UNITED STATES TAX COURT

T.C. Memo. 2001-198

UNITED STATES TAX COURT

ROBERT L. BECK, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

MARGUERITE BECK, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 14577-98, 14578-98.

Filed July 30, 2001.

Robert L. Beck and Marguerite Beck, pro sese.

Nancy Graml, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

THORNTON, Judge:

briefing, and opinion.

These cases were consolidated for trial,

By separate notices of deficiency,

respondent determined the following deficiencies, additions to

- 2 tax, and penalties with respect to each petitioner’s Federal

income taxes:1

Robert L. Beck

Year

1991

1992

1993

1994

1995

Deficiency

$50,232

50,051

58,916

83,789

79,636

Additions to Tax

Sec. 6651(a)(1)

$12,558

12,513

14,729

20,947

23,049

Penalties

Sec. 6663(a)

$37,674

37,538

44,187

62,842

59,727

1

1

The notice of deficiency states that if “it is

determined the underpayment is not due to fraud, then

the accuracy related penalty per Internal Revenue Code

Section 6662(a) would be applicable.”

Marguerite Beck

Year

1991

1992

1993

1994

1995

Deficiency

$43,671

41,045

50,049

68,890

76,387

Additions to Tax

Sec. 6651(f)

Sec. 6654(a)

$32,753

$2,496

30,784

1,790

37,537

2,097

51,667

3,575

57,290

4,142

1

1

The notice of deficiency states that if “it is

determined the failure to file is not due to fraud,

then the delinquency penalty rate of 25 percent, per

Internal Revenue Code Section 6651(a) would be

applicable.”

In his answer to Robert L. Beck’s (Dr. Beck’s) petition,

respondent conceded the fraud penalties under section 6663(a) for

1

Unless otherwise indicated, 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.

- 3 all years in issue, and asserted in the alternative accuracyrelated penalties under section 6662(a), as follows:

Year

1991

1992

1993

1994

1995

Penalties

Sec. 6662(a)

$10,046

10,010

11,783

16,758

15,927

In his answer to Marguerite Beck’s (Mrs. Beck’s) amended

petition, respondent conceded the additions to tax under section

6651(f) for fraudulent failure to file and asserted in the

alternative additions to tax for failure to file pursuant to

section 6651(a)(1) as follows:

Year

1991

1992

1993

1994

1995

Additions to Tax

Sec. 6651(a)(1)

$10,918

10,261

12,512

17,223

19,097

After concessions, the issues to be decided are:

(1) Whether Dr. Beck is entitled to dental-practice business

deductions greater than respondent has allowed; (2) whether for

years 1993, 1994, and 1995, Dr. Beck is entitled to claimed

losses allegedly arising from a horse operation; (3) whether Dr.

Beck is entitled to claimed net operating loss carryovers;

(4) whether Dr. Beck’s income from his dental practice and from

oil royalties constitutes community property, taxable one-half to

each petitioner for each year in issue; (5) whether Mrs. Beck

- 4 qualifies for relief pursuant to section 66(c); (6) whether

petitioners are liable for additions to tax pursuant to section

6651(a)(1) for failure to file timely returns; (7) whether Dr.

Beck is liable for accuracy-related penalties pursuant to section

6662(a); and (8) whether Mrs. Beck is liable for additions to tax

pursuant to section 6654(a) for underpayment of estimated taxes.2

Procedural Background

On August 28, 1998, petitioners filed their petitions with

this Court.

They were then represented by John Wells (Wells).

By Court Order dated January 14, 1999, the cases were calendared

for trial at the session of the Court commencing May 17, 1999, at

Houston, Texas.

On February 1, 1999, Wells filed a motion to withdraw as

counsel.

On February 3, 1999, the Court granted Wells’s motion.

After unsuccessfully attempting to secure petitioners’

cooperation in preparing a stipulation of facts, on February 19,

1999, respondent sent a letter to each petitioner, requesting

them to respond in writing to his proposed stipulations of facts

and evidence contained in 110 separately numbered paragraphs.

the same date, respondent mailed to each petitioner and filed

2

Robert L. Beck’s (Dr. Beck’s) self-employment tax, selfemployment tax deduction, and the amounts of his allowable

personal exemption and standard deduction are computational.

