Opinion
18374-15
01-12-2022
LAWRENCE W. NELSON, III, DECEASED AND JACALYN A. THOMPSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Joseph H. Gale, Judge
Pending before the Court is respondent's Motion to Dismiss for Lack of Prosecution, filed October 16, 2020. Respondent therein requests that this case be dismissed for failure to properly prosecute as to petitioner Lawrence W. Nelson, III, who died after the Petition was filed, and that a decision be entered against him sustaining the 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 determined in the notice of deficiency upon which this case is based.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent determined in the notice of deficiency, 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 $104 of taxable interest income; 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 reported to respondent by a third party on two Forms 1099-C, Cancellation of Debt; and failed to report Social Security benefits of $22,254 (of which respondent determined $18,916 was taxable). Respondent also determined that, for 2012, petitioners underreported their gross receipts on two Schedules C in a total amount of $374,158, and that they 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.
The Commissioner's determinations in a notice of deficiency are generally entitled to a presumption of correctness. See Rule 142(a). But 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 does not apply until 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). A notice of deficiency alone may satisfy the burden of production if it indicates that a third party paid the taxpayer the amount in question and reported the payment to the Commissioner. See Banister v. Commissioner, T.C. Memo. 2008-201, 2008 WL 3925877, at *2, aff'd, 418 Fed.Appx. 637 (9th Cir. 2011). 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).
The notice of deficiency, if offered for the truth of the matter asserted, is inadmissible hearsay. However, a court may properly consider hearsay evidence for the limited purpose of determining whether to shift the evidentiary burden from the taxpayer to the Commissioner. 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), aff'g T.C. Memo. 1976-129.
In this case, the notice of deficiency indicates the source of the information supporting some, but not all, of respondent's unreported income determinations. Although respondent acknowledged his burden of production as to the unreported income determinations in his Pretrial Memorandum filed January 30, 2017, his Motion to Dismiss does not rely on any evidence, other than the notice of deficiency, supporting those determinations. Accordingly, on the present record, we cannot sustain all of respondent's unreported income determinations with respect to Mr. Nelson.
In particular, respondent indicated in his Pretrial Memorandum that he based his determination that petitioners underreported their Schedule C gross receipts on a bank deposits analysis, but his Motion to Dismiss does not rely on any evidence relating to such an analysis.
Furthermore, the Commissioner generally bears the burden of production with respect to any penalty, addition to tax, or other additional amount where, as here, the taxpayer has contested it in his or her 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 v. Commissioner, 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).
Respondent's Motion to Dismiss does not rely on any evidence that would satisfy his burdens of production with respect to the additions to tax and penalties determined against petitioners in the notice of deficiency. We therefore cannot, on the present record, sustain those determinations with respect to Mr. Nelson.
Consequently, we will direct respondent to file a supplement to his Motion to Dismiss, which shall include any evidence with respect to the burdens of production described herein that respondent wishes the Court to consider in ruling on his Motion to Dismiss.
The foregoing considered, it is
ORDERED that respondent shall, on or before February 10, 2022, file a supplement to his Motion to Dismiss for Lack of Prosecution filed October 16, 2020, which shall set forth the evidence, if any, on which respondent relies to satisfy his burdens of production with respect to his determinations of unreported income, additions to tax, and penalties set forth in the notice of deficiency upon which this case is based.