T.C. Memo. 2010-143
UNITED STATES TAX COURT
PHILIP JENSEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16800-09. Filed June 28, 2010.
Philip Jensen, pro se.
David M. McCallum, for respondent.
MEMORANDUM OPINION
COHEN, Judge: Respondent determined a deficiency of $35,074
in petitioner’s Federal income tax for 2005 and additions to tax
of $7,891.65 under section 6651(a)(1) for failure to file a
return, $5,962.58 under section 6651(a)(2) for failure to pay
tax, and $1,406.87 under section 6654 for failure to make
estimated tax payments. The issues for decision are whether
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petitioner has shown (1) any errors in the notice of deficiency,
or (2) that he is entitled to any deductions related to his body
shop business. As discussed below, none of the facts have been
stipulated, and the evidence is too sparse for meaningful
findings of fact. Unless otherwise indicated, all section
references are to the Internal Revenue Code in effect for the
year in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
Background
Petitioner resided in Alabama at the time that he filed his
petition. During 2005, petitioner operated a body shop. He
received nonemployee compensation of $109,789 from AWC Carriers,
Inc., during 2005.
Petitioner started his body shop business in 2005. He
purchased equipment and supplies and made payments for services.
He did not, however, maintain records of his purchases of
equipment or other expenses, and he did not report to the
Internal Revenue Service (IRS) any commissions or other payments
to persons providing services to the body shop.
Petitioner failed to file a Federal income tax return for
2005. The IRS prepared a substitute for return under section
6020(b) based on information reported by the payor of income to
petitioner.
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The petition in this case had attached a form containing a
hodgepodge of frivolous, irrelevant, and spurious arguments
common to petitions following a program of tax defiance. See
Sullivan v. Commissioner, T.C. Memo. 2010-138; Cook v.
Commissioner, T.C. Memo. 2010-137. The form sets out a general
denial of tax liability; a claim of various deductions and
exemptions and filing status other than allowed in the statutory
notice; an assertion that the figures used “stem from illegal
immigrants” using the taxpayer’s Social Security number; an
allegation that penalties should be waived because “the Internal
Revenue Code is so complex and confusing”; a claim for credit
“for the illegal telephone excise tax for each year”; a claim of
deductible expenses of tax preparation and advice on filing (even
though no return was filed); and a claimed lack of records
justifying reconstruction and estimates, with a citation of and
quotation from Cohen v. Commissioner, 266 F.2d 5 (9th Cir. 1959),
remanding T.C. Memo. 1957-172. Petitioner requested Columbia,
South Carolina, as the place of trial.
By notice served September 29, 2009, this case was set for
trial in Columbia on March 1, 2010. Attached to the notice
setting case for trial was the Court’s standing pretrial order,
which advises the parties of the requirements for preparation of
cases for trial in this Court, specifically the exchange of
documents and stipulations in accordance with Rule 91.
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Petitioner refused to stipulate facts that should not have
been disputed. Instead, he filed a motion to shift the burden of
proof, reciting the requirements of section 7491(a)(2), although
he had not complied with those requirements. He also filed a
meritless motion for summary judgment, seeking summary
adjudication based on his “affidavit of expense and deductions”.
He served on respondent’s counsel requests for admissions and
otherwise demanded concessions of his claimed deductions and
agreement with the allegations in the form attached to his
petition, including those that clearly have no applicability to
his factual circumstances. His claimed deductions, totaling over
$116,000, were based entirely on estimates and were unsupported
by any reliable substantiation.
At the time of trial, petitioner continued to pursue his
frivolous contentions even though he had been warned that
respondent’s counsel intended to seek a penalty under section
6673. His pretrial memorandum repeated the allegations of the
petition and identified one witness (other than petitioner), but
that witness was not present. The proposed witness was
petitioner’s brother; apparently, the brother was not a person
that petitioner paid to perform services during 2005, and he was
offered only as a person who observed petitioner’s body shop
operation and assisted petitioner in compiling materials and
photographs in 2009. Petitioner sought a continuance, but the
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record made over the 5 months during which the case was set for
trial showed that a continuance was not justified and would not
be productive. Thus it was denied in accordance with the
standing pretrial order and Rule 133.
Petitioner testified that he purchased equipment and
supplies and incurred costs for commissions and outside services
when he started his body shop business in 2005, but his testimony
was based solely on estimates and percentages of the income
received. He did not produce any payment records or receipts or
other reliable evidence of the purchase price paid or the useful
life of any equipment for depreciation purposes or supplies
purchased and consumed during the year. He tendered some
computer printouts of equipment and supplies available for
purchase in 2009 and photographs of his body shop operations
taken in 2009. The tendered materials were not admitted in
evidence but were considered as petitioner’s offer of proof.
Petitioner did not testify as to the amount of any personal
itemized deductions that would exceed the standard deduction.
Although he referred to his wife, he did not provide any
testimony sufficient to determine his correct filing status or
personal exemptions for 2005. (The notice of deficiency applied
rates applicable to single taxpayers. In the absence of a joint
return, petitioner’s married status would have resulted in a
higher tax liability.)
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At the conclusion of the trial, petitioner was told that he
might produce more persuasive evidence to respondent’s counsel
and seek to reopen the record, but he has not done so.
Discussion
This case presents another unfortunate situation where a
taxpayer has pursued arguments and programs provided by an
unreliable source rather than obtaining competent tax advice and
substantiating his deductions. He has thus forgone otherwise
available tax benefits and appropriate deductions. For example,
if petitioner had filed a return for 2005, he might have elected
under section 179 to deduct, rather than depreciate, the cost of
equipment purchased and placed in service that year. His failure
to file a timely return or to meet the other applicable
requirements now precludes that opportunity. See Visin v.