Similarly, the amounts of Marguerite Beck’s (Mrs. Beck’s)

allowable personal exemption and standard deduction are

computational.

On

- 5 with the Court, pursuant to Rule 90, respondent’s request for

admissions, reflecting substantially the same matters contained

in respondent’s proposed stipulations of fact.

On April 2, 1999, Lorenzo W. Tijerina (Tijerina) filed an

entry of appearance on behalf of Dr. Beck.

Also on April 2,

1999, Dr. Beck filed a motion to continue the trial, on the

ground that Tijerina needed additional time to familiarize

himself with the case and consult with Dr. Beck and respondent’s

trial attorney.

On April 5, 1999, respondent filed a motion for an order to

show cause why his proposed stipulations should not be deemed

accepted pursuant to Rule 91(f).

On April 7, 1999, the Court entered two Orders:

(1) Extending the time to April 28, 1999, for petitioners to file

their responses to respondent’s requests for admissions; and

(2) ordering petitioners to show cause on or before April 28,

1999, why the facts and evidence set forth in respondent’s

proposed stipulations should not be accepted as established for

purposes of these cases.

On April 29, 1999, Dr. Beck filed substantially identical

responses to both respondent’s request for admissions and the

Court’s Order to Show Cause Under Rule 91(f).

In his responses,

Dr. Beck refused to admit or stipulate anything except a few of

the most basic facts, often stating simply “Not Admitted” or

- 6 “Not Stipulated”, providing no reasons upon which he based his

refusal to admit or stipulate, contrary to the requirements of

Rules 90(c) and 91(f)(2).

Mrs. Beck filed no response to

respondent’s request for admissions or to the Court’s Order to

Show Cause pursuant to Rule 91(f).3

On May 4, 1999, the Court granted Dr. Beck’s motion for a

continuance and discharged its Order to Show Cause Under Rule

91(f).

In the Court’s notice setting case for trial, dated May

21, 1999, the cases were calendared for trial at the session of

the Court commencing October 25, 1999, in Houston, Texas.

On June 4, 1999, respondent once again filed a motion to

show cause why proposed facts in evidence should not be accepted

pursuant to Rule 91(f).

The subject matter of respondent’s Rule

91(f) motion was the facts and evidence set forth in those

paragraphs of respondent’s requested admissions and proposed

stipulations of facts to which Dr. Beck had failed to agree in

his previous responses.

On June 7, 1999, the Court granted

respondent’s motion and ordered petitioners to file a response

and show cause, on or before June 28, 1999 (subsequently,

enlarged to July 13, 1999, by Court Order dated June 30, 1999),

why the matters set forth in respondent’s motion papers should

not be deemed admitted for purposes of these proceedings.

3

Consequently, pursuant to Rule 90(c), each matter set

forth in respondent’s requested admissions was deemed admitted as

to Mrs. Beck.

- 7 Petitioners filed no responses to the Court’s order.4

On July

29, 1999, the Court ordered that its June 7, 1999, Order to Show

Cause be made absolute.

Consequently, all matters contained in respondent’s 110

paragraphs of requested admissions and proposed stipulations were

deemed admitted and/or stipulated by Mrs. Beck and either

actually admitted or stipulated or deemed stipulated by Dr. Beck.

On October 20, 1999, Tijerina filed a motion to withdraw as

counsel.

The Court granted Tijerina’s motion.

At trial, petitioners appeared pro sese.

Dr. Beck stated

that he had no objection to the admission into evidence of the

various documents that were the subject of respondent’s requested

admissions and proposed stipulations.

FINDINGS OF FACT

The admitted facts, deemed stipulations, and corresponding

exhibits are incorporated herein by this reference.

When petitioners filed their respective petitions, they each

resided in San Antonio, Texas.

Petitioners were married during

the years in issue, and continued to be married, though separated

4

The Court’s June 7, 1999, Order to Show Cause, sent by

certified mail to each petitioner, was returned unclaimed by Mrs.

Beck. The Court’s June 30, 1999, Order, which enlarged the time

for petitioners to respond to the June 7, 1999, Order to Show

Cause, also sent by certified mail to each petitioner, was not

returned unclaimed by either petitioner.

- 8 and in the process of obtaining a divorce, at the time of trial.

Throughout the years in issue, petitioners resided together in

the State of Texas.

