Wallace v. Commissioner

T.C. Memo. 1997-28

UNITED STATES TAX COURT

RICHARD T. WALLACE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22124-94. Filed January 15, 1997.

Richard T. Wallace, pro se.

Virginia L. Hamilton, for respondent.

MEMORANDUM OPINION

SCOTT, Judge: Respondent determined deficiencies in

petitioner's Federal income taxes and additions to tax for 1990

through 1993 as follows:

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Additions to Tax

Year Deficiency Sec. 6651(a)(1)1 Sec. 6654

1990 $5,472 $1,368 ---

1991 5,675 1,419 $324

1992 5,869 1,467 256

1993 6,124 612 257

The issues for decision are: (1) Whether petitioner

received taxable income in the amounts determined by respondent

during the years 1990 through 1993; (2) whether petitioner is

liable for self-employment taxes for each of the years 1990

through 1993; (3) whether petitioner is liable under section

6651(a) for the additions to tax for failure to file Federal

income tax returns for each of the years 1990 through 1993; and

(4) whether petitioner is liable under section 6654 for the

additions to tax for failure to make estimated tax payments for

each of the years 1991 through 1993.

This case was submitted with the facts fully stipulated

under Rule 122. The stipulation of facts and the exhibits

attached thereto are incorporated herein by reference. The

pertinent facts are summarized below.

Petitioner resided in Boulder, Colorado, at the time his

petition was filed in this case. He filed no Federal income tax

1

All section references are to the Internal Revenue Code

in effect for the years in issue, and all Rule references are to

the Tax Court Rules of Practice and Procedure, unless otherwise

indicated.

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returns and paid no Federal income taxes for 1990, 1991, 1992,

and 1993.

1. Determination of Taxable Income

Petitioner failed to provide any information as to the

amount or source of his income for the years 1990 through 1993.

During those years he was self-employed in the business of

selling hearing aids and giving hearing tests. He had been in

such business for about 20 years. Petitioner admitted during an

investigation by the Colorado Consumer Protection Office that

between July 1992 and January 1994, he had at least six business

transactions in Colorado. He also admitted that he transacted

most of his business in States other than Colorado and in six

foreign countries, but he refused to disclose any information

relating to such business.

Petitioner provided some support for his wife, Martha

Wallace, during the years 1992 and 1993.

In determining the amounts of petitioner's income for the

years 1990 through 1993, respondent used data obtained from the

U.S. Department of Labor, Bureau of Labor Statistics, which

detailed what it would cost a family of four to live, taking into

account food, housing, transportation, medical care, personal

care, and taxes. These figures were adjusted to one person,

based on the Bureau of Labor Statistics Survey of Consumer

Expenditures. Respondent subtracted all taxes contained in the

Bureau of Labor Statistics determination of necessary expenses.

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Respondent then took the adjusted expenditures for one person and

applied the Consumer Price Index based on the Denver area to

determine the necessary income for petitioner to live on during

1990 through 1993. Thus, the Bureau of Labor Statistics method

resulted in determined income of $22,034 for 1990, $22,886 for

1991, $23,733 for 1992, and $24,738 for 1993.

Section 61 provides, in part, that gross income means income

derived from business and as compensation for services. Section

63(b) provides that, in the case of an individual who does not

elect to itemize deductions, the term "taxable income" means

adjusted gross income minus the standard deduction and the

deduction for personal exemptions. Section 63(c) provides the

amount of the basic standard deduction for the years 1990 through

1993 for an individual married and filing separately. Respondent

allowed petitioner these deductions.

Section 151 provides for a personal exemption. Petitioner

presented no evidence that he is entitled to claim any exemption

other than for himself.

Petitioner was required to maintain books and records

sufficient to establish the amount of his gross income. Sec.

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

F.2d 16 (2d Cir. 1992). He failed to do so. Therefore,

respondent was authorized to compute petitioner's income by any

method that clearly reflected income. Sec. 446(b); Holland v.

