The opinion
T.C. Memo. 2003-139
UNITED STATES TAX COURT
ALBERT DUDLEY THROWER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14625-92. Filed May 15, 2003.
Albert Dudley Thrower, pro se.
John M. Tkacik, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Respondent determined the following
deficiency and additions to tax with respect to petitioner’s 1988
Federal income tax:1
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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Additions to Tax
Sec. Sec. Sec.
Deficiency 6651(a)(1) 6653(a)(1) 6654(a)
$1,020,626 $255,156.50 $51,031 $65,550
The issues for decision are: (1) The amount, if any, of
petitioner’s 1988 unreported rental income; (2) whether
petitioner had $3,400,351 of unreported income from illegal
activities in 1988, as respondent determined; and (3) whether
petitioner is liable for additions to tax.2
FINDINGS OF FACT
When he petitioned this Court, petitioner was incarcerated
at Allen Correctional Institute in Lima, Ohio.
During 1988, petitioner owned at least 141 rental properties
in Akron, Ohio. Conducting business under the name of “College
Rentals”, 545 Grant Street, Akron, Ohio, he rented these
properties mainly to college students.
In August 1988, the Akron, Ohio, Police Department arrested
petitioner on charges of trafficking in marijuana. The arrest
occurred in the apartment of one of petitioner’s associates at
80 S. Portage Path, Akron, Ohio.
2
On brief, petitioner has advanced various meritless
arguments. For example, petitioner contends that the limitations
period for assessing his 1988 tax liability has expired.
Petitioner, however, failed to file a 1988 tax return; therefore,
“the tax may be assessed * * * at any time.” Sec. 6501(c)(3).
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In February 1989, petitioner pleaded guilty to trafficking
in marijuana and other related offenses. He received a prison
term of 7 to 25 years and was ordered to forfeit 141 of his
rental properties. See Thrower v. Anderson, No. 98AP-1152 (Ohio
Ct. App. May 18, 1999); State v. Thrower, No. 14967 (Ohio Ct.
App. July 31, 1991); State v. Thrower, 575 N.E.2d 863, 876-877,
879 (Ohio Ct. App. 1989).
For 1988, petitioner filed no Federal income tax return and
paid no estimated taxes.
OPINION
1. Unreported Rental Income
In the notice of deficiency, respondent determined that in
1988 petitioner had $217,460 of unreported net rental income,
representing $543,851 of gross rental income reduced by $98,501
of depreciation expense and $227,890 of other rental expenses.
In his petition, petitioner affirmatively acceded to these
determinations.3 At trial, petitioner offered into evidence a
photocopy of a 1988 Form 1040, U.S. Individual Income Tax Return
(the purported return), which he contended was “my 1988 tax
3
The petition states: “I do not contest the rental income
and expenses.” Moreover, petitioner failed to respond to
respondent’s requests for admissions, which set forth the same
amounts of gross receipts, expenses, and depreciation
attributable to his rental properties as contained in the notice
of deficiency. Pursuant to Rule 90(c), petitioner is deemed to
have admitted these matters. See Freedson v. Commissioner, 65
T.C. 333, 335-336 (1975), affd. 565 F.2d 954 (5th Cir. 1978).
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return * * * signed under oath.” The purported return is dated
September 8, 2002–-2 days before trial. On line 18 (“Rents,
royalties, partnerships, estates, trusts, etc.”) of the purported
return, petitioner listed $445,354 of net rental income--a
significantly greater amount than respondent had determined in
the notice of deficiency--representing $1,212,140 of rents
received, reduced by $98,499 of depreciation expense and $668,287
of other rental expenses. On line 15 (“Other gains or (losses)”)
of the purported return, petitioner listed $2,283,273 of alleged
losses which he contends resulted from “involuntary conversion”
of his forfeited rental properties.