Dr. Beck attended the University of Virginia, Duke

University, and Harvard University.

and dentistry.

He has degrees in medicine

During the years in issue, he was a self-employed

dentist in San Antonio, Texas.

In 1987, the Texas State Board of Dental Examiners (the

board), created by the Texas legislature, revoked Dr. Beck’s

dental license.

In 1988, Dr. Beck filed suit in Texas State

court to set aside the revocation.

On April 1, 1992, the board

and Dr. Beck entered into an agreed board order pursuant to which

Dr. Beck’s license was suspended for 3 years with all but the

first 90 days being a probationary period.

The lawsuit brought

by Dr. Beck against the board was dismissed as moot.

During this process, Mrs. Beck was active in efforts on her

husband’s behalf to dissolve the board.

She first contacted

Texas Attorney General Jim Maddox, and in 1989 she contacted

Texas Attorney General Richard “Racehorse” Haynes.

She

eventually persuaded a former board investigator to testify as a

witness for Dr. Beck at the hearings before the Texas State

legislature regarding dissolution of the board.5

5

The board was dissolved in 1994 and reestablished during

the 1995 Texas legislative session.

- 9 During the years in issue, Mrs. Beck occasionally worked in

Dr. Beck’s dental office and participated in recruiting employees

for his dental practice (the dental practice).

A few times each

week, Mrs. Beck called the dental practice to ask the practice

administrator how much money the office received for the day.

Mrs. Beck was a signatory on the dental practice’s bank

account at Nation’s Bank (the dental practice account).

From

December 1993 to January 1995, petitioners maintained a joint

personal account at Frost National Bank (the joint account).

In

addition, from November 1994 through January 1996, Mrs. Beck was

the sole signatory to an account at Frost National Bank (the

separate account).

Dr. Beck employed a practice administrator who handled his

dental office affairs.

The practice administrator would fill out

checks to pay substantially all of the dental practice expenses.

Either Dr. Beck or Mrs. Beck would sign the checks.

Dr. Beck accepted payment for his dental work in cash as

well as checks.

The dental practice offered its services at a

discount if the patient paid cash.

The dental practice employees

turned over to Dr. Beck all cash payments received.

During 1993 and 1994, the dental practice would receive

from its patients, on average, $3,000 a day in cash.

From 1991

through 1994, only one cash deposit, in the amount of $2,000, was

made to the dental practice account.

- 10 In 1994, Mrs. Beck deposited approximately $11,691 into her

separate account, mostly in cash.

In 1995, she made deposits of

approximately $54,616 into the separate account, mostly in cash.

The primary source of these deposits was income from the dental

practice.

In 1994, Mrs. Beck made cash deposits totaling at

least $6,120 to petitioners’ joint account.

From 1977 through September 1995, Dr. Beck, either singly or

with his former wife, E. Roman Beck, owned or controlled the

ownership of more than 100 acres in Blanco Hills County Estate in

Bexar County, north of San Antonio, Texas (the Blanco property).

In a foreclosure sale on October 3, 1995, the Blanco property was

sold to an unrelated third party for $290,000.

On October 15,

1995, Mrs. Beck purchased the Blanco property from the third

party, in exchange for a note in the principal amount of

$331,845, executed by Mrs. Beck and secured by a lien on the

Blanco property.

Mrs. Beck used income from Dr. Beck’s dental

practice to purchase the Blanco property.

Petitioners’ Tax Returns

Dr. Beck filed no Federal income tax returns for taxable

years 1991 through 1994 until September 1, 1995.6

For each year

6

Dr. Beck was granted extensions to file Federal income tax

returns for each of the taxable years in issue and filed his

returns on the dates indicated below:

(continued...)

- 11 in issue, Dr. Beck claimed a filing status of married, filing

separate.

Mrs. Beck filed no Federal income tax returns and paid

no estimated income taxes for any of the years in issue.

For the years in issue, Dr. Beck reported on Schedule C,

Profit or Loss From Business (Sole Proprietorship), income and

expenses from “Dental Medical Services” as follows:

Year

1991

1992

1993

1994

1995

Gross Income

$388,429

551,770

592,960

645,960

562,892

Total Expenses

$373,590

579,198

529,114

585,831

377,218

Net Profit

(or Loss)

$14,839

(27,428)

63,846

60,129

185,674

For each year in issue, Dr. Beck reported on Schedule E,

Supplemental Income and Loss, $1,020 net income from oil

royalties.

