Opinion
18374-15
07-29-2022
LAWRENCE W. NELSON, III, DECEASED AND JACALYN A. THOMPSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Joseph H. Gale, Judge.
Pending before the Court is respondent's Motion to Dismiss for Lack of Prosecution, filed October 16, 2020, as supplemented by respondent's First Supplement thereto and a Declaration of Regena Carr in support thereof, both filed July 11, 2022 (collectively, the Motion). Respondent requests in his Motion that this case be dismissed for failure to properly prosecute as to petitioner Lawrence W. Nelson, III (Mr. Nelson), who died after the Petition was filed. Respondent represents that he has been advised that no representative or fiduciary is currently authorized to act on behalf of the estate of Mr. Nelson and that Mr. Nelson's only ascertainable heirs at law are his surviving spouse, petitioner Jacalyn A. Thompson (Ms. Thompson), and his surviving issue, Brittany Thompson. Respondent further represents that neither Ms. Thompson nor Mr. Nelson's surviving issue objects to our granting the Motion.
Attached as Exhibit A to both respondent's original Motion and the Supplement thereto is a redacted copy of a Certificate of Death issued on July 26, 2017, by the State of California, County of Contra Costa, indicating that Mr. Nelson died on July 15, 2017.
In the notice of deficiency upon which this case is based, respondent determined that Mr. Nelson and Ms. Thompson were jointly and severally liable for deficiencies, additions to tax under section 6651(a)(1), and accuracy-related penalties under section 6662(a) for the taxable years 2011 and 2012, as follows:
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Year
Deficiency
Additions to Tax/Penalties
2011
$261,108.00
$65,276.50
$52,221.60
2012
132,105.00
33,026.00
26,421.00
Respondent now concedes that petitioners are not liable for the section 6662(a) penalties for the years at issue, and he further concedes that Ms. Thompson is entitled to partial relief from joint and several liability under section 6015(f) for both years at issue. Respondent otherwise requests that we sustain the determinations set forth in the notice of deficiency.
Respondent and Ms. Thompson filed a Proposed Stipulated Decision on October 16, 2020, reflecting their agreement as to the extent to which she is entitled to relief from joint and several liability under section 6015(f). Therein, Ms. Thompson concedes that (before application of section 6015(f)) she is liable for deficiencies, additions to tax, and penalties as determined in the notice of deficiency (due to an apparent clerical error, the amounts of the section 6651(a)(1) additions to tax and section 6662(a) penalties are transposed). In view of the fact that we may enter only one decision in this case, we will recharacterize the Proposed Stipulated Decision as respondent and Ms. Thompson's Stipulation of Settled Issues. Our decision in this case will reflect the agreement that respondent and Ms. Thompson have reached, as well as respondent's subsequent concession of the section 6662(a) penalties.
The Court may dismiss a case at any time and enter a decision against a taxpayer for failure properly to prosecute his case, failure to comply with the Rules of this Court or any order of the Court, or for any cause which the Court deems sufficient. Rule 123(b); Stearman v. Commissioner, 436 F.3d 533, 535-37 (5th Cir. 2006), aff'g T.C. Memo. 2005-39; Bauer v. Commissioner, 97 F.3d 45, 48-49 (4th Cir. 1996); Edelson v. Commissioner, 829 F.2d 828, 831 (9th Cir. 1987), aff'g T.C. Memo. 1986-223. When a petitioner dies, the Court generally will order that a representative or successor be substituted as the proper party. Rule 63(a). In the event that no representative of a decedent comes forward to prosecute the decedent's case before this Court, the procedural means for bringing the case to a close is the Commissioner's filing of a motion to dismiss for failure to properly prosecute. See Nordstrom v. Commissioner, 50 T.C. 30, 32 (1968); see also Wyler v. Commissioner, T.C. Memo. 1990-285, 1990 WL 74410, at *3.
We are satisfied that respondent's Motion to Dismiss is well taken. As noted, there is no representative or fiduciary currently authorized to act on behalf of the estate of Mr. Nelson, and his heirs at law have notice of this case and do not object to his dismissal from it. Accordingly, we will grant respondent's Motion and we will dismiss this case for failure to properly prosecute as to Mr. Nelson.