Commissioner, T.C. Memo. 2003-246, affd. 122 Fed. Appx. 363 (9th
Cir. 2005); Verma v. Commissioner, T.C. Memo. 2001-132; Fors v.
Commissioner, T.C. Memo. 1998-158; Starr v. Commissioner, T.C.
Memo. 1995-190, affd. without published opinion 99 F.3d 1146 (9th
Cir. 1996). His failure to show the cost and useful life of any
equipment purchased and placed in service in 2005 has precluded
an allowance for depreciation.
Respondent presented evidence of petitioner’s receipt of
nonemployee compensation from AWC Carriers, Inc. That evidence
was admitted under rules 803(6) and 902(11) of the Federal Rules
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of Evidence. Petitioner has not raised a reasonable dispute with
respect to the income included in the notice of deficiency for
2005, and he has implicitly admitted receipt of that income by
claiming expenses in a specific amount as a percentage of the
income determined. See sec. 6201(d); Parker v. Commissioner, 117
F.3d 785, 787 (5th Cir. 1997). He did not satisfy any of the
criteria under section 7491(a) for shifting the burden of proof
to respondent as to any item of income or deduction. The burden
of proving error in the notice of deficiency thus remains his.
See Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435,
440 (1934); Rockwell v. Commissioner, 512 F.2d 882, 886 (9th Cir.
1975), affg. T.C. Memo. 1972-133.
Petitioner claims that he is entitled to deductions based on
his estimates. He has not provided any explanation or excuse for
his failure to maintain and produce records of actual
expenditures. His estimates are not permissible reconstructions
and are not based on any other evidence. The items identified by
petitioner are not uncommon, and he may well have incurred
expenses in the categories that he identifies. He has not,
however, provided anything more than speculation as to the actual
amounts spent during 2005.
When a taxpayer establishes that he has incurred a
deductible expense but is unable to substantiate the exact
amount, we are, in some circumstances, permitted to estimate the
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deductible amount. See Cohan v. Commissioner, 39 F.2d 540, 543-
544 (2d Cir. 1930). We can estimate the amount of the deductible
expense, however, only when the taxpayer provides evidence
sufficient to establish a rational basis upon which the estimate
can be made. See Vanicek v. Commissioner, 85 T.C. 731, 743
(1985). Petitioner’s pursuit of frivolous arguments undermines
his credibility and the reliability of generalized claims. We
are confident that, if he had cooperated with the IRS, some
deductions would have been conceded on the likelihood that
expenses had been incurred. Cf., e.g., Sullivan v. Commissioner,
T.C. Memo. 2010-138. When a case is tried, however, we apply the
rules regarding maintenance of records, substantiation of
deductions, and burden and adequacy of proof. We also determine
admissibility of proof under the Federal Rules of Evidence. See
sec. 7453.
Petitioner’s photographs of items in his shop in 2009 do not
explain equipment purchased and placed in service in 2005, and
his testimony does not cure that defect. He did not even recall
when in 2005 he commenced his business. Although, for example,
we do not doubt that petitioner purchased and consumed paint in
operating a body shop, we have no way of determining the number
of gallons purchased and consumed or the prices paid in 2005.
If, as he claims, petitioner incurred office expenses, those
expenses should have been reflected in records of his income and
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expenditures. He might have secured bank records or copies of
utility bills and other receipts from the providers of services,
but he failed to do so. He has not suggested any tenable
explanation for the absence of reliable evidence. We have
considered the entire record and petitioner’s offer of proof, and
we see no rational basis for estimating his deductible expenses.
Under section 7491(c), respondent has the burden of
production with respect to the additions to tax. Respondent
produced official records reflecting petitioner’s failure to file
a return for 2005 and the preparation of a substitute for return
under section 6020(b). These records were received in evidence
pursuant to rules 803(8) and (10) and 902(1) and (4) of the
Federal Rules of Evidence. Respondent has satisfied the burden
of production with respect to the additions to tax under section
6651(a)(1) and (2). See, e.g., Higbee v. Commissioner, 116 T.C.
438, 447-448 (2001). Petitioner has not shown reasonable cause
for his failure to file the return. When asked for his reason,
he declined to answer, citing the Fifth Amendment. Those
additions to tax will be sustained. Respondent did not, however,
present adequate information concerning petitioner’s liability
for 2004 or otherwise satisfy the burden of showing petitioner’s
obligation to make estimated tax payments during 2005. See
Wheeler v. Commissioner, 127 T.C. 200, 210-212 (2006), affd. 521
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F.3d 1289 (10th Cir. 2008). The addition to tax under section
6654, therefore, will not be sustained.
Respondent has moved for a penalty under section 6673 on
the grounds that petitioner instituted these proceedings
primarily for delay and/or because petitioner’s position is
frivolous or groundless. Petitioner chose an erroneous course of
action rather than competent tax advice, and he ignored the
warnings of respondent and the rulings of the Court. As a
result, he has been a victim of his own folly. He asserts that
he has not failed to file returns before or after the single year
in issue. We have decided not to impose a penalty, but we
caution petitioner that a penalty in an amount not in excess of
$25,000 may be awarded if he pursues such a misguided course in
the future.
For the reasons explained above,
Decision will be entered
for respondent except for the
addition to tax under section
6654.