T.C. Memo. 2010-229
UNITED STATES TAX COURT
THOMAS F. HALE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17754-08. Filed October 20, 2010.
Thomas F. Hale, pro se.
R. Craig Schneider, for respondent.
MEMORANDUM OPINION
HALPERN, Judge: By notice of deficiency (the notice),
respondent has determined deficiencies in, and accuracy-related
penalties with respect to, petitioner’s Federal income tax as
follows:
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Penalty
Year Deficiency Sec. 6662(a)
2003 $17,994 $3,599
2004 19,240 3,848
2005 23,216 3,568
The issues for decision are whether, for those years,
petitioner: (1) Underreported his gross income; (2) overstated
his deductions; and (3) is liable for the accuracy-related
penalties.
Unless otherwise stated, section references are to the
Internal Revenue Code in effect for the years in issue, and Rule
references are to the Tax Court Rules of Practice and Procedure.
We round all amounts to the nearest dollar. Petitioner bears the
burden of proof. See Rule 142(a)(1).1
Background
Some facts are stipulated and are so found. The stipulation
of facts, with accompanying exhibits, is incorporated herein by
this reference.
Petitioner resided in Idaho at the time he filed the
petition (and the amended petition) in this case.
1
Petitioner has not raised the issue of sec. 7491(a), which
shifts the burden of proof to the Commissioner in certain
situations. We conclude that sec. 7491(a) does not apply because
petitioner has not produced any evidence that he has satisfied
the preconditions for its application.
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During the years in issue, petitioner was a European history
professor at Idaho State University, from which he received
wages; was an attorney operating a legal clinic for low-income
clients, from whom he received fees; and he owned three rental
properties, for which he received rents. During 2005, he
received interest income.
Petitioner filed Federal income tax returns for the years in
issue, reporting tax liabilities of $76, zero, and zero for those
years, respectively. Respondent examined those returns and
determined a deficiency in tax for each year principally on the
grounds that petitioner had underreported his taxable income by
omitting items of business and rental income and by claiming
deductions for business and rental expenses that he could not
substantiate. Respondent also determined a section 6662(a)
accuracy-related penalty for each year, asserting that petitioner
had underpayments “attributable to substantial [understatements]
of income tax” and had shown neither reasonable cause for the
underpayments nor that he acted in good faith.
Petitioner assigned error to respondent’s disallowance of
the claimed deductions, arguing that he had offered canceled
checks, receipts, and invoices in support of those deductions.
Although petitioner failed in the petition or the amended
petition (without distinction, petition) to assign error to
respondent’s adjustments increasing his gross income, he claimed
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at trial that he accurately reported all of his income, and we
shall treat that issue as if raised in the petition. See Rule
41(b)(1). The section 6662(a) penalty is also before us.
At trial, petitioner introduced into evidence approximately
317 pages of uncategorized photocopies of receipts, canceled
checks, invoices, and similar documents. He also offered copies
of Federal and State tax returns that he had submitted to
respondent during respondent’s examination. He made no attempt
to tie that evidence to respondent’s adjustments underlying the
deficiencies in question. At the conclusion of the trial, we set
a schedule for briefing and provided petitioner with detailed
instructions as to the form and content of briefs, directing him
to Rule 151(e), which addresses that subject. In particular, we
cautioned him to set forth in response to each adjustment made by
respondent the facts in evidence that he believed supported his
claim that respondent erred in making that adjustment.
Petitioner failed to file any brief.
Discussion
I. Deficiencies in Tax
We can dispose summarily of petitioner’s assignment of error
to respondent’s determinations of deficiencies in tax. We have
no question of substantive tax law before us; we have only
factual questions of whether petitioner failed to report all of
his items of gross income and can substantiate his deductions.
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As stated, petitioner bears the burden of proof, which he must
carry by a preponderance of the evidence.2 See Merkel v.
2
This case involves unreported income, and barring
stipulation to the contrary the venue for appeal is the Court of
Appeals for the Ninth Circuit. See sec. 7482(b)(1)(A), (2). We
are therefore bound by a line of cases of the Court of Appeals
for the Ninth Circuit beginning with Weimerskirch v.
Commissioner, 596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672
(1977), 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). E.g., Rodriguez v. Commissioner, T.C. Memo.
2009-92. The general rule established by that line of cases is
that, for the Commissioner to prevail in a case involving
unreported income, there must be some evidentiary foundation
linking the taxpayer with the alleged income-producing activity.