After trial, with leave of the Court, respondent filed an
amendment to his answer, asserting an increased deficiency and
additions to tax in conformity with the evidence that
petitioner’s 1988 net rental income is $445,352.4
Petitioner has not sought to retract or disavow his
admissions on the purported return as to the amounts of his gross
rental income, rental depreciation expense, and other rental
expenses. He argues, however, that his net rental income is more
than offset by the $2,283,273 of losses that he claimed on the
purported return.
4
Respondent attributes to rounding the $2 difference
between the amounts of net rental income indicated on the
purported return and as calculated in the amended answer.
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In his petition, petitioner did not raise the issue of
losses allegedly resulting from the forfeiture of his rental
properties. He did not seek to amend his petition to raise this
issue, nor did he otherwise give proper notice before trial that
he intended to raise it. Accordingly, the issue is not before
the Court, and we will not consider it. See Frentz v.
Commissioner, 44 T.C. 485, 490-491 (1965), affd. per order 375
F.2d 662 (6th Cir. 1967).
Even if the issue were properly before us, however,
petitioner would not be entitled to the claimed losses.
Petitioner failed to introduce any credible evidence to establish
the amounts of the alleged losses or the year in which they might
have been realized. Indeed, because the forfeitures occurred
after petitioner’s guilty plea in February 1989, they would not
have given rise to any loss in 1988. See sec. 461(a); sec.
1.446-1(c)(1), Income Tax Regs. In any event, losses resulting
from drug traffickers’ asset forfeitures are disallowed as
contravening clearly defined public policy.5 See, e.g., Holt v.
5
On brief, petitioner suggests that the above-cited
principle of public policy is nongermane here because his claimed
losses did not result from a forfeiture related to drug
trafficking but rather from a “breach of contract” as a result of
a “reneged plea agreement.” Contrary to petitioner’s
contentions, the Ohio Court of Appeals has repeatedly and
consistently characterized the disposition of petitioner’s 141
rental properties as a forfeiture related to his drug trafficking
charges. See, e.g., State v. Thrower, No. 20615 (Ohio Ct. App.
Mar. 13, 2002); Thrower v. Anderson, No. 98AP-1152 (Ohio Ct. App.
(continued...)
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Commissioner, 69 T.C. 75, 79-81 (1977), affd. 611 F.2d 1160 (5th
Cir. 1980); Bailey v. Commissioner, T.C. Memo. 1989-674, affd.
without published opinion 929 F.2d 700 (6th Cir. 1991).
In conclusion, we hold that for 1988 petitioner had
unreported net rental income of $445,352.
2. Unreported Income From Illegal Activities
In the notice of deficiency, respondent determined that
during the first 8 months of 1988, petitioner received $3,823,364
of “unreported funds by illegal means”. To arrive at this
figure, respondent first determined that petitioner’s alleged
illegal receipts for the month of August 1988 totaled
$477,920.50; respondent then projected petitioner’s alleged
5
(...continued)
May 18, 1999); State v. Thrower, 621 N.E.2d 456, 457 (Ohio Ct.
App. 1993); State v. Thrower, No. 14967 (Ohio Ct. App. July 31,
1991); State v. Thrower, 610 N.E.2d 433, 434 (Ohio Ct. App.
1991); State v. Thrower, 575 N.E.2d 863, 876-877, 879 (Ohio Ct.
App. 1989).
Petitioner also seeks to assert in this action a breach of
contract “counterclaim” against respondent for “$250
million/specific performance as to property”. We lack authority
to address such a claim. The Tax Court is a court of limited
jurisdiction and may exercise only the power conferred by
statute. See sec. 7442; Neilson v. Commissioner, 94 T.C. 1, 9
(1990). Petitioner’s “counterclaim” falls outside that
jurisdiction.