As shown above, respondent determined deficiencies of $261,108 and $132,105 in petitioners' 2011 and 2012 federal income tax, respectively. Respondent further determined, among other things, that for 2011 petitioners underreported their gross receipts on two Schedules C, Profit or Loss from Business, by a total of $571,354; failed to report $3,799 of pension and annuity income reported to respondent by a third party on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.; failed to report a total of $21,736 of income from cancellation of indebtedness, which was reported to respondent by a third party on two Forms 1099-C, Cancellation of Debt; failed to report Social Security benefits of $22,254 (of which $18,916 was taxable); and failed to report $104 of taxable interest income. Respondent also determined that, for 2012, petitioners underreported their gross receipts on two Schedules C by a total of $374,158; failed to report a total of $29,426 of income from cancellation of indebtedness, which was reported to respondent by third parties on Forms 1099-C; and underreported the taxable portion of their Social Security benefits by $18,566.
The manner in which the notice of deficiency describes the adjustments to petitioners' income from Social Security benefits suggests that respondent determined that petitioners entirely failed to report their Social Security benefits for 2011, but that the adjustment for 2012 was merely a computational adjustment resulting from other adjustments to petitioners' income for that year. However, respondent takes the position in his Motion that Mr. Nelson "failed to report" petitioners' Social Security income for both of the years at issue in amounts equal to the adjustments to the taxable portions of those benefits set forth in the notice of deficiency. For purposes of respondent's Motion, we will therefore treat the $18,566 adjustment to the taxable portion of petitioners' Social Security benefits for 2012 as if petitioners did not report that portion of the Social Security benefits on their 2012 federal income tax return.
The Commissioner's determinations in a notice of deficiency are generally entitled to a presumption of correctness. See Rule 142(a). In a case involving unreported income, as in the instant matter, the Court of Appeals for the Ninth Circuit, where appeal in this case lies absent a stipulation to the contrary, has held that the presumption of correctness applies once the Commissioner makes at least a minimal evidentiary showing connecting the taxpayer to the income-producing activity or the receipt of funds. See, e.g., Hardy v. Commissioner, 181 F.3d 1002, 1004-05 (9th Cir. 1999), aff'g T.C. Memo. 1997-97; Weimerskirch v. Commissioner, 596 F.2d 358, 360-61 (9th Cir. 1979), rev'g 67 T.C. 672 (1977). The Commissioner need not produce direct evidence to satisfy his burden of production. See Reyes v. Commissioner, T.C. Memo. 2012-129, 2012 WL 1557391, at *2; Banister v. Commissioner, T.C. Memo. 2008-201, 2008 WL 3925877, at *2 (finding that a notice of deficiency indicating that third parties paid the taxpayer the specific amounts in question satisfied the minimal evidentiary burden, particularly because the taxpayer challenged the Commissioner's disallowance of deductions but did not dispute receiving income), aff'd, 418 Fed.Appx. 637 (9th Cir. 2011); Curtis v. Commissioner, T.C. Memo. 2001-308, 2001 WL 1530238, at *5-6 (finding that notices of deficiency, in conjunction with summaries of rental income information provided to the taxpayer by the Commissioner's counsel, satisfied the minimal evidentiary burden, particularly in view of the taxpayer's implicit concessions concerning the receipt of rental income), aff'd in part, rev'd in part on another issue, 73 Fed.Appx. 200 (9th Cir. 2003).
Once the Commissioner satisfies his burden of production, the burden shifts to the taxpayer to prove that the Commissioner's determinations are arbitrary or erroneous. See, e.g., Walquist v. Commissioner, 152 T.C. 61, 67-68 (2019). For the limited purpose of determining whether to shift the evidentiary burden from the taxpayer to the Commissioner, a court may properly consider hearsay evidence. See Williams v. Commissioner, 999 F.2d 760, 765 (4th Cir. 1993) ("Hearsay evidence inadmissible for its truth value may nonetheless be considered in determining whether a burden of proof should be shifted from the Taxpayer to the Commissioner."), aff'g T.C. Memo. 1992-153; Avery v. Commissioner, 574 F.2d 467, 468 (9th Cir. 1978) (per curiam), aff'g T.C. Memo. 1976-129; Gleason v. Commissioner, T.C. Memo. 2011-154, 2011 WL 2600917, at *6, 8-9 & n.12 (admitting, for the limited purpose of determining whether the method of reconstructing a taxpayer's income was reasonable, spreadsheets containing unidentified columns of numbers that the Commissioner had used in reconstructing the taxpayer's income).