For taxable years 1993, 1994, and 1995, Dr. Beck reported

losses on Schedule F, Profit or Loss From Farming, of $98,850,

$76,700, and $9,854, respectively, relating to an alleged horse

operation.

For 1993 and 1994, these reported losses include

claimed losses of $30,000 and $25,000, respectively, described on

each Schedule F simply as “ONE DEAD HORSE”.

6

(...continued)

Taxable

Year

Date due

1991

Apr. 15, 1992

1992

Apr. 15, 1993

1993

Apr. 15, 1994

1994

Apr. 15, 1995

1995

Apr. 15, 1996

Date due with

Extensions granted

Aug. 15, 1992

Aug. 15, 1993

Aug. 15, 1994

Aug. 15, 1995

Oct. 15, 1996

Date filed

Sept. 1, 1995

Sept. 1, 1995

Sept. 1, 1995

Sept. 1, 1995

Oct. 16, 1996

- 12 For each year in issue, Dr. Beck claimed net operating loss

(NOL) carryovers as follows:

Year

1991

1992

1993

1994

1995

NOL Carryover

$367,251

318,145

377,950

408,759

424,310

Notices of Deficiency

In the notice of deficiency issued to Dr. Beck, respondent

determined that Dr. Beck had claimed and failed to substantiate

certain Schedule C deductions as follows:

Claimed

Deductible

Expenses

$382,205

591,436

1

542,044

1

600,159

377,218

Year

1991

1992

1993

1994

1995

Respondent’s

Determination of

Deductible Expenses

$88,407

270,839

288,668

247,194

110,174

Adjustment to

Taxable Income

$293,798

320,597

253,376

352,965

267,044

1

As previously indicated, for years 1993 and

1994, petitioner’s claimed Schedule C deductions were

$529,114 and $585,831, respectively. In the notice of

deficiency, respondent appears to have overstated the

amounts of deductions claimed by Dr. Beck for 1993 and

1994, resulting in excessive adjustments to taxable

income for these 2 years. We expect these errors to be

corrected in the Rule 155 computation.

Based on these adjustments, respondent redetermined Dr.

Beck’s Schedule C income for each year in issue and allocated

one-half of that income, along with one-half of Schedule E

royalty income reported by Dr. Beck for each year in issue, to

Mrs. Beck as her community property income.

Accordingly, in

separate notices of deficiency, respondent determined that Mrs.

- 13 Beck had unreported income and that Dr. Beck is entitled to a

corresponding deduction for the community property split of his

income, as follows:

Amount

$154,829

147,095

1

159,121

1

207,057

226,869

Year

1991

1992

1993

1994

1995

1

As previously described, it appears that for

1993 and 1994 respondent has overstated the amount of

Dr. Beck’s Schedule C income, thus resulting in an

overstatement of the amounts of community property

income for 1993 and 1994. We expect these errors to be

corrected in the Rule 155 computation.

Respondent disallowed entirely the Schedule F farm losses

that Dr. Beck claimed for 1993, 1994, and 1995, on the ground

that Dr. Beck had not established that each claimed loss

“constitutes an ordinary and necessary business expense, was

expended, or was expended for the designated purpose.”

Respondent also disallowed the NOL carryforward deductions that

Dr. Beck claimed for each year in issue, on the ground that Dr.

Beck had “neither established * * * [his] entitlement under the

Internal Revenue Code to [claim] a net operating loss nor

substantiated the amount of any loss.”

OPINION

Dr. Beck’s Schedule C Deductions

For each year in issue, respondent disallowed a portion of

Dr. Beck’s claimed Schedule C expenses as described above.

- 14 Deductions are strictly a matter of legislative grace;

petitioners bear the burden of proving that they are entitled to

any deductions claimed.

INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992).

Section 162(a) allows a deduction for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on

a trade or business.

Taxpayers must maintain records sufficient

to establish the amount of their income and deductions.

Sec.

6001; sec. 1.6001-1(a), (e), Income Tax Regs.