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illegal receipts for the first 8 months of 1988 as being 8 times
this amount.6
If a taxpayer keeps inadequate records, the Commissioner may
compute the taxpayer’s income by any indirect method that is
reasonable in light of all the facts and circumstances. See United
States v. Walton, 909 F.2d 915, 918 (6th Cir. 1990); see also United
States v. Fior D’Italia, Inc., 536 U.S. 238, 243 (2002) (stating
that IRS assessment authority under section 6201(a) is not exceeded
“when the IRS estimates an individual’s tax liability–-as long as
the method used to make the estimate is a ‘reasonable’ one”). If
necessary, the Commissioner may reconstruct a taxpayer’s income,
provided the result is reasonable and substantially correct.
Mendelson v. Commissioner, 305 F.2d 519, 521-522 (7th Cir. 1962),
affg. T.C. Memo. 1961-319; Cebollero v. Commissioner, T.C. Memo.
1990-618, affd. 967 F.2d 986 (4th Cir. 1992). The Commissioner’s
income reconstruction need not be exact, but it must be “reasonable
in light of all surrounding facts and circumstances.” Schroeder v.
Commissioner, 40 T.C. 30, 33 (1963).
Respondent reconstructed petitioner’s alleged illegal income
using the projection method, which “has received widespread judicial
approval.” Jackson v. Commissioner, 73 T.C. 394, 403 (1979). In
general, the projection method entails extrapolating income for a
6
In the notice of deficiency, respondent also allowed
petitioner a $423,013 deduction for cost of goods sold relative
to the alleged illegal income.
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taxable period from records of income produced by the activity in
question over some shorter period. See, e.g., United States v.
Janis, 428 U.S. 433, 437 (1976) (upholding projection of 77 days’
income based upon 5 days’ gross proceeds as indicated in wagering
records); United States v. Besase, 623 F.2d 463, 468 (6th Cir. 1980)
(upholding reconstruction of income based on 4 days’ gross gambling
receipts as indicated on adding machine tapes). Obviously, the
reliability of the results obtained under this method depends upon
the reliability of the starting point; i.e., the adequacy of the
data used to extrapolate the projected income. Cf. Thomas v.
Commissioner, 223 F.2d 83, 89 (6th Cir. 1955) (“‘To be dependable,
however, the [net worth] method requires a starting point,
reasonably well established as accurate.’” (quoting Gariepy v.
United States, 189 F.2d 459, 461 (6th Cir. 1951))).
In employing the projection method here, respondent used as his
starting point petitioner’s alleged illegal receipts for the month
of August 1988. To arrive at this starting point, respondent relied
upon information derived from a notebook that the Akron Police
Department allegedly seized from petitioner’s briefcase upon his
arrest at 80 S. Portage Path, in Akron, Ohio.
At trial, respondent sought to introduce into evidence certain
photocopied pages (the photocopied pages) that respondent claimed to
be a true copy of the notebook in question. Respondent was unable
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to account for the original notebook or for apparently missing pages
of the exhibit.7
The photocopied pages show columns of numbers added and
subtracted, accompanied by various marginal notations, at least some
of which were made by law enforcement personnel or by respondent’s
examining agent. Throughout the photocopied pages are faint,
illegible markings as might result from erasures. The notebook
pages reproduced in the photocopied pages contain no identifiable
direct or indirect references to petitioner.
Petitioner denies that any of the handwriting in the
photocopied pages is his. At a pretrial hearing, in response to
petitioner’s inquiry on this point, respondent’s counsel conceded
that the handwriting in the photocopied pages is not petitioner’s.8
Although respondent’s counsel belatedly attempted to retract this
concession at trial, no competent evidence was offered to establish
7
The photocopied pages are numbered C-4 through C-31.
Respondent did not attempt to account for the apparently missing
pages C-1 through C-3. Respondent’s counsel explained only that
the page numbers were “marked by Respondent * * * during
examination”.
8
At trial the next day, respondent’s counsel represented
that he “misspoke” in making this concession and stated “I think
I clarified that later on the record.” The record reflects no
such clarification intelligibly made. To the contrary, it
reflects that respondent’s counsel took no exception when on at
least nine separate occasions during the remainder of the
pretrial hearing, petitioner referred to what he–-and the Court–-
understood to be respondent’s concession and stated that in light
of it, he (petitioner) would forgo calling his own handwriting
witness.
