Penland v. Comm'r

T.C. Memo. 2011-274

UNITED STATES TAX COURT

MARY A. PENLAND, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6241-07. Filed November 17, 2011.

Mary A. Penland, pro se.

Bradley C. Plovan, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MORRISON, Judge: On December 15, 2006, the respondent (“the

IRS”) issued the petitioner, Mary A. Penland, a notice of

deficiency for tax years 1998, 1999, and 2001 (years at issue).

The notice stated that the IRS determined (i) that she had

deficiencies in taxes of $2,048,607 for 1998, $558,401 for 1999,

and $686,371 for 2001; (ii) that she was liable for additions to
 - 2 -

tax under section 6651(a)(1)1 of $512,401.75 for 1998 and $23,477

for 1999; and (iii) that she was liable for an addition to tax

under section 6654(a) of $93,740.61 for 1998.

On March 15, 2007, Mary Penland filed a petition disputing

the IRS’s determinations; she was a South Carolina resident at

the time. The IRS concedes that she is not liable for the

addition to tax under section 6654(a) for 1998. In deciding

whether to sustain the remaining determinations in the notice of

deficiency, we resolve the following issues:

A. Did Mary Penland own all shares of Penco, Inc., an S

corporation, during the years at issue? (We conclude

that she owned all shares of Penco.)

B. Did Penco own Woodruff Auto Sales,2 a sole

proprietorship, during the years at issue? (We conclude

that it did own Woodruff.)

C. Did Penco own Sweet Water Miniature Horses, Inc.,3

during the years at issue? (We conclude that it did not

own Sweet Water.)

1
Unless otherwise indicated, section references are to the
Internal Revenue Code, as amended, effective for the years at
issue, and Rule references are to the Tax Court Rules of Practice
and Procedure.
2
We refer to Woodruff Auto Sales as either “Woodruff Auto
Sales” or “Woodruff”.
3
We refer to Sweet Water Miniature Horses, Inc. as either
“Sweet Water Miniature Horses” or “Sweet Water”.
 - 3 -

D. Was the IRS’s disallowance of Penco’s net section 1231

losses (other than due to casualty or theft) proper?

(We conclude that it was proper.)

E. Is Mary Penland entitled to carry a net operating loss

from 2000 to the years at issue? (We conclude that she

is not so entitled.)

F. Did Mary Penland pay her tax liabilities by abandoning

her rights to Penco’s assets? (We conclude that she did

not so pay her liabilities.)

G. Did the receiver appointed to manage Penco’s assets

assume Mary Penland’s income-tax liabilities for the

years at issue, thus relieving her of liability? (We

conclude that the receiver did not assume her

liabilities.)

H. Was the IRS’s determination that section 446 required

Penco to use the accrual method of accounting an abuse

of discretion? (We conclude that it was not an abuse of

discretion.)

I. Was the IRS’s determination that Penco must take into

account a section 481(a) adjustment for 1998 proper?

(We conclude that the determination was improper.)

J. Is Mary Penland liable for the section 6651 late-filing

penalty for 1998 and 1999? (We conclude that she is

liable.)
 - 4 -

FINDINGS OF FACT

The parties stipulated some facts; those facts are so found.

Before 1998

Before 1998, Mary Penland’s husband (Charles Penland) owned

Woodruff Auto Sales, a used-car business that maintained an

inventory of vehicles for sale. Charles Penland apparently

operated Woodruff as a sole proprietorship, not as a corporation.

Sweet Water Miniature Horses was in the business of buying,

selling, and breeding miniature horses. It is unclear who owned

Sweet Water before the years at issue--1998, 1999, and 2001. And

it is unclear what type of entity Sweet Water was for federal

income-tax purposes--e.g., a sole proprietorship or a C

corporation--both before and during the years at issue.

Penco, Inc., was a South Carolina corporation. It was

incorporated on October 29, 1996, by an attorney named Terry

Clark. As reflected in Penco’s corporate records, on November 1,

1996: (i) Clark transferred his rights in Penco to Mary Penland;

(ii) Penco named Mary Penland its sole officer; and (iii) Penco

issued Mary Penland all of its stock.4

4
That Mary Penland’s ownership of Penco began on Nov. 1,
1996, is a fact stated in pars. 11 and 12 of the stipulation.
The Nov. 1, 1996 date is contradicted by par. 4 of the
stipulation, which states: “Beginning in 1998 and through the
years at issue [1998, 1999, and 2001], petitioner [Mary Penland]
was the sole owner of Penco, Inc. (‘Penco’).” Even if her
ownership started in 1998, it would not matter here because as
par. 4 says, her ownership was coextensive with the years 1998,
1999, and 2001, the years at issue.
 - 5 -

1998-2001

The parties stipulated that Mary Penland owned Penco during

the years at issue--1998, 1999, and 2001. She now contends that

she did not. As we explain infra part A, we conclude that she is

bound by her stipulation.