See Weimerskirch v. Commissioner, supra at 362. Although
Weimerskirch 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) (stating, in a
case involving unreported income from an income-generating auto
repair business owned by the taxpayer: “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 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”). At trial, petitioner testified that, for each
year in issue, he received wages from Idaho State University,
fees for his legal representation of low-income clients, and
rents from his rental properties. He reported some interest
income on his 2005 Federal income tax return. Receipts of the
types enumerated are items of gross income, see sec. 61(a), and
the omission of receipts of those types forms the basis for
respondent’s adjustments increasing petitioner’s gross income.
Respondent has, therefore, met his burden of showing sources for
his adjustments increasing petitioner’s gross income, and the
burden of proof is on petitioner.
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Commissioner, 109 T.C. 463, 476 (1997), affd. 192 F.3d 844 (9th
Cir. 1999). “A tax return is not evidence of the truth of the
facts stated in it.” Taylor v. Commissioner, T.C. Memo. 2009-235
(citing Lawinger v. Commissioner, 103 T.C. 428, 438 (1994)). In
support of his claim that his only income was what he reported on
his return and he has adequately substantiated all of his
deductions, petitioner offers us what amounts in effect to a
shoebox full of papers. Petitioner has ignored our specific
instructions that he link his evidence to respondent’s
adjustments. We need not (and shall not) undertake the task of
sorting through the voluminous evidence petitioner has provided
in an attempt to see what is, and what is not, adequate
substantiation of the items on petitioner’s returns.3 Petitioner
has failed to carry his burden of proving that respondent erred
in determining the deficiencies in issue. See Patterson v.
Commissioner, T.C. Memo. 1979-362 (in determining that the
taxpayer failed to carry his burden of proving trade or business
items, we stated: “Petitioner has chosen to rely on what may be
termed the ‘shoebox method’ of attaching photocopies of numerous
cash register tapes and of similar bits of paper to his returns,
3
Petitioner offered approximately 317 uncategorized and
unorganized pages of evidence, consisting of: 394 meal and
travel receipts; 51 invoices listing rental expenses; a 15-page
spreadsheet with 493 entries of advertising purchases; 59 pages
of respondent’s handwritten notes as to already allowed expenses;
and a Deed of Gift.
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without making any effort on the returns or on brief, and only a
slight effort in oral testimony, to link any item to a deductible
trade or business expense transaction.”).
II. Accuracy-Related Penalty
Section 6662 imposes a penalty equal to 20 percent of the
portion of any underpayment which is attributable to, among other
things, a substantial understatement of income tax. Sec. 6662(a)
and (b)(2). An understatement of income tax is deemed substantial
if it exceeds the greater of: (1) 10 percent of the tax required
to be shown on the return for the taxable year, or (2) $5,000.
Sec. 6662(d)(1)(A). For those purposes, the amount of an
understatement is reduced to the extent it is attributable to a
position: (1) For which there is substantial authority, or (2)
which the taxpayer adequately disclosed on his return and for
which there is a reasonable basis. Sec. 6662(d)(2)(B). In
addition, the section 6662 penalty does not apply to the extent
the taxpayer can show that there was reasonable cause for the
underpayment and that he acted in good faith with respect thereto.
Sec. 6664(c)(1).
Giving effect to respondent’s adjustments in the notice,
petitioner’s underpayments are $17,994, $19,240, and $17,841 for
2003, 2004, and 2005, respectively.4 The taxes required to be
4
Taking into account an understatement of prepayment credits
of $5,375 for 2005.
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shown on petitioner’s returns were $18,070, $19,240, and $23,216
for those years, respectively. Since petitioner’s understatements
exceed 10 percent of the tax required to be shown on the returns--
$1,807 in 2003, $1,924 in 2004, and $2,322 in 2005--those
understatements are substantial within the meaning of section
6662(d)(1)(A).
Respondent bears the burden of production with respect to the
section 6662(a) penalty. See sec. 7491(c). We have previously
stated that the “burden imposed by section 7491(c) is only to come
forward with evidence regarding the appropriateness of applying a
particular addition to tax or penalty to the taxpayer.” Good v.
Commissioner, T.C. Memo. 2008-245. Respondent has satisfied his
burden of production. Nevertheless, the accuracy-related penalty
specified by section 6662(a) is not imposed with respect to any
portion of the underpayment as to which the taxpayer has acted
with reasonable cause and good faith. Sec. 6664(c)(1). The
taxpayer bears the burden of proving his entitlement to section
6664(c)(1) relief. Higbee v. Commissioner, 116 T.C. 438, 446
(2001). Petitioner did not at trial specifically address the
section 6662 penalty, and our examination of the evidence before
us fails to demonstrate that petitioner acted with reasonable
cause and good faith. Petitioner has failed to carry his burden
of showing his entitlement to any relief from the penalty, and we
shall sustain it.
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III. Conclusion
For the foregoing reasons,
Decision will be entered
for respondent.