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that any of the handwriting in the photocopied pages is
petitioner’s.
Respondent’s sole witness was a former Akron Police Department
officer who had been in charge of petitioner’s criminal
investigation and who, since leaving the Akron Police Department in
1991, has owned and operated his own consulting business.
Respondent’s witness acknowledged that some of the handwriting and
markings in the photocopied pages were his own, apparently made in
the course of his analyzing the notebook at some unspecified time
and in unspecified circumstances. Respondent’s witness (who was not
present when petitioner was arrested and the notebook was allegedly
seized) was unable to authenticate the photocopied pages or even to
identify them satisfactorily.9 Respondent established no chain of
custody of the notebook or notebooks–-a concern that gains in
significance given that the photocopied pages appear to be an
incomplete and corrupted version of the original document or
documents.
Because of these various evidentiary infirmities, the Court
sustained petitioner’s objection to the admission of the photocopied
pages into evidence. On brief, respondent has not sought to revisit
this evidentiary ruling and appears to have abandoned any reliance
9
Respondent’s witness identified the photocopied pages as a
true copy of a notebook seized from petitioner’s briefcase at his
arrest. Internal handwritten notations in the photocopied pages,
however, identify approximately the last half of the photocopied
pages as having been found at an address other than the place of
petitioner’s arrest.
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on the photocopied pages. Instead, respondent argues on brief that
the reasonableness of his determination of the amount of
petitioner’s 1988 alleged illegal income is established by the
testimony of respondent’s witness. At trial, the testimony on this
point was as follows:
[RESPONDENT’S COUNSEL:] * * * based on your
experience as a police officer investigating narcotics
activity, and your knowledge of Mr. Thrower’s involvement
in the marijuana trafficking, is it reasonable to
determine that Mr. Thrower had receipts of $477,920 during
the month of August ‘88?
[RESPONDENT’S WITNESS:] That’s correct.
In asking this leading question, respondent’s counsel
ostensibly sought to elicit expert opinion testimony on the basis of
the witness’s specialized knowledge as a former police officer,
notwithstanding that respondent’s witness was never formally offered
as an expert witness.10 Cf. Chagra v. Commissioner, T.C. Memo. 1991-
366 (“It is well settled that the testimony of a drug enforcement
officer with respect to the valuation of illegal narcotics is expert
10
Upon commencing direct examination of respondent’s
witness, respondent’s counsel stated that he was calling the
witness as both a fact witness and an expert witness. At the
Court’s direction, respondent’s counsel commenced direct
examination with questions relating to the witness’s role as a
fact witness. Respondent’s counsel gave no overt indication of
ever moving to the expert witness phase of the testimony.
Before trial, pursuant to Rule 143(f) respondent submitted
to the Court a copy of a putative expert report prepared by
respondent’s witness. Respondent never offered the expert report
into evidence. The expert report made a fleeting appearance in
the courtroom, however, when respondent’s counsel produced the
version of the photocopied pages he offered into evidence by
physically detaching them from the expert report.
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testimony.”), affd. without published opinion 990 F.2d 1250 (2d Cir.
1993). Considering the testimony as expert opinion testimony, we do
not believe it is properly based upon “sufficient facts or data” or
upon “reliable principles and methods” applied “reliably to the
facts” of this case, as required by rule 702 of the Federal Rules of
Evidence.11 Earlier in the trial, respondent’s witness had testified
that he had relied on the photocopied pages as the basis for his
conclusion that petitioner’s drug-related income for the first 8
months of 1988 should be computed as eight times approximately
$477,000. At trial, it was apparent that in giving an affirmative
response to the above-quoted leading question, respondent’s witness
was merely reaffirming his prior opinion, which was based on the
photocopied pages. Having concluded that the photocopied pages are
unreliable evidence which respondent has failed to adequately
connect with petitioner, we conclude that the expert opinion
11
Fed. R. Evid. 702 provides as follows:
If scientific, technical, or other specialized
knowledge will assist the trier of fact to understand
the evidence or to determine a fact in issue, a witness
qualified as an expert by knowledge, skill, experience,
training, or education, may testify thereto in the form
of an opinion or otherwise, if (1) the testimony is
based upon sufficient facts or data, (2) the testimony
is the product of reliable principles and methods, and
(3) the witness has applied the principles and methods
reliably to the facts of the case.