In this case, the notice of deficiency satisfies respondent's burden of production for some, but not all, of respondent's determinations concerning petitioners' unreported income. For 2011, as we have noted, the notice of deficiency indicates that third parties reported to respondent that they paid petitioners $3,799 in pension and annuity income and that petitioners had debts cancelled totaling $21,736. Similarly, for 2012, the notice of deficiency indicates that third parties reported to respondent that petitioners had debts cancelled totaling $29,426.
Although the notice of deficiency is hearsay if offered for the truth of the matters asserted therein, we may, as we have noted, consider it for the limited purpose of determining whether respondent has made the minimal evidentiary showing necessary to connect Mr. Nelson to the unreported income.
Respondent has also produced certified copies of Wage and Income Transcripts for Mr. Nelson and Ms. Thompson for each of the years at issue. Those transcripts confirm that respondent received information returns reporting the amounts of pension and annuity and cancellation of indebtedness income reflected in the notice of deficiency for the years at issue. In addition, although the notice of deficiency itself does not identify information returns or other evidence connecting petitioners to the taxable interest income that respondent determined was unreported for 2011, or the Social Security income that respondent determined was unreported for 2011 and 2012, the Wage and Income Transcripts indicate that respondent received information returns reporting each of those items. With respect to the interest income for 2011, Mr. Nelson's Wage and Income Transcript for that year lists two Forms 1099-INT, Interest Income, showing interest payments of $32 and $72, for a total of $104 (matching the amount of unreported interest income shown in the notice of deficiency). With respect to the Social Security income, Ms. Thompson's Wage and Income Transcript for 2011 lists a Form SSA-1099 showing benefits paid of $22,254 (matching the total unreported amount shown for that year in the notice of deficiency), and her Wage and Income Transcript for 2012 lists a Form SSA-1099 showing benefits paid of $23,050 (exceeding the total taxable amount of Social Security benefits, as adjusted, shown for that year in the notice of deficiency).
The certified copies of the Wage and Income Transcripts fall within an exception to the rule against hearsay. See Fed. R. Evid. 803(8), 902(1), (4). We accordingly may consider those transcripts for the truth of the matters asserted therein.
Respondent's burden of production is accordingly satisfied as to the pension and annuity income, cancellation of indebtedness income, interest income, and Social Security benefits that he determined petitioners failed to report.
Although section 6201(d) may in certain circumstances shift the burden of production to the Commissioner when a disputed information return forms the basis for his deficiency determination, we find that the provision does not apply here. While the Petition assigns error to each income adjustment set forth in the notice of deficiency, it does not raise a dispute with respect to the information returns themselves. The Petition instead implicitly acknowledges that petitioners received the amounts reported on the information returns and alleges that petitioners' reporting of the disputed items was proper. For example, the Petition alleges that petitioners "properly excluded payments from National Financial Services LLC in TY 2011 as pension income" and that they "properly excluded debt cancellation from income in TY 2011 and 2012." The Petition thus does not raise a reasonable dispute as to the underlying information returns for purposes of section 6201(d). See Carlson v. Commissioner, T.C. Memo. 2012-76, 2012 WL 947161, at *3, aff'd, 604 Fed.Appx. 628 (9th Cir. 2015). Mr. Nelson has not otherwise raised any such dispute.
The notice of deficiency and the Wage and Income Transcripts do not, however, contain sufficient information to support respondent's determination that petitioners underreported their gross receipts on their Schedules C by a total of $571,354 for 2011 and $374,158 for 2012. To satisfy his burden of production with respect to the gross receipts, respondent relies on the Declaration of Regena Carr, who states therein that she is the Revenue Agent who examined petitioners' federal income tax returns for the years at issue. Ms. Carr further states that because petitioners' records did not reconcile with the information reported on their Schedules C for the years at issue, she obtained information from petitioners' banks, including account statements, that she used to perform a bank deposits analysis for each of the years at issue. Additionally, Ms. Carr states that attached to her Declaration are true and correct copies of her bank deposits analyses, from which she determined that, after accounting for nontaxable items, petitioners underreported their gross receipts in the amounts set forth in the notice of deficiency. The bank deposits analyses take the form of spreadsheets listing the dates and amounts of deposits to petitioners' numerous bank accounts, along with amounts that were identified as transfers, loans, or otherwise not taxable.
