Gleason v. Comm'r

T.C. Memo. 2011-154

UNITED STATES TAX COURT

RICHARD H. GLEASON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

LORI A. GLEASON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 980-09, 1043-09. Filed June 29, 2011.

R determined deficiencies in income tax and additions
to tax under secs. 6651(a)(1), (2), and (3) and 6654(a),
I.R.C., for Ps’ 2001, 2002, and 2003 tax years that were
based on R’s determination that Ps failed to report taxable
income. Ps argue that they did not receive the taxable
income as determined by R. P-W further argues that to the
extent there was unreported taxable income, it was P-H’s
sole and separate property, not community property.

Held: Ps received taxable income in 2001, 2002, and
2003 which they failed to report. The unreported
taxable income is community property, not P-H’s sole and
separate property.

Held, further, Ps are subject to the additions to tax
to the extent redetermined herein.
 - 2 -

Richard H. Gleason and Lori A. Gleason, pro sese.

Kimberly A. Santos and Kathryn A. Meyer, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: These consolidated cases are before the

Court on petitions for redetermination of deficiencies and

additions to tax determined by respondent for petitioners’ 2001,

2002, and 2003 tax years. After concessions by the parties,1 the

issues for decision are:

(1) Whether respondent is barred from assessing income tax

deficiencies against petitioner Richard Gleason for his 2002 and

2003 tax years;

(2) whether petitioners received unreported taxable income

during their 2001, 2002, and 2003 tax years;

1
The parties agree that: (1) The wage income earned by and
taxable to petitioner Lori Gleason in the 2001 and 2003 tax years
was $3,320 and $11,635, respectively, and was her sole and
separate property none of which is taxable to Richard Gleason as
originally determined by respondent; (2) petitioner Richard
Gleason is not obligated to report $8,304 of alleged cancellation
of debt income for the 2003 tax year; (3) Mrs. Gleason is not
obligated to report $4,152 of alleged cancellation of debt income
for the 2003 tax year; (4) Mrs. Gleason is not obligated to
report interest income for the 2002 and 2003 tax years of $8.50
and $14, respectively; (5) petitioners are entitled to married
filing separate filing status for all tax years at issue; and (6)
Mrs. Gleason is entitled to the two dependency exemptions for the
couple’s two children.
 - 3 -

(3) if petitioners received unreported taxable income during

their 2001, 2002, and 2003 tax years, whether this income was Mr.

Gleason’s sole and separate property or community property;

(4) whether petitioners are liable for additions to tax

under section 6651(a)(1) for failure to file their 2001, 2002,

and 2003 tax returns;2

(5) whether Mr. Gleason is liable for additions to tax under

section 6651(a)(2) for failure to pay his 2001, 2002, and 2003

taxes;

(6) whether Mrs. Gleason is liable for additions to tax

under either section 6651(a)(2) or (3) for failure to pay her

2001, 2002, and 2003 taxes;

(7) whether Mr. Gleason is liable for additions to tax under

section 6654(a) for failure to make estimated tax payments for

his 2001, 2002, and 2003 tax years; and

(8) whether Mrs. Gleason is liable for additions to tax

under section 6654(a) for failure to make estimated tax payments

for her 2001 and 2003 tax years.

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulations of

the parties, with accompanying exhibits, are incorporated herein

2
All section references are to the Internal Revenue Code of
1986, as amended and in effect for the years at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
 - 4 -

by this reference. Mr. and Mrs. Gleason were married in 1975 and

since then have resided at all times in California, a community

property State.

1. Gleason Supply

The major issues in this case stem from petitioners’

business, Gleason Supply, and Mrs. Gleason’s involvement in

Gleason Supply. In 1983 Mr. Gleason applied to be a Mac Tools,

Inc. (Mac Tools) distributor. Mac Tools distributors buy tools

from Mac Tools at a wholesale distributor rate and then have the

exclusive right to sell the tools to third-party retailers

located in a designated distributorship territory. Mac Tools

establishes suggested retail prices for its tools, and on the

basis of these suggested retail prices, distributors make an

average profit margin of 37 percent.

Mac Tools requires distributors to meet minimum purchase

amounts each month or risk termination of their distributorship

contract. Mac Tools distributors are independent contractors,

not employees, and Mac Tools does not issue tax information forms

such as Form 1099 to its distributors.

Both Mr. and Mrs. Gleason signed the Mac Tools application,

although Mrs. Gleason signed only that part of the application

that gave Mac Tools permission to perform a credit check on her

and Mr. Gleason. Mac Tools approved the application and Mr.

Gleason began operating a Mac Tools distributorship in 1984 under
 - 5 -

the name Gleason Supply Company (Gleason Supply) and with a

distributorship number of 29427.3

Mr. Gleason took out a second mortgage of $17,000 on the

Gleasons’ home to help finance the startup of Gleason Supply Co.

Mr. Gleason paid for initial inventory with checks written on the

couple’s joint account at Security Pacific National Bank. Mr.

Gleason listed the Gleasons’ home address as the address of

Gleason Supply and Mac Tools sent both inventory and mail to the

Gleasons’ home. Certified mail for Gleason Supply came to the

Gleasons’ home, and Mrs. Gleason often signed on behalf of

Gleason Supply. Mrs. Gleason endorsed checks made out to Gleason

Supply; and while she acknowledged that she dealt with Gleason

Supply up until at least 1997, there is compelling evidence that

she helped with Gleason Supply even after 1997.4

Because of consistently low purchase volume, Mac Tools

terminated Gleason Supply’s distributorship contract effective

April 28, 2002. The Gleasons did not, nor were they required to,

3
Gleason Supply Co. was listed on the Mac Tools
distributorship application as the name Mr. Gleason intended to
use. Although Mr. Gleason used other names including Mac Tools
and Richard Gleason Mac Tools, for ease of reference and to
distinguish between Mac Tools, Inc., and the distributorship
operated by Mr. Gleason, we shall refer to Mr. Gleason’s
distributorship as Gleason Supply.
4
After 1997 Mrs. Gleason endorsed checks made out to Gleason
Supply and signed certified mail on behalf of Gleason Supply, and
customers wrote checks to “Lori Gleason” for their purchases from
Gleason Supply.
 - 6 -

return any of the tools they had purchased before termination.

In fact, the Gleasons continued to operate Gleason Supply and

sell Mac Tools for the remainder of 2002 and into 2003.