The parties stipulated that Charles Penland transferred

Woodruff Auto Sales to Penco in 1998. Mary Penland now contends

that the transfer did not occur. As we explain infra part B, we

conclude that she is bound by her stipulation. There is no

evidence that Penco disposed of Woodruff during the years at

issue. We therefore conclude that Penco owned Woodruff during

1998, 1999, and 2001.

Mary Penland concedes that Penco did not own Sweet Water

Miniature Horses during the years at issue. See infra part C.

For the years at issue Penco filed Forms 1120S, U.S. Income Tax

Return for an S Corporation, which Mary Penland signed. Attached

to each of these returns was a Schedule K-1, Shareholder’s Share

of Income, Credits, Deductions, etc. Each Schedule K-1 reported

that Mary Penland was Penco’s sole shareholder. The returns

computed Penco’s taxable income using the cash method of

accounting and reported the income, losses, and expenses of both

Woodruff Auto Sales and Sweet Water Miniature Horses.

Attached to the 1999 and 2001 returns were Forms 4797, Sales

of Business Property; no Form 4797 was attached to Penco’s 1998
 - 6 -

return. On the Forms 4797, Penco reported that its net section

1231 losses (other than due to casualty or theft)5 were $927,290

for 1999 and $37,736 for 2001.

Mary Penland filed Forms 1040, U.S. Individual Income Tax

Return, for 1998, 1999, and 2001. She filed her 1998 return on

September 8, 2003, her 1999 return on September 22, 2000, and her

2001 return on July 26, 2002. Each of her income-tax returns

reported her 100-percent share of Penco’s income, expenses, and

other tax attributes. The returns also reported that she earned

wages from Woodruff Auto Sales of $15,750 in 1999 and $39,000 in

2001. Her filing status each year was married filing separately.

2002-2005

The record does not reveal whether the ownership of Penco,

Woodruff Auto Sales, or Sweet Water Miniature Horses changed from

2002 to 2005. Thus it is unclear whether, after 2001, the

ownership of these entities was the same as it was at the end of

2001, when Mary Penland owned 100 percent of the shares of Penco,

Penco owned Woodruff as a sole proprietorship, and Penco did not

own Sweet Water.

5
A sec. 1231 loss is a loss from the sale, exchange, or
conversion of (i) property used in a trade or business or (ii)
capital assets held for more than one year in connection with a
trade or business or in connection with a transaction entered
into for profit. Sec. 1231(a)(3).
 - 7 -

2005-Present: Charles Penland’s Criminal Proceedings

In July 2005, a federal grand jury indicted Charles Penland

for various drug and money-laundering offenses. See Indictment,

United States v. Penland, No. 7:05-cr-00710-HFF (July 12, 2005),

ECF No. 27.6 On March 3, 2006, the United States filed a bill of

particulars which contained a list of properties that the

government alleged to be forfeitable on conviction. One of the

entries on the list of properties was Penco’s “business assets

and corporate interests * * * including but not limited to all

monies, claims, interests and accounts receivable payable to or

received by * * * [Penco]”. Government’s Third Bill of

Particulars for Forfeiture of Property at 6-7, United States v.

Penland, No. 7:05-cr-00710-HFF (Mar. 3, 2006), ECF No. 224. The

bill of particulars also specified real properties7 that the

government intended, if necessary, to seek forfeiture of as

6
We take judicial notice of the public record of Charles
Penland’s criminal proceedings in the U.S. District Court for the
District of South Carolina. See Fed. R. Evid. 201.
7
Among those real properties was 2.837 acres of land that
the bill of particulars identified as “Woodruff Auto Sales”, “300
Cross Anchor Highway”, “Woodruff, South Carolina 29388”. The
bill of particulars alleges that this parcel was titled in the
name of “South Carolina Investment Corporation” at the time. The
parties have not addressed whether this property, as its name
suggests, was used for the Woodruff Auto Sales business Penco
owned during the years at issue. Neither party has argued that
the treatment of this property either contradicts or supports the
stipulation that Penco owned Woodruff during the years at issue.
 - 8 -

equivalent substitute assets under 21 U.S.C. sec. 853(p). Id. at

7-10.

On March 14, 2006, Charles Penland pleaded guilty to

(i) conspiring to possess cocaine and methamphetamine with intent

to distribute in violation of 21 U.S.C. sec. 841(a)(1) and

(b)(1)(A); (ii) money laundering in violation of 18 U.S.C. sec.

1956(a)(3)(A), (B), and (C); and (iii) attempting to possess

cocaine with intent to distribute in violation of 21 U.S.C. sec.