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testimony based thereon is also unreliable and entitled to little or
no weight.12
In the final analysis, it is apparent, on the basis of all the
evidence in the record, that respondent’s deficiency figures for
petitioner’s alleged illegal income are predicated on the unreliable
and inadmissible evidence of the photocopied pages. In Rosano v.
Commissioner, 46 T.C. 681, 687 (1966), we observed that “the
Commissioner’s determination may often rest upon hearsay or other
inadmissible evidence, and we know of no rule of law calling for a
review of the materials that were before the Commissioner in order
to ascertain whether he relied upon improper evidence”. By the same
token, however, if the Commissioner undertakes to demonstrate the
basis of his determination with unreliable evidence and in the
process convinces the Court that his determination is arbitrary,
12
In light of our conclusion that the testimony in question
was proffered as expert testimony, based on “specialized
knowledge” of respondent’s witness as a former police officer, it
follows that the testimony is not admissible as opinion testimony
by a lay witness under Fed. R. Evid. 701 (providing that opinion
testimony by lay witnesses is limited to opinions that are not
based on, among other things, “scientific, technical, or other
specialized knowledge within the scope of Rule 702.”). Even if
we had concluded, however, that the opinion testimony in question
was not based on specialized knowledge within the scope of Fed.
R. Evid. 702, we would nevertheless disregard the testimony as
improper opinion testimony by a lay witness, in that respondent’s
witness failed to establish a reliable factual predicate for his
opinion testimony. See Chagra v. Commissioner, T.C. Memo. 1991-
366, affd. without published opinion 990 F.2d 1250 (2d Cir.
1993); see also United States v. Williams, 212 F.3d 1305, 1310
(D.C. Cir. 2000) (“to admit lay opinion evidence rationally based
on the witness’s perception, a sufficient factual foundation must
exist”).
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then the Government may be “elevated on its own powder charge”.
Jackson v. Commissioner, 73 T.C. at 403. In that event, “the burden
is no longer on petitioner to show that he owes nothing, or the
correct amount, if any, that he does owe.” Id. (citing Helvering v.
Taylor, 293 U.S. 507 (1935)); see Harp v. Commissioner, 263 F.2d
139, 141 (6th Cir. 1959) (“the Commissioner’s determination is
presumed correct, but if error is shown, the presumption disappears
and the Commissioner then has the burden of proving the correctness
of his determination, or at least the correct amount actually
due.”), affg. in part, revg. in part and remanding T.C. Memo. 1957-
105.
Having admitted that he derived his deficiency figures for
petitioner’s alleged illegal income from the photocopied pages and
having undertaken at trial to establish the reasonableness of his
determination on that basis, respondent has in the process
inadvertently convinced us that his deficiency figures were
unreliably derived. In particular, respondent’s belatedly retracted
admission that the photocopied pages (which respondent has not
otherwise adequately connected with petitioner) are not in
petitioner’s handwriting seems plainly inconsistent with the basis
of respondent’s reconstruction of petitioner’s income.
Taxpayers may not avoid the imposition of legally due taxes by
concealing facts, but neither may the Commissioner base his
determination on a “‘strong underlying element of guess work.’”
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Jacobs v. Commissioner, T.C. Memo. 1974-73 (quoting Polizzi v.
Commissioner, 265 F.2d 498, 502 (6th Cir. 1959), affg. in part and
revg. in part T.C. Memo. 1957-159). In the instant case, as in
Thomas v. Commissioner, 223 F.2d at 90, respondent’s reconstruction
of petitioner’s alleged illegal income may have the “inviting
quality of apparent exactitude” but ultimately proves conjectural.