2. Bank of America Joint Account

In 1996, using a false taxpayer identification number of

“XXX-XX-XXXX”, Mr. Gleason opened a joint bank account at Bank of

America (BA joint account) which remained open during the years

in issue.

In addition to the BA joint account, Mrs. Gleason maintained

a separate bank account during the years at issue. Mrs. Gleason

received wages from third parties of $3,320 in 2001 and $11,635

in 2003. Mrs. Gleason indicates that she cashed payroll checks

for these amounts.

3. Community Property Agreement

On June 16, 1997, Mr. and Mrs. Gleason executed a legally

valid postnuptial agreement entitled “Community Property

Declaration and Agreement” (community property agreement).

Essentially, the community property agreement provided that each

spouse was divesting himself or herself of any rights he or she

had in any community property acquired by the other spouse’s “own

labor and/or initiative.” The community property agreement

provided that such property was “separate and personal property”

of the spouse who earned it instead of community property. It

also contained provisions for separate bank accounts as well as a
 - 7 -

joint checking account for the purpose of paying Mr. Gleason’s

“marital support obligations” to Mrs. Gleason. There were no

specific provisions regarding income generated from communal

efforts.

After the community property agreement was executed, both

Mr. and Mrs. Gleason continued to have access to the BA joint

account. While Mrs. Gleason argued she had access only for

“spousal and family support”, she deposited numerous checks

written to her, including her 2003 payroll checks, into the BA

joint account and wrote checks, including ones to her church and

an individual who cared for her mother, on the account. After

the community property agreement was executed, Mrs. Gleason

endorsed and deposited checks written to Gleason Supply and

signed for certified mail on behalf of Gleason Supply, and

customers of Gleason Supply wrote checks to Mrs. Gleason for

their purchases from Gleason Supply.

4. Audit and Investigation

Mr. Gleason and Mrs. Gleason are habitual nonfilers. They

failed to timely file tax returns and report their income for all

years at issue. Initially, respondent contacted the Gleasons and

attempted to convince them to file tax returns or explain and

provide records as to why they did not have to file tax returns.

Mr. and Mrs. Gleason did not do so, and the agent initially

assigned to their case prepared substitutes for their tax
 - 8 -

returns, as authorized by section 6020(b), on July 29, 2004, for

Mr. Gleason’s 2002 tax year and on September 20, 2005, for Mr.

Gleason’s 2003 tax year.

A Form 1099, Miscellaneous Income, that Collateral Recovery

Services, an independent debt collection business hired by Mac

Tools, had issued to “Mac Tools Richard Gleason” in 2002 and

provided a copy of to respondent led Revenue Agent Andrew Ortiz

(RA Ortiz), the agent assigned to the Gleasons’ audit and

examination, to the existence of Gleason Supply.5 RA Ortiz

attempted to convince the Gleasons to cooperate, explain Gleason

Supply, and bring in documents showing revenue and expenses.

After the Gleasons continuously failed to respond to RA Ortiz’s

requests to meet with them and prepare tax returns, the Gleasons

were summoned and finally met with RA Ortiz on August 22, 2006.

At the meeting, the Gleasons did not bring any documents and

refused to answer any of RA Ortiz’s questions as to their sources

of income, work, business, or occupation, instead pleading the

Fifth Amendment. While the Gleasons did verify that they were

legally married and resided in Downey, California, they were

otherwise uncooperative, refusing to answer even simple questions

such as what Mrs. Gleason’s maiden name was, what their

5
Respondent transferred Mr. Gleason’s case from the initial
agent assigned to RA Ortiz in November or December 2005. RA
Ortiz eventually audited both Mr. Gleason’s and Mrs. Gleason’s
returns.
 - 9 -

educational background was, whether they rented or owned their

home, and whether they were involved with programs such as the

American Rights Litigators Promotion, We the People, We the

People Sovereignty Pure Trust, or Liberty International.

Because of the Gleasons’ lack of cooperation, RA Ortiz

relied solely on third-party information to reconstruct the

income from Gleason Supply. As elaborated below, RA Ortiz

reconstructed the income from Gleason Supply using two indirect

methods: (1) Bank deposit analysis method and (2) unit and

volume method.

Under the first method used to reconstruct the income from

Gleason Supply, the bank deposit analysis method, RA Ortiz

obtained from Collateral Recovery Services copies of checks

issued to Gleason Supply. Some of these checks had been cashed

and some had been deposited into the BA joint account. RA Ortiz

then issued a summons to Bank of America requesting copies of the

bank statements for any account the Gleasons maintained at Bank

of America. Bank of America provided statements (BA statements)

with regard to the BA joint account.6

6
While there is no evidence of the existence of any bank
accounts during the years in issue other than the BA joint
account and Mrs. Gleason’s separate account, Mr. Gleason’s use of
a fraudulent Social Security number to open the BA joint account
and the Gleasons’ refusal to answer the question of whether they
had any other bank accounts leaves open the possibility that
other bank accounts existed.
 - 10 -

Using the BA statements, RA Ortiz performed a bank deposit

analysis. RA Ortiz calculated the total amount of taxable

deposits and examined the statements to see whether any of the

deposits were nontaxable. He could find no indication that any

of the deposits were nontaxable and although given an opportunity

to do so, the Gleasons failed to provide evidence that any of the

deposits were nontaxable. In total, RA Ortiz determined taxable

income of $23,955.71, $13,634.24, and $34,692.34 for 2001, 2002,

and 2003, respectively.

RA Ortiz’s second indirect method, the unit and volume

method, also reconstructed the income from Gleason Supply. When

a Mac Tools distributor orders products from Mac Tools, the Mac

Tools accounting department uses the distributor’s number to keep

track of what that person has purchased, what has been shipped,

and what has been paid for.

Mac Tools provided RA Ortiz with the payment and sales

history, including the cost and suggested retail price, of items

sent or sold to Gleason Supply during the 2001 and 2002 tax years

up until termination. With this information, RA Ortiz used

retail price to determine gross income and gave credit for the

cost of goods sold for each tool. In total, RA Ortiz determined

taxable income under the unit and volume method of $47,492 and

$11,412 for 2001 and 2002, respectively.
 - 11 -

Combining the income computed under both the bank deposit

analysis and the unit and volume method, RA Ortiz determined

taxable income of $71,447.71, $25,046.24, and $34,692.34 for

2001, 2002, and 2003 respectively.