846. Plea Agreement, United States v. Penland, No.

7:05-cr-00710-HFF (Mar. 14, 2006), ECF No. 234. Charles Penland

agreed to forfeit whatever interests he had in the properties

listed in the agreement. Id. at 2-5. The list of properties

coincided with the properties the government alleged in the bill

of particulars to be forfeitable on conviction and did not

include the properties identified as equivalent substitute

assets. The agreement stipulated that the properties on the list

were traceable to or were derived from his intentional and

willful violations of 21 U.S.C. secs. 846 and 841(a)(1). Id. at

6.

On the same day, Mary Penland entered into an agreement with

the United States in which she agreed to “abandon, quitclaim and

forfeit” her interests in the properties the indictment alleged

to be forfeitable. Forfeiture Agreement and Stipulation, United

States v. Penland, No. 7:05-cr-00710-HFF (Mar. 14, 2006), ECF No.
 - 9 -

236. Penco’s assets and receivables were among those properties.

Id. at 1-4. She also agreed to execute documents required to

transfer clear title to the United States; to assist with

resolving claims of third parties to any of the assets; and to

provide records, documents, and other materials needed to

identify and resolve issues relating to ownership, chain of

title, and encumbrances or liens. In exchange, the government

agreed to release to her the real property that the bill of

particulars identified as equivalent substitute assets. Id. at

5. The agreement did not mention Mary Penland’s tax liabilities.

Mary Penland’s agreement with the United States also

addressed her right to petition for an ancillary hearing under 21

U.S.C. sec. 853(n). She stipulated that she understood that--if

not for the agreement--she could have filed a petition for an

ancillary hearing under 21 U.S.C. sec. 853(n) to assert any

interest she had or claimed to have in the properties alleged to

be forfeitable. Id. at 1. She agreed to waive her right to do

so. Id. at 4-5.

On June 6, 2006, the U.S. District Court for the District of

South Carolina, under Federal Rule of Criminal Procedure

32.2(b)(2), entered a preliminary order of forfeiture as to

Charles Penland. The order decreed that, subject to 21 U.S.C.

sec. 853(n), Charles Penland forfeited “all right, title and

interest” in listed property to the United States. Preliminary
 - 10 -

Order of Forfeiture as to Charles W. Penland, Sr., at 3-4, United

States v. Penland, No. 7:05-cr-00710-HFF (June 6, 2006), ECF No.

260. Among the listed property were the “business assets and

corporate interests of * * * [Penco, Inc.], including but not

limited to all monies, inventory, equipment, claims, interests

and accounts receivable payable to or received by * * * [Penco,

Inc.]”. Id. at 8. The preliminary order said that the “United

States is not seeking and this Court is not ordering forfeiture

of the * * * corporations themselves or the stock of such

corporations, at this time.”8 Id. at 9. The preliminary order

authorized the court-appointed receiver to “sell or otherwise

dispose of” Penco’s assets and directed the receiver to hold the

proceeds of the sale until entry of a final order of forfeiture.

Id. at 10. On motion of the United States, the preliminary order

dismissed the allegations that the properties the United States

agreed to release to Mary Penland were forfeitable. Id. at

16-17.

8
The preliminary order went on to state: “Accordingly,
until further notice, Charles W. Penland, Sr. remains the sole
stockholder of the corporations and the owner of the businesses
described above.” Penco was among the businesses “described
above”. As we explain below, because the district court entered
the preliminary order after the years at issue, this language
does not contradict the stipulation that Mary Penland owned Penco
during the years at issue. See infra pt. A.
 - 11 -

Notice of Deficiency

On December 15, 2006, the IRS issued Mary Penland a notice

of deficiency.9 The notice stated that the IRS determined (i)

that she had deficiencies in tax of $2,048,607 for 1998, $558,401

for 1999, and $686,371 for 2001; (ii) that she was liable for

additions to tax under section 6651(a)(1) of $512,401.75 for 1998

and $23,477 for 1999; and (iii) that she was liable for an

addition to tax under section 6654(a) of $93,740.61 for 1998.