Dr. Beck has offered no credible evidence to establish that

he is entitled to deduct claimed Schedule C expenses greater than

the amounts that respondent has determined to be allowable.7

Consequently, we sustain respondent’s determinations disallowing

the claimed deductions.

7

Dr. Beck claimed that his accounting records were stored

in a “black box” at his office and that this box was mistakenly

removed and disposed of by office cleaning people in February

1995. Dr. Beck’s contention is not credible in light of his

deemed stipulations of fact. The deemed stipulations indicate

that according to the office cleaning people involved in the

incident and the police officer who filed a report of the

incident, the dimensions of the discarded box were approximately

9 by 12 by 4 inches. The deemed stipulations also indicate that

Dr. Beck’s 1995 business and accounting records took up several

five-drawer filing cabinets. In any event, Dr. Beck has not

attempted to substantiate his claimed deductions by

reconstructing any expenditures through other credible evidence.

Cf. Watson v. Commissioner, T.C. Memo. 1988-29.

- 15 Dr. Beck’s Schedule F Deductions

In taxable years 1993, 1994, and 1995, Dr. Beck claimed

Schedule F losses relating to an alleged horse operation.

Respondent disallowed these losses in their entirety.

Dr. Beck presented no evidence to demonstrate the existence

of any horse activity.

He failed to present any records relating

to the alleged horse activity or to otherwise substantiate or

even explain the losses asserted on his returns.8

Moreover, Dr.

Beck did not establish that the alleged horse activity was

conducted with the primary purpose of making a profit.

Dr. Beck has failed to establish that he is entitled to

deduct the claimed Schedule F losses.

Consequently, we sustain

respondent’s determinations disallowing the claimed Schedule F

losses.

Net Operating Loss Carryovers

Dr. Beck claimed, and respondent disallowed, substantial net

operating loss carryover deductions for each year in issue.

In the case of net operating loss deductions, as with other

deductions, Dr. Beck bears the burden of proving that he is

entitled to the claimed deductions.

See Rule 142(a); United

States v. Olympic Radio & Television, 349 U.S. 232, 235 (1955);

8

In particular, with respect to the losses of $30,000 and

$25,000, claimed in 1993 and 1994, respectively for “ONE DEAD

HORSE”, Dr. Beck established neither the existence nor demise of

any horse.

- 16 Jones v. Commissioner, 25 T.C. 1100, 1104 (1956), revd. and

remanded on other grounds 259 F.2d 300 (5th Cir. 1958); Leitgen

v. Commissioner, T.C. Memo. 1981-525, affd. per curiam without

published opinion 691 F.2d 504 (8th Cir. 1982).

Dr. Beck presented no evidence regarding any of his claimed

NOL carryover deductions.

Accordingly, Dr. Beck has failed to

establish that he is entitled to the claimed NOL carryover

deductions.

We sustain respondent’s determination disallowing

these deductions.

Community Property Under Texas State Law

Texas is a community property State.

See Tex. Const. art.

16, sec. 15; Tex. Fam. Code Ann. sec. 5.01 (Vernon 1993).

Under

Texas law, community property consists of all property acquired

by either spouse during marriage, except for property acquired by

gift, devise, or descent, or (with certain exceptions) in

recovery for personal injuries sustained by a spouse in marriage.

Tex. Fam. Code Ann. sec. 5.01.

Property possessed by either

spouse during or at dissolution of the marriage is presumed to be

community property--a presumption rebuttable with clear and

convincing evidence.

Id. at sec. 5.02.

earnings are community property.

A spouse’s personal

Winger v. Pianka, 831 S.W.2d

853, 857 (Tex. App. 1992).

Because each spouse is owner of one-half of all community

property, each spouse is liable for Federal income taxes on such

- 17 share.

United States v. Mitchell, 403 U.S. 190 (1971); Hopkins

v. Bacon, 282 U.S. 122, 126-127 (1930); Bowling v. United States,

510 F.2d 112, 113 (5th Cir. 1975); Johnson v. Commissioner, 72

T.C. 340, 343 (1979).

Petitioners were married to each other throughout the years

in issue.

Respondent determined that Dr. Beck’s Schedule C and

Schedule E net profits were community income during the years in

issue and that each petitioner is liable for Federal income tax

on one-half of this community income.

Neither Dr. Beck nor Mrs.

Beck presented any evidence to contest respondent’s

determination.9

We sustain respondent’s determination on this issue.