In response to letters from RA Ortiz regarding her potential

tax liability, on March 23, 2008, respondent received Forms 1040,

U.S. Individual Income Tax Return, for Mrs. Gleason’s 2001, 2002,

and 2003 tax years. The 2001 Form 1040 showed $3,320 of income

and no taxes owed. The 2002 Form 1040 showed no income and no

tax owed. The 2003 Form 1040 showed $11,635 of income and no tax

owed. While respondent argues that he did not accept the Forms

1040, his own Exhibits 22-R through 24-R indicate he did accept

and file the Forms 1040.7 Mr. Gleason never filed a tax return

for any of the years in issue.

7
We acknowledge there is conflicting evidence as to whether
respondent accepted Mrs. Gleason’s Forms 1040. On the Form 4549-
A, Income Tax Discrepancy Adjustments, attached to the notice of
deficiency issued to Mrs. Gleason, respondent, on the line
entitled “Taxable Income Per Return or as Previously Adjusted”,
lists “0.00” for all 3 tax years. In his answer, respondent
admits to receiving the Forms 1040 but “denies that tax returns
for [Mrs. Gleason’s] 2001, 2002, and 2003 [tax years] were duly
filed and accepted by respondent”. However, certified Account
Transcripts prepared by respondent for Mrs. Gleason’s 2001, 2002,
and 2003 tax years indicate returns were filed on Mar. 24, 2008,
for all 3 years. And on Apr. 10, 2008, respondent noted on all
three Account Transcripts that the “IRS can assess tax until 03-
24-2011” thus giving the impression he had accepted the returns
and the statute of limitations on assessment had started running.
We find that the Account Transcripts, certified and prepared
contemporaneously, are presumptively correct and better evidence
than the notice of deficiency. Respondent’s answer is simply a
pleading and not evidence in this case.
 - 12 -

On October 8, 2008, respondent prepared updated examination

reports and substitutes for returns for Mr. Gleason’s 2002 and

2003 tax years as well as one for his 2001 tax year. On the

basis of these substitutes for return, on October 14, 2008,

respondent issued a notice of deficiency to Mr. Gleason showing

the following deficiencies and additions to tax:

Additions to Tax
Tax Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
2001 $12,559 $2,825 $3,139 $501
2002 3,009 677 752 100
2003 4,850 1,091 1,212 125

Also on October 14, 2008, respondent issued a notice of

deficiency to Mrs. Gleason showing the following deficiencies and

additions to tax:

Additions to Tax
Tax Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2)
2001 $5,174 $206 $1,292
2002 963 --- 240
2003 3,935 101 983

Petitioners timely petitioned this Court. Respondent

thereafter conceded issues including that the community property

agreement was valid and pursuant to it, Mr. Gleason is not liable

for one-half of the wage income earned by Mrs. Gleason in the

2001 and 2003 tax years.

On the basis of the community property agreement and

additional alleged facts, in his answers filed on March 19, 2009,
 - 13 -

respondent sought increased deficiencies and additions to tax

against both petitioners. Respondent’s answer to Mr. Gleason’s

petition showed the following asserted deficiencies and additions

to tax:

Additions to Tax
Tax Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
2001 $19,090 $4,294.58 $4,771.75 $762.78
2002 3,780 850.50 945 126.31

2003 5,472 1,231.20 1,368 141.17

Respondent’s answer to Mrs. Gleason’s petition showed the

following asserted deficiencies and additions to tax:

Additions to Tax
Tax Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
2001 $5,628 $1,265.63 $1,406.25 $224.17
2002 963 216.68 240 ---
2003 4,805 1,081.13 1,201.25 123.97

The cases were consolidated for trial, briefing, and opinion

on February 22, 2010. Trial was held on February 23, 2010, in

Los Angeles, California.

OPINION

I. Preliminary Evidentiary Matters

At trial respondent introduced into evidence Exhibits 32-R

and 33-R, which, according to respondent, were Mr. Gleason’s

purchase history from Mac Tools for 2001 and 2002 up until

termination. Respondent used the information in Exhibits 32-R

and 33-R to reconstruct income under the unit and volume method.
 - 14 -

RA Ortiz testified that he called Mac Tools and asked for

Mr. Gleason’s purchase history. A representative of Mac Tools

spoke to RA Ortiz over the telephone and later emailed RA Ortiz,

attaching the requested purchase histories to the email. A copy

of the email was identified as Exhibit 31-R and admitted into

evidence. RA Ortiz testified that Exhibit 32-R was Mr. Gleason’s

purchase history for 2001, that Exhibit 33-R was Mr. Gleason’s

purchase history from January 2002 up until termination, and that

both had been attached to the email. RA Ortiz further testified

that Exhibits 32-R and 33-R were accurate representations of the

information provided by Mac Tools and that the exhibits matched

Exhibit 10-R, Mr. Gleason’s distributorship file, which had been

admitted into evidence.

When respondent moved to have Exhibits 32-R and 33-R

admitted into evidence, Mr. Gleason objected on the grounds of

hearsay and lack of authentication. At trial, this Court,

concerned among other things about the hearsay aspects, the

authentication, and the chain of custody of Exhibits 32-R and 33-

R, reserved ruling on the admissibility of Exhibits 32-R and

33-R.

The rules of evidence applicable to Tax Court proceedings

are the rules applicable in trial without jury in the U.S.

District Court for the District of Columbia. These include the
 - 15 -

Federal Rules of Evidence. See Rule 143(a); Vallone v.

Commissioner, 88 T.C. 794, 796 n.3 (1987).

Rule 901(a) of the Federal Rules of Evidence provides that

the requirement of authentication is satisfied “by evidence

sufficient to support a finding that the matter in question is

what its proponent claims”. The authenticity of Exhibits 32-R

and 33-R is supported by RA Ortiz’s testimony that the exhibits

represent Mr. Gleason’s purchase history from Mac Tools and that

RA Ortiz received the information in Exhibits 32-R and 33-R after

requesting it from Mac Tools and talking to a representative over

the telephone. Their authenticity is also supported by Exhibit

31-R, the email from the Mac Tools representative, which states

that she attached the purchase and payment history for 2001-2002

for “Gleason”. Their authenticity is further supported by

comparing them to Exhibit 10-R. We find that the disputed

documents were properly authenticated. See Ioane v.

Commissioner, T.C. Memo. 2009-68; see also Alexander Dawson, Inc.

v. NLRB, 586 F.2d 1300, 1302 (9th Cir. 1978) (“The context of a

document, when considered with the circumstances surrounding its

discovery, is an adequate basis for a ruling admitting it into

evidence.”).