The IRS determined that Penco did not own Sweet Water

Miniature Horses. The notice of deficiency stated that the IRS

therefore made the following changes to Penco’s ordinary income:

Changes to Penco’s Ordinary Income
Made by the IRS To Reflect That
Penco Did Not Own Sweet Water Miniature Horses
1998 1999 2001
Eliminating Sweet Water ($112,645) ($118,880) -0-
income
Eliminating Sweet Water 175,580 327,537 $152,562
expenses
Eliminating depreciation 662,635 316,998 99,303
deductions for Sweet
Water assets
Total 725,570 525,655 251,865

9
The date on the notice of deficiency is more than three
years after Penland filed her income-tax returns. Generally, the
time limit for the IRS to assess tax (and thus for the IRS to
issue a notice of deficiency) is three years from the filing of
the return, unless certain exceptions apply. Sec. 6501.
Untimeliness of the notice of deficiency is an affirmative
defense. Adler v. Commissioner, 85 T.C. 535, 540 (1985). The
taxpayer must specifically plead it. Rule 39. Penland did not
raise the question of timeliness in the pleadings (or otherwise),
and we do not address it.
 - 12 -

The IRS also determined that Penco was not entitled to most

of the net section 1231 losses (other than due to casualty or

theft) reflected on the Forms 4797 that it had filed with its

Forms 1120S for 1999 and 2001.10 For 1999, the IRS determined

that Penco was entitled to only $595 of the $927,290 loss that it

claimed. For 2001, the IRS determined that Penco was entitled to

none of the $37,736 loss that it claimed. Thus the IRS increased

Penco’s taxable income by $926,695 for 1999 and $37,736 for 2001.

The IRS determined that section 446 required Penco to use

the accrual method of accounting. As a result of that

conclusion, the IRS made two types of determinations. First, the

IRS made the following changes to Penco’s ordinary income to

reflect Penco’s income computed using the accrual method:11

10
Penco did not file a Form 4797 for 1998 and did not claim
a net sec. 1231 gain or loss.
11
The parties do not dispute that the amounts of these
changes are correct if the IRS was correct in determining that
Penco is required to use the accrual method of accounting. See
infra pt. I.
 - 13 -

Changes to Penco’s Ordinary Income
Made by the IRS to Reflect Penco’s Income
Computed Using the Accrual Method
1998 1999 2001
Gross receipts $271,039 $2,798,545 $2,689,373
Expenses (4,795) (6,528) (3,220)
Cost of goods sold 728,434 223,783 128,125
Total 994,678 3,015,800 2,814,278

Second, the IRS determined that section 481(a) required Penco to

take into account a $3,709,197 adjustment to taxable income for

1998 to prevent duplicating or omitting income or expenses from

previous years.

The IRS made other determinations, none of which are in

dispute. The IRS determined (i) that Mary Penland failed to

report $1,800 of gambling income for 1998;12 (ii) that she was

entitled to a $300 rate-reduction credit for 2001 under section

6428; (iii) that she was not entitled to carry forward a $221,117

net operating loss from 1998 to 1999; and (iv) that the amounts

she claimed for personal-exemption deductions should be reduced

by $2,700 for 1998, $2,750 for 1999, and $2,900 for 2001.

12
Penland raised the gambling-income issue for the first
time in her reply brief. She did not raise the issue in her
petition, and she presented no evidence or argument on the issue
at trial. Issues not raised in the petition are deemed conceded.
Rule 34(b)(4). So we need not address this issue.
 - 14 -

OPINION

The taxpayer generally has the burden of proving that the

IRS’s determinations described in the notice of deficiency are

wrong. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115

(1933). But section 7491(a)(1) imposes the burden of proof on

the IRS if the taxpayer introduces credible evidence and

satisfies the conditions of section 7491(a)(2). The taxpayer

bears the burden of proving that the conditions in section

7491(a)(2) have been satisfied. See Rolfs v. Commissioner, 135

T.C. 471, 483 (2010). Penland failed to do so for any factual

issue and thus bears the burden of proof.

A. Mary Penland Owned All Shares of Penco, Inc., an S
Corporation, During the Years at Issue--1998, 1999, and
2001.

Mary Penland now asserts that her husband, Charles Penland,

owned Penco during 1998, 1999, and 2001, an assertion that

contradicts paragraph 4 of the stipulation. Paragraph 4 states

that “throughout the years at issue petitioner [Mary Penland] was

the sole owner of Penco, Inc.” As we explain below, we will not

permit her to contradict the stipulation.

Stipulations are generally treated “as conclusive

[admissions]”. Rule 91(e). However, we will disregard

stipulations where the facts as stipulated are “clearly contrary

to facts disclosed by the record”. Jasionowski v. Commissioner,
 - 15 -

66 T.C. 312, 318 (1976). Such circumstances are not present

here.

The record does not contradict the stipulation. Indeed the

record supports it: Penco’s corporate records report that Mary

Penland was its sole shareholder. Penland argues that Penco’s

assets could not have been forfeited unless Charles Penland owned

Penco. But even if he owned Penco at the time of the forfeiture

in 2006, the issue here is whether Mary Penland owned Penco in

1998, 1999, and 2001. And the weight of the evidence in the

record supports the stipulation that she owned Penco in those

years.

