue will require the presentation of different
5
Petitioner does not contend that sec. 7491(a) should apply
in the instant case to shift the burden of proof to respondent,
nor did he establish that it should apply to the instant case.
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evidence than that which would have been required for the stocks
and bonds sale issue. Accordingly, we conclude that the bank
deposit issue is a new matter on which respondent bears the
burden of proof. See Rule 142(a).
We next turn to the issue of whether respondent may raise
the bank deposit issue in this proceeding. Rule 41(b)(2) allows
this Court to accept evidence that is not within the issues
raised by the pleadings and conform the pleadings to that
evidence “freely when justice so requires”, provided that the
objecting party is not prejudiced by its admission. Church of
Scientology v. Commissioner, 83 T.C. 381, 469 (1984), affd. 823
F.2d 1310 (9th Cir. 1987). The facts necessary to decide the
remaining issues were before the Court as of the time petitioner
failed to file a timely response to respondent’s Rule 91(f)
motion as required by the Court’s order. Therefore, the relevant
facts necessary to decide the case were deemed established at
that time. While we did provide petitioner a trial during which
he could have provided further evidence, he did not do so. He
objected merely to the trial of the bank deposit issue at that
time. We believe that justice requires that petitioner not be
allowed to sit on his objection to the bank deposit issue until
after the facts regarding that issue have been established.
Petitioner had ample opportunity to object to the bank deposit
issue in response to the Court’s order requiring him to respond
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to respondent’s Rule 91(f) motion. Furthermore, petitioner had
other occasions to present relevant evidence and to object to the
raising of the bank deposit issue. Petitioner had notice of the
bank deposit issue nearly a year before trial, as the bank
deposit issue was included in respondent’s first pretrial
memorandum. Respondent’s second pretrial memorandum, filed 2
weeks before trial, also included the bank deposit issue. It was
not until trial that petitioner raised his objection to the bank
deposit issue. Accordingly, we conclude that petitioner is not
prejudiced by respondent’s raising of the bank deposit issue. We
deem the pleadings amended to conform to the evidence and
conclude that the bank deposit issue is properly before the
Court. Consequently, on the basis of the record, including the
facts deemed established, we hold that petitioner’s gross income
includes the SunTrust bank deposits of $178,110.
We next decide whether petitioner’s gross income for the tax
year in issue includes ordinary income of $4,479 and interest
income of $86.6 Respondent contends that petitioner earned
ordinary income of $4,533 from Hickory Valley Retirement Inn,
Ltd., that he is entitled to a flowthrough loss of $54 from
Decubitus, Inc., and that he received interest income of $86 from
Hickory Valley Retirement Inn, Ltd. As to the foregoing issues,
6
The burden of proof on these issues remains on petitioner.
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the facts deemed established support respondent’s determinations.
At trial petitioner failed to present any evidence or argument on
those issues. Accordingly, we hold that petitioner’s gross
income includes ordinary income of $4,4797 and interest income of
$86.
We next consider the issue of the failure to file addition
to tax pursuant to section 6651(a)(1). Section 6651(a)(1)
imposes an addition to tax for failure to file a return by the
date prescribed (determined with regard to any extension of time
for filing) unless the taxpayer can establish that such failure
is due to reasonable cause and not due to willful neglect. The
addition to tax is 5 percent of the ultimately determined tax if
the failure to file does not exceed 1 month, with an additional 5
percent per month for each month the failure continues, up to a
maximum of 25 percent. Id. Respondent bears the burden of
production under section 7491(c), and petitioner bears the burden
of proof. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Petitioner is deemed to have admitted that he failed to file
a return for taxable year 2002. Accordingly, respondent has met
his burden of production. Petitioner has failed to meet his
burden of proof as he failed to present any evidence or argument
7
The ordinary income amount of $4,479 includes ordinary
income of $4,533 from Hickory Valley Retirement Inn, Ltd., less a
flowthrough loss of $54 from Decubitus, Inc.
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on the failure to file addition to tax. Consequently, we hold
that petitioner is liable for the failure to file addition to tax
pursuant to section 6651(a)(1) for taxable year 2002.
We next consider the issue of the failure to pay addition to
tax pursuant to section 6651(a)(2). Section 6651(a)(2) provides
for an addition to tax for failure to pay taxes shown on a return
on or before the payment due date. The addition to tax is 0.5
percent per month, with an additional 0.5 percent per month for
each month the failure continues, up to 25 percent. Id. In
instances where the taxpayer fails to file a return, the return
prepared by the Commissioner pursuant to section 6020(b) shall be
treated as the return filed by the taxpayer for the purpose of
calculating the addition to tax pursuant to section 6651(a)(2).
Sec. 6651(g)(2). For a return prepared by the Commissioner to
constitute a section 6020(b) return, it must be subscribed, it
must contain sufficient information from which to compute the
taxpayer’s tax liability, and the return form and any attachments
must purport to be a return. Spurlock v. Commissioner, T.C.
Memo. 2003-124. Respondent bears the burden of production under
section 7491(c), and petitioner bears the burden of proof. See
Higbee v. Commissioner, supra at 446.
The record contains a substitute return for taxable year
2002. The substitute return is subscribed and includes a section
6020(b) certification; Form 4549, Income Tax Examination Changes;
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and Form 886-A, Explanation of Items. Those forms are sufficient
for respondent to compute petitioner’s tax liability for tax year
2002, and respondent has certified that they will be treated as a
return. The facts deemed admitted show that petitioner did not
pay any taxes or have any amounts withheld for tax year 2002.
Because petitioner has not paid the amount shown on the
substitute return, we uphold respondent’s determination of the
failure to pay addition to tax pursuant to section 6651(a)(2).
We next consider the issue of the failure to pay estimated
tax addition to tax pursuant to section 6654(a). Taxpayers are
liable for an addition to tax for failure to pay estimated taxes
where prepayments of tax, either through withholding or by making
estimated quarterly payments during the year, do not equal the
lesser of 90 percent of the tax shown for the current taxable
year or 100 percent of the tax shown for the previous taxable
year. Sec. 6654. An exception applies if the tax due for the
year in issue is less than $1,000, the individual had no tax
liability for the preceding year, or a waiver applies. Sec.
6654(e). The Commissioner bears the burden of production to show
that the taxpayer had an estimated tax payment obligation, which
includes whether a return was filed for the preceding year. Sec.
7491(c); Wheeler v. Commissioner, 127 T.C. 200, 211-212 (2006),
affd. 521 F.3d 1289 (10th Cir. 2008). Petitioner bears the
burden of proof. Higbee v. Commissioner, supra at 446.
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The record shows that petitioner failed to file a return for
taxable year 2001, and he therefore was required to make
estimated payments equal to 90 percent of his tax for taxable
year 2002. See sec. 6654(d)(1)(B). Accordingly, respondent’s
burden of production is satisfied. The facts deemed established
show that petitioner did not pay any taxes for taxable year 2002.
Moreover, petitioner has failed to present any evidence or
argument that an exception applies. Consequently, petitioner has
failed to meet his burden of proof, and we uphold respondent’s
determination of the failure to pay estimated tax addition to
tax.
The Court has considered all other arguments made by the
parties and, to the extent we have not addressed them herein, we
consider them moot, irrelevant, or without merit.
To reflect the foregoing and respondent’s concession,
Decision will be entered
under Rule 155.