United States, 348 U.S. 121 (1954). Any such reconstruction of

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income need only be reasonable in light of all surrounding facts

and circumstances. Giddio v. Commissioner, 54 T.C. 1530, 1533

(1970). The Commissioner is given wide latitude in determining

which method of reconstruction to apply when a taxpayer fails to

maintain adequate books and records. Petzoldt v. Commissioner,

92 T.C. 661, 693 (1989).

In this case petitioner neither filed Federal income tax

returns for the years in issue nor provided information with

respect to his business income. Respondent, however, linked

petitioner to his self-employed business of selling hearing aids

and administering hearing tests, and determined from third-party

sources that petitioner received taxable income for the years in

issue. In these circumstances respondent had broad latitude in

using the method based on the Bureau of Labor Statistics

expenditures to determine petitioner's income. That method was

specifically approved by this Court in Giddio v. Commissioner, 54

T.C. at 1533. There we sustained the Commissioner's

determination of a taxpayer's deficiency computed by using Bureau

of Labor Statistics data showing the normal cost of supporting a

family in the locality where he lived in order to arrive at

taxable income.

We disagree with petitioner's primary contention that

respondent's determination is arbitrary and excessive and that

therefore respondent bears the burden of proving that he had

taxable income.

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The Commissioner's deficiency determination is generally

afforded a presumption of correctness. United States v. Janis,

428 U.S. 433, 441-442 (1976); Welch v. Helvering, 290 U.S. 111,

115 (1933). However, in nonfiler cases, such as this one, there

are decisions holding that the Commissioner cannot sustain a

deficiency determination or assessment unless there is some

predicate evidence showing that the taxpayer received income from

the charged activity. United States v. Janis, supra at 442;

Anastasato v. Commissioner, 794 F.2d 884, 887 (3d Cir. 1986);

Gerardo v. Commissioner, 552 F.2d 549, 554 (3d Cir. 1977); see

also Dellacroce v. Commissioner, 83 T.C. 269 (1984). The

evidentiary foundation need only be minimal. Weimerskirch v.

Commissioner, 596 F.2d 358, 361 (9th Cir. 1979).

Petitioner has incorrectly asserted that respondent has

presented no such evidence. As previously indicated, the

evidence links petitioner to an income-producing activity. It

also shows that he carried on his hearing aid business in

Colorado and other States and in foreign countries. In view of

these facts and circumstances, we conclude that respondent's

determination has not been shown to be either arbitrary or

excessive. The burden of proving error in the determination

remained with petitioner. He failed to carry it.

Petitioner's reliance on Senter v. Commissioner, T.C. Memo.

1995-311, is misplaced. In Senter the Commissioner produced no

predicate evidence that the taxpayer received unreported income

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for the years at issue. That is not the situation here. The

cases of Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), and

Couzens v. Commissioner, 11 B.T.A. 1040 (1928), cited by

petitioner, are inapposite.

Accordingly, we hold that petitioner received taxable income

in the amounts determined by respondent for the years 1990

through 1993.

2. Self-employment Taxes

Section 1401 imposes a tax on the "the self-employment

income" of every individual. In general, self-employment income

consists of "the net earnings derived by an individual (other

than a nonresident alien) from a trade or business carried on by

him as sole proprietor", less allowable deductions and certain

exclusions. Sec. 1402(a); sec. 1.1401-1(c), Income Tax Regs.

Petitioner presented no evidence contesting respondent's

determination that he is subject to self-employment tax under

section 1401. Therefore, we hold that petitioner is liable for

self-employment taxes in the amounts determined by respondent for

the years 1990 through 1993.

3. Section 6651(a)(1) Additions to Tax

For each year in issue respondent determined that petitioner

is liable for the addition to tax under section 6651(a)(1) for

his failure to file a Federal income tax return. Section

6651(a)(1) provides for an addition to tax in the amount of 5

percent of the amount of the tax if the failure to file is for

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not more than 1 month, with an additional 5 percent for each

month in which the failure to file continues, to a maximum of 25

percent of the tax in the aggregate. The addition to tax is

applicable unless it is shown that the failure to file is due to

reasonable cause and not due to willful neglect.

There is no evidence in the record that suggests that

petitioner's failure to file a Federal income tax return for any

year in issue was due to reasonable cause and not due to willful

neglect. It was petitioner's burden to produce such evidence,

Rule 142(a), and this he has failed to do. Consequently, we

sustain respondent's determination that petitioner is liable for

the additions to tax under section 6651(a)(1) for the years 1990

through 1993.

4. Section 6654 Additions to Tax

For the years 1991 through 1993 respondent determined that

petitioner is liable for the additions to tax under section 6654

for his failure to make estimated tax payments. Section 6654

provides for an addition to tax if estimated taxes are underpaid.

It contains no provision relating to reasonable cause and lack of

willful neglect. Because petitioner failed to make any estimated

tax payments for each of the years 1991 through 1993,

respondent's determination is sustained. Grosshandler v.

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

To reflect the foregoing,

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Decision will be entered

for respondent.