Because the stipulation is not clearly contrary to the facts

disclosed by the record, there is no basis for us to disregard

it. See id. We therefore conclude that Mary Penland owned Penco

during the years at issue, as stipulated.13

B. Penco Owned Woodruff Auto Sales, a Sole Proprietorship,
During the Years at Issue--1998, 1999, and 2001.

Mary Penland next asserts that Penco did not own Woodruff

Auto Sales during the years at issue. This assertion contradicts

paragraph 14 of the stipulation, which states that Charles

13
Sec. 1366(a)(1) taxes S corporation shareholders on their
proportionate shares of the S corporation’s income. Thus Mary
Penland, as sole shareholder, is taxed on her 100-percent share
of Penco’s income for the years at issue.
 - 16 -

Penland transferred Woodruff to Penco in 1998.14 Again, we see

no reason to allow Mary Penland to contradict her stipulation

that Woodruff was transferred to Penco in 1998.

This stipulation is uncontradicted by the facts disclosed in

the record. See id. The documentary evidence on which she bases

her claim that Penco did not own Woodruff Auto Sales is a

solitary inadmissible document.15 She also relies on her own

testimony and Charles Penland’s testimony. We do not believe

them: their testimony was evasive and curiously unsupported by

documents. On the other hand, documents in the record support

the stipulation that Woodruff was transferred to Penco. For

example, Penco’s tax returns, which Mary Penland signed, report

income from Woodruff for each year at issue.

Again, because the stipulation is not clearly contrary to

the facts disclosed by the record, there is no basis for us to

disregard it. See Jasionowski v. Commissioner, supra at 318. We

therefore find that Penco owned Woodruff Auto Sales in 1998,

1999, and 2001, as stipulated.

14
The record does not reveal the date of the transfer in
1998. Mary Penland has not argued or presented evidence that any
part of the income reported on Penco’s returns for Woodruff Auto
Sales was attributable to times in 1998 before the transfer.
15
The IRS objected to Exhibit 25-P at trial. The Court took
the objection under advisement and later issued an order
excluding the exhibit from evidence.
 - 17 -

C. Penco Did Not Own Sweet Water Miniature Horses, Inc., During
the Years at Issue--1998, 1999, and 2001.

The notice of deficiency reflected the IRS’s determination

that Penco did not own Sweet Water Miniature Horses during 1998,

1999, and 2001. Mary Penland contended in her petition that

Penco owned Sweet Water. Yet she gave no evidence that Penco

owned Sweet Water, and her husband testified that it did not.

She concedes the issue in her posttrial reply brief.16 But even

if she had not, the record compels the conclusion that Penco did

not own Sweet Water during 1998, 1999, and 2001.

D. The IRS’s Disallowance of Penco’s Net Section 1231 Losses
(Other Than Due to Casualty or Theft) Was Proper.

The IRS disallowed net section 1231 losses (other than due

to casualty or theft) of $926,695 for 1999 and $37,736 for 2001.

Penland--who has the burden of proof--offered no evidence that

Penco was entitled to these losses. We therefore uphold the

IRS’s determination.

E. Mary Penland Is Not Entitled To Carry a Net Operating Loss
From 2000 to the Years at Issue--1998, 1999, and 2001.

Mary Penland claims that she is entitled to carry a

purported net operating loss from 2000 to the years at issue,

reducing her deficiencies. A taxpayer can generally deduct a

net operating loss for one year from taxable income in each of

the preceding two years (as a “net operating loss carryback”) and

16
It says: “Penco, Inc. did not and has never owned the
corporation Sweet Water Miniature Horse Farm, Inc.”
 - 18 -

then in each of the following 20 years (as a “net operating loss

carryover”). Sec. 172(a) and (b)(1). A net operating loss is

carried to the earliest possible tax year first; any excess is

then carried to the next earliest year, and so on. Sec.

172(b)(2).

Mary Penland, however, gave no evidence that she had a net

operating loss in 2000. She asserts that copies of various

federal and South Carolina amended tax returns for the years at

issue are evidence of the loss.17 But merely claiming a

deduction on a return is not enough to substantiate the

deduction. Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979);

see also Lawinger v. Commissioner, 103 T.C. 428, 438 (1994);

Halle v. Commissioner, 7 T.C. 245 (1946), affd. 175 F.2d 500 (2d

Cir. 1949); Taylor v. Commissioner, T.C. Memo. 2009-235.

We therefore hold that Mary Penland is not entitled to

deductions for net operating loss carrybacks from tax year 2000

to tax years 1998 and 1999. And we hold that Mary Penland is not

entitled to a deduction for a net operating loss carryover from

tax year 2000 to tax year 2001.