We now turn to petitioners’ hearsay objection. Rule 801(c)

of the Federal Rules of Evidence defines “Hearsay” as “a

statement, other than one made by the declarant while testifying
 - 16 -

at the trial or hearing, offered in evidence to prove the truth

of the matter asserted.” Hearsay is generally excluded from

evidence unless an exception applies. See Fed. R. Evid. 801 and

802; Snyder v. Commissioner, 93 T.C. 529, 532 (1989).

Exhibits 32-R and 33-R are both spreadsheets containing

columns of numbers; and other than RA Ortiz’s testimony, there is

no indication where these numbers came from. No certification or

affidavit was attached to either exhibit, and neither “Mac Tools”

nor any other identifier is present reflecting authorship of the

spreadsheets. While RA Ortiz testified that a representative of

Mac Tools provided the spreadsheets to him, respondent did not

call the representative to testify. Both Exhibits contain

handwritten notes we presume to have been made by RA Ortiz

although it is unclear. We find that Exhibits 32-R and 33-R are

hearsay; and respondent did not offer an exception to the hearsay

rules, nor can this Court ascertain one.

Respondent argues that in the event this Court finds that

Exhibits 32-R and 33-R are inadmissible hearsay, we should admit

them for the limited purpose of showing the reasonableness of

respondent’s deficiency determinations. For the reasons set

forth infra note 11, we agree and admit Exhibits 32-R and 33-R

for the limited purpose of showing the reasonableness of

respondent’s determination.
 - 17 -

II. Whether Respondent Is Barred From Assessing Deficiencies
Against Mr. Gleason for His 2002 and 2003 Tax Years

Mr. Gleason asserts that respondent may no longer assess any

deficiency for his 2002 or 2003 tax years because the period

during which assessment can be made has expired. We disagree.

The period of limitations on assessment begins to run only after

a taxpayer files a return. See sec. 6501(a). Where, as here,

the taxpayer fails to file any return at all for the years at

issue, “the tax may be assessed, or a proceeding in court for the

collection of such tax may be begun without assessment, at any

time”. Sec. 6501(a), (c)(3); see also Taylor v. Commissioner, 43

F.3d 1483 (10th Cir. 1994), affg. without published opinion T.C.

Memo. 1993-529.

Mr. Gleason argues that the substitutes for returns

prepared by respondent on July 29, 2004, for his 2002 tax year

and on September 20, 2005, for his 2003 tax year constitute the

filing of a return and caused the limitations period for

assessment to begin to run. Mr. Gleason is incorrect.

Substitutes for returns prepared by the Commissioner do “not

start the running of the period of limitations on assessment and

collection.” Sec. 6501(b)(3).

Because Mr. Gleason did not file a return for 2002 or 2003,

the period for assessing deficiencies for these years remains

open.
 - 18 -

III. Whether Petitioners Received Unreported Taxable Income

A. Burden of Proof

As a general rule, the Commissioner’s determination of a

taxpayer’s liability in the notice of deficiency is presumed

correct, and the taxpayer bears the burden of proving that the

determination is improper. See Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933). Pursuant to Rule 142(a)(1), respondent

bears the burden of proof for the increased deficiencies asserted

in his answers to both petitions. See Gefen v. Commissioner, 87

T.C. 1471, 1489 (1986). Because the increased deficiencies were

not based on respondent’s unreported income allegations, Rule

142(a)(1) does not shift the burden of proof to respondent as to

this issue.8

However, in unreported income cases, the presumption of

correctness does not attach unless the Commissioner first

establishes an evidentiary foundation linking the taxpayer to the

alleged income-producing activity.9 See Weimerskirch v.

8
The increased deficiencies were based on respondent’s
allegation that Mr. Gleason received cancellation of indebtedness
income, which respondent has conceded; and that Mrs. Gleason was
entitled to dependency exemptions for the couple’s two children
and that Mrs. Gleason’s income was her sole and separate
property, not community property, neither of which petitioners
dispute.
9
In Tokarski v. Commissioner, 87 T.C. 74, 77 (1986), we held
that “A bank deposit is prima facie evidence of income and
respondent need not prove a likely source of that income.” We
recognize that respondent in part used a bank deposit analysis to
(continued...)
 - 19 -

Commissioner, 596 F.2d 358, 360-362 (9th Cir. 1979), revg. 67

T.C. 672 (1977). The requisite evidentiary foundation is minimal

and need not include direct evidence.10 See Banister v.

Commissioner, T.C. Memo. 2008-201, affd. 107 AFTR 2d 2011-1156,

2011-1 USTC par. 50,257 (9th Cir. 2011); Curtis v. Commissioner,

T.C. Memo. 2001-308, affd. in part and revd. on another issue 73

Fed. Appx. 200 (9th Cir. 2003).

The Ninth Circuit has made it clear * * * that once the
government has carried its initial burden of introducing
some substantive evidence linking the taxpayer with income-
producing activity, the taxpayer has the burden to rebut the
presumption of correctness of respondent’s deficiency
determination by establishing by a preponderance of the
evidence that the deficiency determination is arbitrary or
erroneous. * * *

Petzoldt v. Commissioner, 92 T.C. 661, 689 (1989); see also Hardy

v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), affg. T.C.

9
(...continued)
reconstruct Mr. Gleason’s income. However, because respondent
relied on a second method, the unit and volume method, respondent
must still establish an evidentiary foundation linking Mr.
Gleason with Gleason Supply.
10
Pursuant to sec. 7491(a), the burden of proof on factual
issues that affect the taxpayer’s tax liability may shift to the
Commissioner where the “taxpayer introduces credible evidence
with respect to * * * such issue.” The burden will shift only if
the taxpayer has, inter alia, complied with applicable
substantiation requirements and “cooperated with reasonable
requests by the Secretary for witnesses, information, documents,
meetings, and interviews”. Sec. 7491(a)(2). Petitioners did not
raise the burden of proof issue, did not introduce any credible
evidence, and failed to comply with the substantiation
requirements. Accordingly, sec. 7491(a) does not shift the
burden of proof to respondent.
 - 20 -

Memo. 1997-97; Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir.

1985).

Respondent has established the requisite evidentiary

foundation linking Mr. Gleason with an income-producing activity,

here Gleason Supply. Respondent introduced evidence that Mr.

