The opinion
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.
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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.
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(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.
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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
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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.
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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
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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
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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.
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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.
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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.
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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.
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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,
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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.
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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
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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
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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.
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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.
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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...)
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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.
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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.
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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
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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.