Although the Declaration, like the notice of deficiency, is hearsay if offered for the truth of the matters asserted therein, we may likewise consider it for the limited purpose of determining whether respondent has satisfied his minimal evidentiary burden.
From the summary on the first page of each bank deposits analysis, it appears that Ms. Carr initially identified potential unreported gross receipts in excess of the amounts ultimately determined in the notice of deficiency.
Although the bank deposits analyses, like the notice of deficiency and Declaration, are hearsay if offered for the truth of the matters asserted therein, we may likewise consider them for the limited purpose of determining whether respondent has satisfied his minimal evidentiary burden.
"The use of the bank deposits method for computing income has long been sanctioned by the courts" and is appropriate where a taxpayer fails to maintain sufficient books or records to establish the amount of his or her income. DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), aff'd, 959 F.2d 16 (2d Cir. 1992); see also Estate of Mason v. Commissioner, 64 T.C. 651, 656-57 (1975), aff'd, 566 F.2d 2 (6th Cir. 1977). "Deposits in a taxpayer's bank account are prima facie evidence of income, and the taxpayer bears the burden of showing that the deposits were not taxable income but were derived from a nontaxable source." Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir. 2000), aff'g T.C. Memo. 1998-121; see also Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) ("A bank deposit is prima facie evidence of income and [the Commissioner] need not prove a likely source of that income."). Under the bank deposits method, all money deposited in a taxpayer's bank account during the relevant period is presumed to be taxable income, except that the Commissioner must account for nontaxable amounts or deductible expenses to the extent that he has knowledge of them. Clayton v. Commissioner, 102 T.C. 632, 645- 46 (1994).
We are satisfied that Ms. Carr's Declaration and the copies of the bank deposits analyses attached thereto indicate that she reasonably employed the bank deposits method to determine the correct amount of petitioners' gross receipts for the years at issue from information obtained from petitioners' banks. Because we may consider both hearsay and indirect evidence for the purpose of determining whether the presumption of correctness attaches to respondent's determinations, the materials respondent has produced are sufficient to establish a minimal evidentiary foundation connecting Mr. Nelson to the unreported portions of petitioners' Schedule C gross receipts. We accordingly conclude that respondent has satisfied his burden of production as to those unreported income determinations. See Catlett v. Commissioner, T.C. Memo. 2021-102, at *9-10; Gleason, T.C. Memo. 2011-154, 2011 WL 2600917, at *6, 8-9 & n.12; Curtis, T.C. Memo. 2001-308, 2001 WL 1530238, at *5-6.
Moreover, although petitioners did assign error in their Petition to respondent's adjustments to their Schedule C income for the years at issue, the Petition also alleges that petitioners "properly reported all TY 2011 and 2012 Schedule C2 and C1 income and expenses." Petitioners accordingly concede that they engaged in the income-producing Schedule C activities.
The burden of proof accordingly rests with Mr. Nelson concerning any error in the deficiency determinations. All of the material allegations set forth in the Petition in support of the assignments of error have been denied in respondent's Answer, and Mr. Nelson has not claimed or shown entitlement to any shift in the burden of proof under section 7491(a). As Mr. Nelson has adduced no evidence in support of the assignments of error in the Petition, he has failed to satisfy his burden of proof. We will therefore sustain respondent's deficiency determinations.
In the notice of deficiency, respondent also determined that, for 2011, petitioners are liable for a section 6651(a)(1) addition to tax of $65,276.50 and a section 6662(a) accuracy-related penalty of $52,221.60. For 2012, respondent determined that petitioners are liable for a section 6651(a)(1) addition to tax of $33,026 and a section 6662(a) penalty of $26,421. The Commissioner generally bears the burden of production with respect to any penalty, addition to tax, or other additional amount (generically, penalty) where the taxpayer has contested it in his petition. See § 7491(c); Funk v. Commissioner, 123 T.C. 213, 216-18 (2004); Swain v. Commissioner, 118 T.C. 358, 363-65 (2002). To satisfy the burden, the Commissioner must offer sufficient evidence to indicate that it is appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). The Commissioner's burden of production with respect to penalties includes showing compliance with the supervisory approval requirement of section 6751(b). See Graev v. Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016); see also Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff'g in part, rev'g in part T.C. Memo. 2015-42. If the Commissioner satisfies his burden of production, the taxpayer bears the burden of proving it is inappropriate to impose the penalty because of reasonable cause, substantial authority, or a similar provision. Higbee, 116 T.C. at 446-47; see also § 6664(c); Wheeler v. Commissioner, 127 T.C. 200, 206 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008).