Gleason operated a distributorship up until termination in April

2002. For the remainder of 2002 and 2003, respondent introduced

evidence including witnesses and canceled checks demonstrating

that Mr. Gleason continued to sell tools even after the

termination of his distributorship.11 Mr. Gleason does not deny

the existence of Gleason Supply. Rather, Mr. Gleason asserts

that the burden of proof is on respondent and that respondent

“failed to sustain its burden of proof”. Mrs. Gleason never

disputed the existence of Gleason Supply; rather, she asserts

that the income from Gleason Supply was Mr. Gleason’s sole and

separate property and not community property.

The Court finds that respondent has established the

requisite minimal evidentiary foundation linking Mr. Gleason with

an income-producing activity for all years in issue and therefore

Mr. Gleason bears the burden of proving the deficiency

11
For purposes of determining whether petitioners received
unreported taxable income, we refer solely to Mr. Gleason. We
reserve the issue pertaining to Mrs. Gleason’s involvement for
later under our discussion of the effect of petitioners’
community property agreement on their taxable income.
 - 21 -

determination arbitrary or erroneous. See Palmer v. IRS, 116

F.3d 1309, 1313 (9th Cir. 1997) (holding that the minimal

evidentiary burden was met after the IRS investigated and

uncovered evidence that the taxpayer had worked for wages in 2

years and was self-employed in others); Banister v. Commissioner,

supra (holding that information from third-party payors that they

had paid the taxpayers was enough to meet the minimal evidentiary

burden even though direct evidence was not in the record).

B. Analysis

Taxpayers bear the responsibility to maintain books and

records that are sufficient to establish their income. See sec.

6001; DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), affd. 959

F.2d 16 (2d Cir. 1992). When a taxpayer fails to keep adequate

books and records, the Commissioner is authorized to determine

the existence and amount of the taxpayer’s income by any method

that clearly reflects income. Sec. 446(b); Mallette Bros.

Constr. Co. v. United States, 695 F.2d 145, 148 (5th Cir. 1983);

Parks v. Commissioner, 94 T.C. 654, 658 (1990); Petzoldt v.

Commissioner, supra at 686-687. Because of Mr. Gleason’s utter

lack of cooperation and refusal to provide any books or records,

respondent was forced to use indirect methods to reconstruct Mr.

Gleason’s taxable income.

The Commissioner is afforded great latitude in determining a

taxpayer’s liability and is entitled to use any reasonable method
 - 22 -

to reconstruct a taxpayer’s income, especially where a taxpayer

files no returns and refuses to cooperate in ascertaining income.

Petzoldt v. Commissioner, supra at 693; Giddio v. Commissioner,

54 T.C. 1530, 1533 (1970); Taylor v. Commissioner, T.C. Memo.

2006-67. The Commissioner’s reconstruction of a taxpayer’s

income need not be exact but must be reasonable in light of all

surrounding facts and circumstances. Petzoldt v. Commissioner,

supra at 687; Schroeder v. Commissioner, 40 T.C. 30, 33 (1963);

A.J. Concrete Pumping, Inc. v. Commissioner, T.C. Memo. 2001-42.

Where the Commissioner’s method of calculating income is

rationally based, courts afford a presumption of correctness to

the Commissioner’s determination, and taxpayers bear the burden

of proving that the Commissioner’s determinations are erroneous.

Palmer v. IRS, supra at 1312.

Mr. Gleason failed to keep books or records, failed to file

tax returns, and refused to cooperate with respondent. While

both of the methods respondent used to reconstruct Mr. Gleason’s

taxable income are established methods accepted by this Court,12

12
“The use of the bank deposit method for computing income
has long been sanctioned by the courts.” Estate of Mason v.
Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d 2 (6th Cir.
1977). “When a taxpayer keeps no books or records, has large
bank deposits, and offers no plausible explanation of such
deposits, the Commissioner is not arbitrary or capricious in
resorting to the bank deposit method for computing income.” Id.
at 657. “A bank deposit is prima facie evidence of income and
respondent need not prove a likely source of that income.”
Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (citing Estate of
(continued...)
 - 23 -

we are here faced with the more difficult question of whether

respondent’s using both methods together and then totaling the

separate results is reasonable. We conclude, on the facts and

circumstances of this particular case, that the use of both

12
(...continued)
Mason v. Commissioner, supra at 656-657). The bank deposit
method of reconstruction assumes that all of the money deposited
into a taxpayer’s account is taxable income unless the taxpayer
can show that the deposits are not taxable; however, the IRS must
take into account any nontaxable items or deductible expenses of
which it has knowledge. Clayton v. Commissioner, 102 T.C. 632,
645-646 (1994); DiLeo v. Commissioner, 96 T.C. 858, 868 (1991),
affd. 959 F.2d 16 (2d Cir. 1992).

The unit and volume method is an established method accepted
by this Court. Key v. Commissioner, T.C. Memo. 2001-166; Park v.
Commissioner, T.C. Memo. 1994-343. Under this method, taxable
income is determined by projecting sales and cost of goods sold
from a business’s purchase history.

As stated above, this Court is admitting Exhibits 32-R and
33-R for the limited purpose of showing the reasonableness of
respondent’s determinations. Respondent used Exhibits 32-R and
33-R to help reconstruct income under the unit and volume method.
Respondent may determine a deficiency on the basis of hearsay or
other inadmissible evidence, and otherwise inadmissible evidence
may be used to show the reasonableness of respondent’s actions.
See Cebollero v. Commissioner, 967 F.2d 986, 993 (4th Cir. 1992),
(citing Jackson v. Commissioner, 73 T.C. 394, 400 (1979)), affg.
T.C. Memo. 1990-618; Avery v. Commissioner, 574 F.2d 467, 468
(9th Cir. 1978) (affirming Tax Court decision allowing
inadmissible statements to support the reasonableness of an IRS
agent’s actions), affg. T.C. Memo. 1976-129; Wapnick v.
Commissioner, T.C. Memo. 2002-45. Additionally, RA Ortiz’s
lengthy and credible testimony as to how he determined taxable
income using the unit and volume method is sufficient to prove
the method’s reasonableness even without Exhibits 32-R and 33-R.
See, e.g., Cebollero v. Commissioner, supra at 993 (admitting
testimony about what a revenue agent was told when she called and
asked for a list of prices from the taxpayer’s supplier for the
purpose of verifying markup figures and showing the
reasonableness of the revenue agent’s method).
 - 24 -

methods together is reasonable and respondent’s determination is

not arbitrary or necessarily per se erroneous.