Relief From Liability Pursuant To Section 66(c)

In her petition, Mrs. Beck contends that she “is legally an

‘innocent spouse.’”

Because Mrs. Beck and Dr. Beck did not file

a joint return for any year in issue, the provisions of section

6015 for relief from joint and several liability on joint returns

are inapplicable.10

Consequently, we construe Mrs. Beck’s prayer

9

The deemed admissions and deemed stipulations state that

Dr. Beck’s income reported on Schedule C and Schedule E was

community income during the years in issue.

10

Mrs. Beck filed her petition on Aug. 28, 1998. Effective

July 22, 1998, former sec. 6013(e) was repealed and

simultaneously replaced by sec. 6015 as part of the Internal

Revenue Service Restructuring and Reform Act of 1998, Pub. L.

105-206, sec. 3201(a), 112 Stat. 734. Sec. 6015 provides several

avenues of relief from joint and several liability, all

(continued...)

- 18 for relief as arising under section 66(c), which provides relief

from income tax liability with respect to unreported community

income in certain circumstances.

Section 66(c) provides:

SEC. 66(c). Spouse Relieved of Liability in

Certain Other Cases.--Under regulations prescribed by

the Secretary, if–(1) an individual does not file a joint

return for any taxable year,

(2) such individual does not include in

gross income for such taxable year an item of

community income properly includible therein

which, in accordance with the rules contained

in section 879(a), would be treated as the

income of the other spouse,

(3) the individual establishes that he

or she did not know of, and had no reason to

know of, such item of community income, and

(4) taking into account all facts and

circumstances, it is inequitable to include

such item of community income in such

individual’s gross income,

then, for purposes of this title, such item of

community income shall be included in the gross income

of the other spouse (and not in the gross income of the

individual). Under procedures prescribed by the

Secretary, if, taking into account all the facts and

circumstances, it is inequitable to hold the individual

liable for any unpaid tax or any deficiency (or any

portion of either) attributable to any item for which

relief is not available under the preceding sentence,

the Secretary may relieve such individual of such liability.

10

(...continued)

conditioned on the electing individual’s having made a joint

return for the year in question. See sec. 6015(a), (b)(1)(A),

and (c)(1); Rev. Proc. 2000-15, 2000-5 I.R.B. 447 (Jan. 31,

2000).

- 19 Respondent does not dispute that Mrs. Beck meets the

requirements of section 66(c)(1) and (2).

Respondent contends,

however, that she fails to meet the requirements of section

66(c)(3) and (4).

For the reasons discussed below, we agree with

respondent.

Mrs. Beck has failed to establish that she did not know of

the subject items of community income, within the meaning of

section 66(c)(3).

Whether a taxpayer has knowledge of an item of

community income is determined by reference to knowledge of a

particular income-producing activity, rather than of the exact

amount of community income.

See McGee v. Commissioner, 979 F.2d

66, 70 (5th Cir. 1992) (and cases cited therein), affg. T.C.

Memo. 1991-510; Roberts v. Commissioner, 860 F.2d 1235, 1239-1240

(5th Cir. 1988), affg. T.C. Memo. 1987-391.

Here, Mrs. Beck

clearly was aware that Dr. Beck’s dental practice was an incomeproducing activity.

Mrs. Beck occasionally worked in Dr. Beck’s

office, often called the office to determine how much money Dr.

Beck earned on a given day, and during the last 2 years in issue

made substantial deposits of income from the dental practice into

her separate bank account and into petitioners’ joint bank

account.

After Dr. Beck’s dental license was revoked, she was

actively involved in seeking to have the board dissolved, thus

demonstrating engagement in his business affairs.

- 20 Petitioners have presented no evidence to establish that Mrs.

Beck was unaware of the Schedule E community income.

Mrs. Beck has also failed to establish that it would be

“inequitable” within the meaning of section 66(c)(4) to include

her community share of Dr. Beck’s earnings in her income.

The

legislative history of section 66(c)(4) indicates that an

important factor to consider in this regard is “whether the

spouse [who is seeking relief under section 66(c)] benefitted

from the untaxed income”.

(1984).