The supervisory approval requirement does not apply to additions to tax imposed under section 6651. See § 6751(b)(2)(A).
As we have noted, respondent now concedes that petitioners are not liable for the section 6662(a) penalties he determined in the notice of deficiency. We therefore will not sustain those penalties.
We will, however, sustain the additions to tax that respondent determined under section 6651(a)(1). Section 6651(a)(1) imposes an addition to tax for any failure to file a return by its due date. The addition is equal to 5% of the amount required to be shown as tax on the return for each month or portion thereof that the return is late, up to a maximum of 25%. See id. The addition is imposed on the net amount due, calculated by reducing the amount required to be shown as tax on the return by any part of the tax which is paid on or before its due date and by the amount of any credit that the taxpayer may claim on the return. See § 6651(b)(1). To carry his burden of production with respect to the section 6651(a)(1) addition to tax, the Commissioner must introduce evidence showing that a return was filed after the due date. See Wheeler, 127 T.C. at 207-08; Higbee, 116 T.C. at 447. Petitioners' 2011 income tax return was due in April 2012, and their 2012 income tax return was due in April 2013. See § 6072(a).
Respondent has produced certified copies of Forms 4340, Certificate of Assessments, Payments, and Other Specified Matters, for each of the years at issue. The Forms 4340 do not indicate that petitioners obtained an extension of the due date for filing their return for either of the years at issue, and they show that petitioners' 2011 return was not filed until July 2013 and that their 2012 return was not filed until August 2013. In the absence of any contrary evidence, we conclude that petitioners' 2011 and 2012 returns were due in April 2012 and April 2013, respectively. The Forms 4340 thus indicate that the returns for both years at issue were filed after their due dates, and respondent has satisfied his burden of production with respect to the section 6651(a)(1) additions to tax.
Absent a showing of irregularity, a Form 4340 provides presumptive proof of its contents. See, e.g., Hansen v. United States, 7 F.3d 137, 138 (9th Cir. 1993) (per curiam); Davis v. Commissioner, 115 T.C. 35, 40-41 (2000).
Mr. Nelson accordingly bears the burden of proof with respect to any exculpatory factors for the additions to tax. See Wheeler, 127 T.C. at 206; Higbee, 116 T.C. at 446-47. As Mr. Nelson has adduced no evidence in support of any exculpatory factors, we sustain respondent's determinations of the additions to tax.
The foregoing considered, it is
ORDERED that respondent's Motion to Dismiss for Lack of Prosecution, filed October 16, 2020, as supplemented, is granted in that this case is dismissed for failure to properly prosecute as to petitioner Lawrence W. Nelson, III. It is further
ORDERED that the Clerk of the Court shall recharacterize the Proposed Stipulated Decision filed October 16, 2020, as respondent and petitioner Jacalyn A. Thompson's Stipulation of Settled Issues. It is further
ORDERED and DECIDED that, before application of I.R.C. § 6015(f), there are deficiencies in petitioners' federal income tax due for the taxable years 2011 and 2012 in the amounts of $261,108 and $132,105, respectively;
That there are additions to tax due from petitioners for the taxable years 2011 and 2012 under the provisions of I.R.C. § 6651(a)(1) in the amounts of $65,276.50 and $33,026, respectively; and
That there are no penalties due from petitioners for the taxable years 2011 and 2012under the provisions of I.R.C. § 6662(a). It is further
ORDERED and DECIDED that, after application of I.R.C. § 6015(f), there are deficiencies in income tax due from petitioner Jacalyn A. Thompson for the taxable years 2011 and 2012 in the amounts of $25,145 and $26,384, respectively; and
That there are no additions to tax due from petitioner Jacalyn A. Thompson for the taxable years 2011 and 2012 under the provisions of I.R.C. § 6651(a)(1).