Respondent maintains that both methods were necessary

“Because of petitioners’ refusal to provide any testimony or

documents regarding any sources of income they had during the tax

years at issue * * * although not exact, * * * [use of both

methods] was necessary to determine all income generated from the

tool selling business”. Mr. Gleason, relying solely on this

Court’s vocal concern at trial that using both methods might lead

to duplication, argues that we should “accept only one method”.

If respondent had used only the bank deposit analysis method

to reconstruct taxable income, cash transactions and checks

deposited into other bank accounts would not have been counted.

If respondent had used only the unit and volume method to

reconstruct taxable income, the inventory Mr. Gleason had on hand

as of January 1, 2001, and which was subsequently sold would not

have been counted.

Mr. Gleason could have timely filed tax returns. Mr.

Gleason could have complied with RA Ortiz’s requests. When

summoned, Mr. Gleason could have cooperated, instead of refusing

to provide any information and continuously pleading the Fifth

Amendment. Mr. Gleason could have introduced evidence at trial

to prove double-counting, yet he did not. “The rule is well

established that the failure of a party to introduce evidence
 - 25 -

within his possession and which, if true, would be favorable to

him, gives rise to the presumption that if produced it would be

unfavorable.”13 Wichita Terminal Elevator Co. v. Commissioner, 6

T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

We acknowledge that stacking both methods may potentially

result in double-counting in the event items bought from Mac

Tools in 2001 or 2002 were subsequently sold to a third party who

paid by check deposited into the BA joint account. However Mr.

Gleason does not point to any instance of duplication.14

We acknowledge the troubles inherent with respondent’s use

of two different methods to reconstruct Mr. Gleason’s income, yet

13
We note that “‘Arithmetic precision was originally and
exclusively in * * * [Mr. Gleason’s] hands, and he had a
statutory duty to provide it...[H]aving defaulted in his duty, he
cannot frustrate the Commissioner’s reasonable attempts by
compelling investigation and recomputation under every means of
income determination.’” Page v. Commissioner, 58 F.3d 1342, 1348
n.6 (8th Cir. 1995) (quoting Rowell v. Commissioner, 884 F.2d
1085, 1088 (8th Cir. 1989), affg. T.C. Memo. 1988-410), affg.
T.C. Memo. 1993-398.
14
This Court, in examining the exhibits, found duplication
in three instances, all involving Mrs. Gleason depositing her
2003 payroll checks into the BA joint account. Ex. 9-R, Bates
Numbers 92, 109, and 150. The parties have conceded that Mrs.
Gleason should be taxed on her 2003 wages, and therefore these
three items will be removed from respondent’s bank deposit
analysis.

We do this despite Mrs. Gleason’s testimony that she cashed
her payroll checks. Since the parties conceded that the 2003
wages were Mrs. Gleason’s sole and separate property and that she
was liable for the taxes, we do not reach the issue of whether
Mrs. Gleason’s deposits into the BA joint account affect the
status of the wages as either her sole and separate property or
community property.
 - 26 -

we are not persuaded that respondent’s determination was

arbitrary or capricious in view of Mr. Gleason’s utter lack of

cooperation, failure to provide documents or records, and failure

to point to any specific duplication. See Petzoldt v.

Commissioner, 92 T.C. at 693-694 (stating that the absence of

adequate tax records weakens any critique of the Commissioner’s

method of reconstruction and that mathematical exactitude is not

required for “it ‘would be tantamount to holding that skillful

concealment is an invincible barrier to proof’”); King v.

Commissioner, T.C. Memo. 1998-69 (concluding that the

Commissioner’s use of a combination of methods to reconstruct the

taxpayer’s income was reasonable), affd. without published

opinion 182 F.3d 903 (3d Cir. 1999).

“We are troubled by * * * [the Commissioner’s] method of

reconstruction. * * * Nevertheless, * * * [the Gleasons] did not

present any evidence that persuades us that * * * [the

Commissioner’s] determination was arbitrary or without

foundation. * * * On balance, we are more troubled by the * * *

[Gleason’s lack of evidence] than by * * * [the Commissioner’s]

method.” Maltese v. Commissioner, T.C. Memo. 1988-322.

Accordingly, we sustain respondent’s determination on this

issue.15

15
Gleason Supply was a sole proprietorship, and the income
therefrom is “self-employment income” subject to self-employment
(continued...)
 - 27 -

IV. Whether Under California Community Property Law
Petitioners’ Unreported Taxable Income Is Mr. Gleason’s Sole
and Separate Property or Community Property

“A married individual is taxable on the earnings of his or

her spouse to the extent that the laws of the state of residence

grants that individual a vested property or ownership interest in

the spouse’s earnings.” Edwards v. Commissioner, 680 F.2d 1268,

1271 (9th Cir. 1982) (citing United States v. Mitchell, 403 U.S.

190, 196-197 (1971)). California is a community property State

and under California law each party has a vested interest in

community property sufficient to establish his or her liability

for Federal income tax on his or her half of the community

income. Cal. Fam. Code sec. 760 (West 2004); United States v.

Malcolm, 282 U.S. 792 (1931).

There is a statutory presumption that property acquired by

the spouses during marriage other than by gift or inheritance is

community property. In re Marriage of Rossin, 172 Cal. App. 4th

725, 731 (2009). This presumption is a strong one; the

California Supreme Court characterized it as fundamental to the

community property system. Katz v. United States, 382 F.2d 723,

728 (9th Cir. 1967); In re Duncan’s Estate, 70 P.2d 174, 179

(Cal. 1937). The presumption can be overcome only by clear and

satisfactory proof. In re Jolly’s Estate, 238 P. 353, 353 (Cal.

15
(...continued)
tax. See secs. 1401, 1402.
 - 28 -

1925). The presumption that property is community property is

even stronger when the property was acquired with community

property and when the “marriage has been a long-continued

relation”. In re Duncan’s Estate, supra at 179.

However, it is also well established that married taxpayers

may by agreement change community property to separate property

and vice versa, with or without consideration. Cal. Fam. Code

sec. 850 (West 2004); Katz v. United States, supra at 729. “A

transmutation is an interspousal transaction or agreement that

works a change in the character of the property”. In re Marriage

of Rossin, supra at 734. The principal issue here is Mr. and

Mrs. Gleason’s 1997 community property agreement and whether the

agreement transmuted Gleason Supply and the income therefrom into

Mr. Gleason’s sole and separate property. Respondent has

conceded that the agreement is valid, and therefore the issue is

the effect of the agreement, not its validity.