F. Mary Penland Did Not Pay Her Tax Liabilities by Abandoning
Her Rights to Penco’s Assets.

Mary Penland asserts that she paid her tax liabilities by

abandoning her rights to Penco’s assets. In her words:

17
The parties dispute whether Mary Penland filed the amended
returns. We need not resolve the issue.
 - 19 -

Due to the federal forfeiture of Penco, Inc., and
its transfer into receivership, the Petitioner’s tax
liability, should there actually be one, has been paid
when the company went into receivership. [Citation
omitted.] The Internal Revenue Service cannot collect
taxes after that tax has already been paid.

Mary Penland, however, abandoned her rights to Penco’s assets in

exchange for the release of other properties to her.18 The

government did not agree to apply the value of any of the

properties to her tax liabilities. Indeed, no document from the

forfeiture proceedings purported to address the amounts of her

tax liabilities.

Mary Penland also argues that the IRS was an “unsecured

creditor” in the 2006 forfeiture proceedings and that those

proceedings therefore discharged her tax liabilities.19 But

unlike a chapter 7 bankruptcy proceeding, in which a court

18
She agreed to “abandon, quitclaim and forfeit all of her
right, title and interest in * * * [business assets and corporate
interests of] * * * [Penco, Inc.] including but not limited to
all monies, claims, interests and accounts receivable payable to
or received by [Penco, Inc.]”. She waived her right to assert an
interest in Penco through the filing of a petition under 21
U.S.C. sec. 853(n). And she agreed to execute documents required
to transfer clear title to the United States; to provide records,
documents and other materials needed to identify and resolve
issues relating to ownership, chain of title, and encumbrances or
liens; and to assist with resolving claims of third parties to
any of the assets. In exchange, the government agreed to release
the real property that the bill of particulars identified as
equivalent substitute assets.
19
The reply brief at 9 states: “The debt has been
discharged for federal income tax purposes.” At 34 the reply
brief states: “The Honorable Judge Floyd further ruled that the
IRS’ tax assessment claims are washed away as the IRS is still an
unsecured creditor in this matter”, and “All claims by unsecured
creditors are washed away during a criminal forfeiture.”
 - 20 -

typically discharges prebankruptcy debts, see 11 U.S.C. sec.

727(b), the criminal-forfeiture proceeding against Charles

Penland resulted in no order discharging his debts or those of

his wife.

G. The Receiver Appointed To Manage Penco’s Assets Did Not
Assume Mary Penland’s Income-Tax Liabilities.

Penland also asserts that the receiver appointed by the

district court to manage Penco’s assets is liable for Mary

Penland’s income-tax liabilities for 1998, 1999, and 2001. The

receiver managed Penco’s assets until entry of the final order of

forfeiture. One might speculate that the receiver assumed

Penco’s liabilities along with managing Penco’s assets. But Mary

Penland gave no evidence that this occurred. Besides, Mary

Penland’s liabilities--including her liabilities for income

taxes--are not Penco’s liabilities. See Moline Props., Inc. v.

Commissioner, 319 U.S. 436 (1943). Thus an assumption of Penco’s

liabilities would not necessarily be an assumption of her

liabilities. Furthermore, even if the receiver had somehow

assumed Mary Penland’s tax liabilities, she has not explained how

that assumption would relieve her of liability.

H. The IRS’s Determination That Section 446 Required Penco To
Use the Accrual Method of Accounting Was Not an Abuse of
Discretion.

Generally, a taxpayer must compute taxable income under the

“method of accounting on the basis of which the taxpayer

regularly computes his income in keeping his books.” Sec.
 - 21 -

446(a). But if the taxpayer’s method does not clearly reflect

income, section 446(b) requires the taxpayer to use the method

that “in the opinion of the Secretary, does clearly reflect

income.” The IRS has broad discretion in determining which

method clearly reflects income. See Thor Power Tool Co. v.

Commissioner, 439 U.S. 522, 532-533 (1979). A court must uphold

the IRS’s determination unless the determination was an abuse of

discretion. See id.; Prabel v. Commissioner, 882 F.2d 820, 823

(3d Cir. 1989), affg. 91 T.C. 1101 (1988); Exxon Mobil Corp. v.

Commissioner, 114 T.C. 293, 324 (2000).

Penland argues that the IRS’s past failure to challenge

Charles Penland’s accounting method for Woodruff Auto Sales

estops it from challenging Penco’s accounting method.

The IRS is not estopped from challenging Penco’s accounting

method for Woodruff Auto Sales. The IRS may challenge a

taxpayer’s accounting method for a particular tax year even

though it did not challenge the method for a previous tax year.

Ezo Prods. Co. v. Commissioner, 37 T.C. 385, 391 (1961); see also

Caldwell v. Commissioner, 202 F.2d 113, 115 (2d Cir. 1953).

Besides, the taxpayers are different: Charles Penland owned

Woodruff before 1998, and Penco owned Woodruff during and after

1998.