Cf. Jackson v. Commissioner, supra at 403 (“the elaborate construct
set out in the deficiency notice, based solely as it was on a
secondhand report of peripheral statements made by an unreliable
informant, turns out to be sheer gossamer”). We conclude that
respondent’s deficiency figures were so arbitrarily derived as to
negate any presumption of correctness. The record provides no
reliable basis for estimating petitioner’s alleged illegal income.
Accordingly, respondent’s determination with respect to this issue
is not sustained.
3. Additions to Tax
a. Addition to Tax for Failure To Timely File a Return
Respondent determined that petitioner is liable for the section
6651(a)(1) addition to tax for failure to timely file his 1988
Federal income tax return. Section 6651(a)(1) imposes an addition
to tax for failure to timely file a return unless the taxpayer
establishes that the failure “is due to reasonable cause and not due
to willful neglect”. A delay is due to reasonable cause if “the
taxpayer exercised ordinary business care and prudence and was
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nevertheless unable to file the return within the prescribed time”.
Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
It is undisputed that petitioner failed to timely file his 1988
tax return. Petitioner alleges, however, that he was unable to
timely file his tax return because he was incarcerated and because
his business records were confiscated after his arrest.
The mere fact that petitioner was incarcerated when his return
was due is not reasonable cause for his failure to timely file.
Llorente v. Commissioner, 74 T.C. 260, 268-269 (1980), affd. in
part, revd. in part on other grounds and remanded 649 F.2d 152 (2d
Cir. 1981); Labato v. Commissioner, T.C. Memo. 2001-243. Nor is the
unavailability of records generally reasonable cause for failure to
file a timely return. See Young v. Commissioner, T.C. Memo. 1989-
480, affd. without published opinion 937 F.2d 609 (6th Cir. 1991).
Nothing in the record suggests that petitioner applied for an
extension of time to file his 1988 return; petitioner has not shown
that he could not have prepared a timely 1988 return with a
reasonable degree of accuracy on the basis of the information
available to him as of the due date of that return. See Cook v.
Commissioner, T.C. Memo. 1999-50. Petitioner has not established
that his failure to timely file his return was due to reasonable
cause. Therefore, we hold that petitioner is liable for the section
6651(a)(1) addition to tax with respect to the deficiency
attributable to his unreported net rental income.
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b. Addition to Tax for Negligence
Respondent determined that petitioner is liable for the section
6653(a)(1) addition to tax for an underpayment attributable to
negligence or disregard of rules or regulations. In this context,
negligence is “‘lack of due care or failure to do what a reasonable
and ordinarily prudent person would do under the circumstances.’”
Midwest Indus. Supply, Inc. v. Commissioner, T.C. Memo. 1996-130
(quoting Neely v. Commissioner, 85 T.C. 934, 947 (1985)), affd.
without published opinion 125 F.3d 855 (6th Cir. 1997).
Petitioner does not contend that he paid his 1988 tax
liability. He has failed to show that his underpayment was not
attributable to negligence or disregard of rules or regulations.
Therefore, we hold that petitioner is liable for the section
6653(a)(1) addition to tax with respect to the deficiency
attributable to his unreported net rental income.
c. Addition to Tax for Underpayment of Estimated Tax
Respondent determined that petitioner is liable for the section
6654(a) addition to tax for underpayment of estimated tax.
During the year at issue, petitioner filed no tax return and
paid no estimated taxes. Petitioner has not shown that any of the
exceptions contained in section 6654(e) applies. Accordingly, we
hold that petitioner is liable for the section 6654(a) addition to
tax with respect to the deficiency attributable to his unreported
net rental income.
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In reaching our holding, we have considered all arguments
the parties have raised. Arguments not addressed herein we have
concluded are irrelevant or without merit.
To reflect the foregoing,
Decision will be
entered under Rule 155.