The community property agreement provides in part:

Lori Ann Gleason, wife, voluntarily divest [sic] herself of
any right, interest, or claim she may have to, or in, any
community property considered interest income, stocks,
bonds, dividends, wages, income, rental income or other
earnings, and all realty and personal vehicles which Richard
H. Gleason acquired by and through his own labor and/or
initiative which Lori Ann Gleason, wife, may have acquired
by and through the marriage.

The community property agreement contains no provisions

regarding income generated from communal efforts.
 - 29 -

Mr. Gleason initially capitalized Gleason Supply with checks

written on the couple’s joint account and by taking out a second

mortgage on the community home. He used a truck purchased with

community funds. Mrs. Gleason cosigned on the credit check Mac

Tools ran against Mr. Gleason. Mrs. Gleason admitted that she

dealt with Gleason Supply up until at least 1997 but does not

offer proof that her involvement ended in 1997.

Mrs. Gleason asserts she had nothing to do with Gleason

Supply during 2001--2003, the years in issue. Yet during this

period, checks for tools purchased from Gleason Supply were

written solely to Lori Gleason. Checks issued to Gleason Supply

were deposited into the couple’s BA joint account, and Mrs.

Gleason herself endorsed several of the checks.

On the record before us and petitioners’ lack of evidence to

the contrary, we do not find that the income from Gleason Supply

was separate income attributed solely to Mr. Gleason. Mrs.

Gleason provided no evidence to this Court to support her claims

that she did not actively participate in Gleason Supply.

Accordingly, we find that the income from Gleason Supply was

community income and sustain respondent’s determination with

regard to this issue.16

16
Because we hold that the income from Gleason Supply was
community income, we do not reach the issue of, if it was
initially Mr. Gleason’s sole and separate property, whether it
was subsequently commingled and became community property. We
(continued...)
 - 30 -

V. Additions to Tax

Respondent bears the burden of production with regard to

the additions to tax.17 See sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001). To meet this burden,

respondent must produce sufficient evidence establishing that it

is appropriate to impose the additions to tax. See Higbee v.

Commissioner, supra at 446. However, respondent does not have to

produce evidence of substantial authority, the lack of reasonable

cause, or lack of willful neglect. See id.; Davis v.

Commissioner, 81 T.C. 806, 820 (1983), affd. without published

opinion 767 F.2d 931 (9th Cir. 1985).

A. Section 6651(a)(1)

Generally, “any person made liable for any tax * * * shall

make a return or statement according to the forms and regulations

prescribed by the Secretary.” Sec. 6011(a). Section 6651(a)(1),

in the case of a failure to file a return on time, imposes an

addition to tax of 5 percent of the tax required to be shown on

16
(...continued)
note, however, the use of community funds to operate Gleason
Supply and Mrs. Gleason’s seemingly unrestricted access to the BA
joint account.
17
While we recognize that respondent bears the burden of
proof with regard to the increased deficiencies asserted in his
answer, see Garrison v. Commissioner, T.C. Memo. 2010-261, for
the reasons set forth supra note 8, we find this of no
consequence as either respondent has conceded the liabilities
giving rise to the increased deficiencies or petitioners agree to
the increased deficiencies.
 - 31 -

the return for each month or fraction thereof for which there is

a failure to file, not to exceed 25 percent in the aggregate.

The penalty will not apply if it is shown that such failure is

due to reasonable cause and not due to willful neglect.

Petitioners did not timely file their 2001, 2002, or 2003

tax return. Respondent has thus met his burden of production.

See Wheeler v. Commissioner, 127 T.C. 200, 207-208 (2006)

(holding that evidence showing the taxpayer did not file his

income tax return was sufficient to satisfy the IRS’ burden of

production for section 6651(a)(1)), affd. 521 F.3d 1289 (10th

Cir. 2008). Further, petitioners have not presented any evidence

that their failure to file was due to reasonable cause and not

willful neglect. Accordingly, we sustain the additions to tax

under section 6651(a)(1) for petitioners’ 2001, 2002, and 2003

tax years.

B. Mr. Gleason--Section 6651(a)(2)

Respondent determined Mr. Gleason is liable for additions to

tax under section 6651(a)(2) for failure to pay his 2001, 2002,

and 2003 taxes. Section 6651(a)(2) provides for an addition to

tax of .5 percent per month up to 25 percent for failure to pay

the amount shown on a return unless it is shown that the failure

is due to reasonable cause and not due to willful neglect.18

18
The sec. 6651(a)(1) addition to tax is reduced by the
amount of the sec. 6651(a)(2) addition to tax for any month (or
(continued...)
 - 32 -

The Commissioner’s burden of production with respect to
the section 6651(a)(2) addition to tax requires that the
Commissioner introduce evidence that a return showing the
taxpayer’s tax liability was filed for the year in question.
In a case such as this where the taxpayer did not file a
return, the Commissioner must introduce evidence that an SFR
[substitute for return] satisfying the requirements of
section 6020(b) was made. See Cabirac v. Commissioner, * *
* [120 T.C. 163, 170 (2003)]. * * *

Wheeler v. Commissioner, supra at 210.

Under section 6651(g)(2), a return prepared by the Secretary

pursuant to section 6020(b) is treated as a return filed by the

taxpayer for the purpose of determining the amount of an addition

to tax under section 6651(a)(2). To constitute a section 6020(b)

return, “the return 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.

Substitutes for returns were filed on Mr. Gleason’s behalf

for his 2001, 2002, and 2003 tax years. The substitutes for

returns consisted of Forms 4549-A, Income Tax Examination

Changes, Forms 886-A, Explanation of Changes, and Forms 13496,

IRS Section 6020(b) Certification. Mr. Gleason argues that the

substitutes for returns fail because they do not contain Forms

1040.

18
(...continued)
fraction thereof) to which an addition to tax applies under both
sec. 6651(a)(1) and (2). See sec. 6651(c)(1).
 - 33 -

Mr. Gleason is incorrect. The Forms 4549-A contained his

name, address, and Social Security number and sufficient

information to compute tax liability. Therefore, the substitutes

for returns filed for Mr. Gleason constitute section 6020(b) tax

returns and are treated as returns filed by him for purposes of

section 6651(a)(2). See, e.g., Rivera v. Commissioner, T.C.