We therefore turn to whether the IRS abused its discretion

by requiring Penco to use the accrual method.
 - 22 -

Penland has not shown that the IRS abused its discretion.

Penco was required to use the accrual method by the regulations

under section 446. Those regulations require businesses that

need to take inventories to use the accrual method of accounting

for purchases and sales unless otherwise authorized by the IRS.

Sec. 1.446-1(c)(2)(i) and (ii), Income Tax Regs. Inventories are

necessary for a seller of merchandise. See sec. 1.471-1, Income

Tax Regs.; see also sec. 1.446-1(a)(4)(i), Income Tax Regs.

Penco owned Woodruff Auto Sales, a used-car dealership, and the

sale of merchandise--used cars--was Penco’s main source of

income.20 Thus the regulations required Penco to use the accrual

method unless otherwise authorized by the IRS. See also Smith v.

Commissioner, T.C. Memo. 1983-472 (holding that the regulations

required used-car dealer to use the accrual method). The IRS did

not authorize Penco to use a cash method.

We therefore conclude that Penco is required to use the

accrual method as described in the notice of deficiency.

I. The IRS’s Determination That Penco Must Take Into Account a
Section 481(a) Adjustment for 1998 Was Improper.

As discussed above, the IRS made two types of determinations

on account of the change in Penco’s accounting method. First, the

IRS made changes to Penco’s ordinary income in each year to

20
Mary Penland argued that Penco did not need to use accrual
accounting because it did not own Woodruff Auto Sales. We reject
this argument because we find that Penco owned Woodruff during
the years at issue.
 - 23 -

reflect what Penco’s income would be if it were computed using the

accrual method. Second, the IRS determined that section 481(a)

required Penco to take into account a $3,709,197 adjustment to

taxable income for 1998.21

The petition does not assign error to the amounts of the

changes the IRS made to reflect what Penco’s income would be if it

were computed using the accrual method. And Mary Penland did not

argue at trial or on brief that these amounts were in error. Mary

Penland has thus conceded that if Penco must use the accrual

method of accounting--as we have held that it must--the changes

are correct. See Rule 34(b)(4) (“Any issue not raised in the

assignments of error shall be deemed * * * conceded.”).

21
Sec. 481(a) provides:

SEC. 481(a). General Rule.--In computing the
taxpayer’s taxable income for any taxable year
(referred to in this section as the “year of the
change”)--

(1) if such computation is under a
method of accounting different from the
method under which the taxpayer’s taxable
income for the preceding taxable year was
computed, then

(2) there shall be taken into account
those adjustments which are determined to be
necessary solely by reason of the change in
order to prevent amounts from being
duplicated or omitted, except there shall not
be taken into account any adjustment in
respect of any taxable year to which this
section does not apply unless the adjustment
is attributable to a change in the method of
accounting initiated by the taxpayer.
 - 24 -

The IRS now concedes that section 481(a) does not require

Penco to adjust taxable income for 1998 because Penco did not own

Woodruff Auto Sales in 1997. Section 481(a) does not require an

adjustment in a given year unless the taxpayer used a different

method of accounting in the previous year. Sec. 481(a)(1). Thus

section 481(a) does not require an adjustment if a different

taxpayer owned a business in the year before a change in

accounting method. See, e.g., Ezo Prods. Co. v. Commissioner,

supra at 394 (holding that section 481(a) did not require

adjustment because a corporation, which received the assets and

the liabilities of a partnership in a tax-free exchange, was not

the same taxpayer as the partnership or the partners for section

481(a)(1) purposes); Estate of Biewer v. Commissioner, 341 F.2d

394 (6th Cir. 1965) (holding that section 481(a) did not require

adjustment because the decedent was a different taxpayer than the

estate for section 481(a)(1) purposes), affg. 41 T.C. 191 (1963).

Such is the case here: Charles Penland--not Penco--owned Woodruff

in 1997, the year before the change in accounting.

J. Additions to Tax

The IRS determined that Mary Penland is liable for additions

to tax under section 6651(a)(1) for 1998 and 1999.

The IRS has the burden of producing evidence that a taxpayer

is liable for additions to tax. Sec. 7491(c). The IRS satisfies

its burden if it produces “sufficient evidence indicating that it
 - 25 -

is appropriate to impose” the addition to tax. Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). Once the IRS satisfies

that burden, the taxpayer has the burden of persuading the fact

finder that the taxpayer is not liable for the addition to tax

because, for example, the taxpayer qualifies for an exception.

Id. at 446-447.

If a taxpayer is late in filing a return, section 6651(a)(1)

imposes an addition to tax unless the taxpayer had reasonable

cause for failing to file on time and the taxpayer’s willful

neglect did not cause the delay. For each month the taxpayer is

late, the addition is 5 percent of the tax due,22 up to 25 percent.