H. Rept. 98-432 (Part 2), at 1503

As previously discussed, in 1994 and 1995, Mrs. Beck

made significant deposits of dental practice income into her

separate bank account and petitioners’ joint bank accounts.11

In

1995, Mrs. Beck used dental practice income in purchasing the

more than 100 acres of the Blanco property.

Mrs. Beck has not

shown that she did not benefit from the community property

income.

The last sentence of section 66(c) (the section 66(c)

equitable relief provision) provides for relief from liability if

“it is inequitable to hold the individual liable for any unpaid

11

The record does not reveal whether Mrs. Beck made similar

deposits in other years in issue. The record contains no

evidence to indicate that she did not benefit from the dental

practice income or from the Schedule E income. We cannot assume

that the missing evidence would be favorable to Mrs. Beck.

Indeed, the normal inference is that the missing evidence would

be unfavorable. See Pollack v. Commissioner, 47 T.C. 92, 108

(1966), affd. 392 F.2d 409 (5th Cir. 1968).

- 21 tax or any deficiency * * * attributable to any item for which

relief is not available” under section 66(c)(1) through (4).

The

section 66(c) equitable relief provision was enacted on July 22,

1998, and applies to any liability for tax arising after such

date or arising on or before such date and remaining unpaid as of

such date.

See Internal Revenue Service Restructuring and Reform

Act of 1998 (RRA 1998), Pub. L. 105-206, secs. 3201(b), 3202(g),

112 Stat. 734, 740.

As Mrs. Beck’s liability for tax arose prior

to July 22, 1998, and remains unpaid, the section 66(c) equitable

relief provision is effective with respect to the instant case.

Respondent contends that denial of relief under the section

66(c) equitable relief provision is not subject to judicial

review.

We disagree.

The section 66(c) equitable relief

provision was enacted in the same section of the same legislation

that created a similar equitable relief provision under section

6015(f).12

See RRA 1998 sec. 3201(b), 112 Stat. 734.

We have

previously held that in a deficiency proceeding we have authority

to review respondent’s denial of equitable relief under section

6015(f) as part of our traditional authority in deficiency

proceedings to render an opinion regarding affirmative defenses

raised by the taxpayer.

12

See Butler v. Commissioner, 114 T.C.

Sec. 6015(f) provides that if, taking into account all

the facts and circumstances, it is inequitable to hold the

individual liable for any unpaid tax or any deficiency, and

relief is unavailable under sec. 6015(b) or (c), the Secretary

may relieve such individual of the liability.

- 22 276, 287-292 (2000); see also Fernandez v. Commissioner, 114 T.C.

324, 328-332 (2000) (Tax Court has authority in “stand alone”

petition filed pursuant to section 6015(e)(1)(A) to review denial

of relief under section 6015(f)).

For the same reasons discussed

in Butler v. Commissioner, supra, we conclude that in this

deficiency proceeding we have authority to review respondent’s

denial of equitable relief under the last sentence of section

66(c).

Consistent with our enunciated standard of review for

respondent’s denial of equitable relief under section 6015(f),

see Fernandez v. Commissioner, supra at 331; Butler v.

Commissioner, supra at 291-293, we review the Commissioner’s

denial of equitable relief under section 66(c) for abuse of

discretion.

Mrs. Beck has not established that respondent abused his

discretion in refusing her request for equitable relief.

As

previously discussed, the record indicates that Mrs. Beck was

involved in Dr. Beck’s dental practice, was aware of the dental

practice income, and benefited substantially therefrom.

The

record is devoid of evidence that she was unaware of the Schedule

E income.

Moreover, Mrs. Beck has failed to establish that she

would suffer economic hardship if the relief were not granted.

Finally, by persistently failing to comply with the Rules and

Orders of this Court and by failing to cooperate with respondent

- 23 in preparing this case for trial, Mrs. Beck has demonstrated a

lack of good faith that we believe is indicative of a lack of

respect for the Federal income tax laws and the processes of this

Court.

In sum, Mrs. Beck has not established that respondent would

have abused his discretion in denying any request for relief

under section 66(c).

Additions to Tax for Failure To File Timely Returns

Section 6651(a)(1) imposes an addition to tax for failure to

file a timely return unless the taxpayer establishes that the

failure “is due to reasonable cause and not due to willful

neglect”.