Memo. 2009-215 (holding that a return containing a proposed

individual income tax assessment and section 6020(b)

certification constituted a valid return for purposes of section

6651(a)(2)); see also Hawkins v. Commissioner, T.C. Memo. 2008-

168.

Mr. Gleason did not pay his 2001, 2002, or 2003 taxes.

Respondent has thus met his burden of production. Mr. Gleason

has not presented any evidence that such failure to pay was due

to reasonable cause and not willful neglect. Consequently, we

sustain respondent’s additions to tax under section 6651(a)(2)

for Mr. Gleason’s 2001, 2002, and 2003 tax years.

C. Mrs. Gleason--Section 6651(a)(2) or (3)

Respondent asserts that Mrs. Gleason is liable for additions

to tax under section 6651(a)(2) for failure to pay her 2001,

2002, and 2003 taxes and that if this Court finds she filed tax

returns for the 2001, 2002, and 2003 tax years, she is liable

under section 6651(a)(3) for failure to pay her 2001, 2002, and

2003 taxes.
 - 34 -

First, respondent accepted the Forms 1040 filed on March 23,

2008, for Mrs. Gleason’s 2001, 2002, and 2003 tax years. Because

respondent accepted the Forms 1040 as valid returns, we reject

respondent’s determination that Mrs. Gleason is liable for

section 6651(a)(2) additions to tax for her 2001, 2002, and 2003

tax years. See Cabirac v. Commissioner, T.C. Memo. 2008-142.

Second, section 6651(a)(3) imposes an addition to tax for

failure to pay any amount not shown but required to be shown on a

return within 21 days of notice and demand (within 10 days if

over $100,000). See Burke v. Commissioner, T.C. Memo. 2009-282.

Notice and demand is provided for in section 6303 and “follows

the making of an assessment”. Id. Assessment cannot be made

until this Court’s decision has been made final. Sec.

6503(a)(1). Therefore, the predicates for the imposition of an

addition to tax under section 6651(a)(3) have not been satisfied

and assessment is premature. See Commissioner v. McCoy, 484 U.S.

3, 7 (1987).

C. Section 6654(a)

Respondent determined that Mr. Gleason was liable for

additions to tax under section 6654(a) for his 2001, 2002, and

2003 tax years and that Mrs. Gleason was liable for additions to

tax under section 6654(a) for her 2001 and 2003 tax years.

Section 6654(a) imposes an addition to tax where prepayments of

tax, either through withholding or by making estimated quarterly
 - 35 -

tax payments during the course of the year, do not equal the

percentage of total liability required under the statute.

However, the addition to tax will not apply if one of the several

statutory exemptions applies. See Grosshandler v. Commissioner,

75 T.C. 1, 20-21 (1980).

The section 6654(a) addition to tax is calculated by

applying the section 6621 underpayment interest rate to the

amount of each underpayment from the due date of each installment

until April 15 following the close of the taxable year (for

calendar year taxpayers). Sec. 6654(a), (b)(2). The amount of

each underpayment is the amount of “the required installment”

less “the amount (if any) of the installment paid on or before

the due date for the installment.” Sec. 6654(b)(1). The

“required installment” is due at four times during the year and

is 25 percent of the “required annual payment.” Sec. 6654(c)(1),

(d)(1)(A). For individual taxpayers whose adjusted gross income

for the taxable year is $150,000 or less, a “required annual

payment” is equal to

the lesser of--

(i) 90 percent of the tax shown on the return for
the taxable year (or, if no return is filed, 90
percent of the tax for such year), or

(ii) 100 percent of the tax shown on the return of
the individual for the preceding taxable year.

Clause (ii) shall not apply if the preceding taxable year
was not a taxable year of 12 months or if the individual did
not file a return for such preceding taxable year.
 - 36 -

Sec. 6654(d)(1)(B). Unless a statutory exception applies, the

section 6654(a) addition to tax is mandatory. Sec. 6654(a), (e);

Recklitis v. Commissioner, 91 T.C. 874, 913 (1988). Section 6654

does not contain a general exception for reasonable cause or

absence of willful neglect. Grosshandler v. Commissioner, supra

at 21.

To meet his burden of production with regard to the section

6654(a) addition to tax, respondent must at a minimum produce

evidence necessary to enable the Court to conclude that Mr.

Gleason had a required annual payment for 2001, 2002, and 2003,

and that Mrs. Gleason had an annual payment for 2001 and 2003.

See Wheeler v. Commissioner, 127 T.C. at 11.

Respondent has met the burden of production with respect to

the section 6654(a) additions to tax for Mr. Gleason’s 2002 and

2003 but has failed to meet his burden of production with respect

to Mr. Gleason’s 2001 tax year. Mr. Gleason did not make his

required estimated tax payments for either 2002 or 2003. He does

not qualify for any of the exceptions listed in section 6654(e).

Respondent introduced no evidence about his 2000 tax return or

whether he failed to file his 2000 tax return. Without this

information, we cannot calculate the required estimated annual

payment for his 2001 tax year, if any.

Because Mr. Gleason failed to file Federal income tax

returns for 2001 and 2002, Mr. Gleason’s required annual payment
 - 37 -

of estimated tax for 2002 and 2003 was 90 percent of his tax for

each year. See Wheeler v. Commissioner, supra at 211-212; see

also Rivera v. Commissioner, supra; Walzer v. Commissioner, T.C.

Memo. 2009-200. Mr. Gleason is liable for section 6654 additions

to tax for his 2002 and 2003 tax years.

As with Mr. Gleason, respondent never introduced evidence

regarding Mrs. Gleason’s 2000 tax return. Additionally, we have

held that a taxpayer’s estimated tax liability is based upon the

taxpayer’s tax liability as stated on the original tax return as

filed, and not upon the notice of deficiency amount or the

ultimate tax liability. See Mendes v. Commissioner, 121 T.C.

308, 324 (2003). Mrs. Gleason filed returns for 2001 and 2003

showing no tax owed. The section 6654 addition to tax is

calculated on a “required annual payment” which is equal to the

lesser of “90 percent of the tax shown on the return for the

taxable year” or 100 percent of the tax shown on the previous

year’s return. Sec. 6654(d)(1)(B)(i). As 90 percent of zero is

zero, the lesser of the two will be zero and therefore Mrs.

Gleason is not liable for a section 6654 addition to tax for her

2001 or 2003 tax year.
 - 38 -

The Court has considered all of petitioners’ contentions,

arguments, requests, and statements. To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

To reflect the foregoing,

Decisions will be entered

under Rule 155.