Sec. 6651(a)(1). If a return is more than 60 days late, the

minimum addition under section 6651(a)(1) is the lesser of $100 or

the tax due. Sec. 6651(a).

The IRS met its burden of production for imposing additions

to tax under section 6651(a)(1) for 1998 and 1999. Mary Penland

filed both returns late: she filed her 1998 return on September

8, 2003, and she filed her 1999 return on September 22, 2000.

She did not prove that she is excepted from the addition to

tax. Section 6651(a)(1) excepts a taxpayer from the addition to

22
For purposes of sec. 6651(a)(1), the tax due is “The
amount of tax required to be shown on the return * * *
reduced by the amount of any part of the tax which is paid on or
before the date prescribed for payment of the tax and by the
amount of any credit against the tax which may be claimed on the
return.” Sec. 6651(b)(1); see also sec. 301.6651-1(d), Proced. &
Admin. Regs.
 - 26 -

tax if the taxpayer shows that the delay had reasonable cause and

that willful neglect did not cause the delay. See also sec.

301.6651-1(c), Proced. & Admin. Regs. But she offered no cause,

reasonable or otherwise, for the delays.

We therefore conclude that she is liable for additions to tax

under section 6651(a)(1) for 1998 and 1999.

K. Other Issues

Mary Penland raises several other issues, which, as we

explain below, affect neither her deficiencies nor her liability

for additions to tax under section 6651(a)(1).

First, she claims that we have deprived her of due process.

Yet she does not say--and we do not see--what denial of due

process occurred here.

Second, she raises complaints about the district court

proceedings. But even if her complaints were justified, they

would not affect her deficiencies. We lack jurisdiction to

provide relief other than “to redetermine the correct amount of

the deficiency”. Sec. 6214(a). We may not enlarge upon that

jurisdiction. Breman v. Commissioner, 66 T.C. 61, 66 (1976); see

also sec. 7442.

Third, she states that she is entitled to relief under

section 6015, the provision governing innocent-spouse claims.

Section 6015 relieves qualifying taxpayers from the joint

liability that accompanies the filing of a joint income-tax
 - 27 -

return. See sec. 6015; see also sec. 6013 (providing for filing

of joint returns). Penland did not file a joint return for 1998,

1999, or 2001. Thus section 6015 is inapplicable here.

Fourth, she argues that by granting her attorney’s motion to

withdraw we have deprived her of her Sixth Amendment right to

counsel.23 The Sixth Amendment provides: “In all criminal

prosecutions, the accused shall enjoy the right * * * to have the

assistance of counsel for his defence.” The Sixth Amendment has

no application in civil proceedings such as deficiency actions in

this Court. See, e.g., Cupp v. Commissioner, 65 T.C. 68, 85-86

(1975), affd. without published opinion 559 F.2d 1207 (3d Cir.

1977).

Fifth, she argues that the IRS’s determination of her

income-tax deficiencies violates the Double Jeopardy Clause of

the Fifth Amendment. The Double Jeopardy Clause protects

criminal defendants from “a second prosecution for the same

offense after acquittal; a second prosecution for the same

offense after conviction; and multiple punishments for the same

offense.” United States v. Halper, 490 U.S. 435, 440 (1989).

The first two of these protections are not at issue because the

government never prosecuted Mary Penland. Nor is the protection

against multiple punishments at issue. The IRS’s determination

of her deficiencies seeks not to punish her but to recover her

23
In an order dated May 5, 2008, after a hearing on the
issue, we granted the motion of Penland’s attorney to withdraw.
 - 28 -

purported underpayments of tax. See Ianniello v. Commissioner,

98 T.C. 165, 179 (1992) (citing Traficant v. Commissioner, 884

F.2d 258, 263 (6th Cir. 1989), affg. 89 T.C. 501 (1987)); cf.

Dept. of Revenue of Mont. v. Kurth Ranch, 511 U.S. 767 (1994)

(holding that a state tax conditioned on commission of a crime

and exacted only after arrest for the conduct giving rise to the

tax obligation was a “punishment”). And the additions to tax are

not punishments for double jeopardy purposes because they are

remedial. See Ianniello v. Commissioner, supra at 184-185

(holding fraud penalty under section 6653 is remedial); Joye v.

Commissioner, T.C. Memo. 2002-14 n.9 (“additions to tax such as

those under sec. 6651(a)(1) * * * are remedial, and not

punitive”) (citing Helvering v. Mitchell, 303 U.S. 391, 401

(1932), and Ianniello v. Commissioner, supra at 187). Thus the

determination does not violate the Double Jeopardy Clause.

We have considered the parties’ arguments and conclude that

those not mentioned are moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.