Respondent contends that Dr. Beck is liable for

section 6651(a)(1) additions to tax for failure to file timely

returns for 1991, 1992, 1993, and 1994, and that Mrs. Beck is

liable for the section 6651(a)(1) addition to tax for each year

in issue.

It is undisputed that Dr. Beck did not timely file Federal

income tax returns for taxable years 1991, 1992, 1993, and 1994.

Dr. Beck has not established that he had reasonable cause for his

failure to file timely returns.

Accordingly, Dr. Beck is liable

for the section 6651(a)(1) addition to tax for taxable years

1991, 1992, 1993, and 1994.

Mrs. Beck failed to file a Federal income tax return for any

year in issue.

In her petition, Mrs. Beck contends that she “is

- 24 legally impaired (as a result of mental illness, traumatic

epilepsy, and brain damage) from comprehending or understanding

the nature and requirements of the Internal Revenue Code.”

A taxpayer’s mental incapacity may constitute “reasonable

cause” for failure to file returns.

Memo. 1992-1.

Bloch v. Commissioner, T.C.

Judging by Mrs. Beck’s demeanor at trial and her

testimony, which was lucid and coherent, displaying at most

naivety and poor judgment rather than mental incompetence, and in

the absence of any medical evidence to the contrary,13 we are

unconvinced that Mrs. Beck was so mentally impaired that she

could not appreciate her legal duty to file returns and pay

taxes, particularly during the years in issue, when she was

actively engaged in the conduct of Dr. Beck’s dental practice.

Mrs. Beck has not established that she had reasonable cause

for her failure to file timely returns.

Accordingly, Mrs. Beck

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

year in issue.

13

At trial, the Court admitted into evidence, over

respondent’s objections, a letter that Dr. Beck alleged was sent

to respondent’s auditing agent, which Dr. Beck alleged to contain

medical reports regarding Mrs. Beck’s “emotional instability and

sensitivity.” After trial, it was discovered that Dr. Beck had

failed to relinquish to the Court this exhibit and other exhibits

that he had proffered and that had been marked for

identification. On Nov. 1, 1999, and Nov. 3, 1999, the Court’s

trial clerk contacted Dr. Beck and requested that he return the

exhibits to complete the record in this case. After receiving no

response, on Feb. 9, 2000, the Court ordered the missing exhibits

stricken from the record of these cases.

- 25 Dr. Beck’s Liability for Accuracy-Related Penalties

Respondent contends that for each year in issue Dr. Beck is

liable for the section 6662(a) accuracy-related penalty.

Section

6662(a) imposes a 20-percent penalty on any portion of an

underpayment that is attributable to, among other things,

negligence or disregard of the rules or regulations.

6662(b)(1).

Sec.

Negligence is the lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

the same circumstances.

(1985).

Neely v. Commissioner, 85 T.C. 934

No penalty shall be imposed under section 6662(a) with

respect to any portion of an underpayment if it is shown that

there was reasonable cause and that the taxpayer acted in good

faith.

Sec. 6664(c).

Dr. Beck failed to produce evidence to substantiate the

deductions he claimed on his Schedules C and F.

His failure to

maintain and to produce records of his business activities shows

not only negligence but intentional disregard of rules and

regulations requiring a taxpayer to keep permanent records

sufficient to establish his gross income and deductions.

See

Crocker v. Commissioner, 92 T.C. 899, 917 (1989); Schroeder v.

Commissioner, 40 T.C. 30, 34 (1963).

Dr. Beck has come forward with no evidence to establish that

he acted in good faith.

As previously discussed, Dr. Beck’s

claims that office cleaning people accidentally discarded all his

business records are not credible.

Dr. Beck is liable for the

- 26 section 6662(a) accuracy-related penalty with regard to his

entire underpayment for each year in issue.

Mrs. Beck’s Liability for Section 6654(a) Additions to Tax

Respondent determined that for each year in issue, Mrs. Beck

is liable for the section 6654(a) addition to tax for

underpayment of estimated tax by an individual.

During the years

in issue, Mrs. Beck filed no returns and paid no estimated taxes.

Mrs. Beck has not shown that any of the exceptions contained

in section 6654(e) apply.

Therefore, we hold that she is liable

for the section 6654(a) addition to tax for each year in issue.

To reflect the foregoing and concessions by respondent,

Decisions will be entered

under Rule 155.