BECK v. COMMISSIONER ( 2001 )

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: These cases were consolidated for trial,
briefing, and opinion. By separate notices of deficiency,
respondent determined the following deficiencies, additions to
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tax, and penalties with respect to each petitioner’s Federal
income taxes:1
Robert L. Beck
Additions to Tax Penalties
1
Year Deficiency Sec. 6651(a)(1) Sec. 6663(a)
1991 $50,232 $12,558 $37,674
1992 50,051 12,513 37,538
1993 58,916 14,729 44,187
1994 83,789 20,947 62,842
1995 79,636 23,049 59,727
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
Additions to Tax
1
Year Deficiency Sec. 6651(f) Sec. 6654(a)
1991 $43,671 $32,753 $2,496
1992 41,045 30,784 1,790
1993 50,049 37,537 2,097
1994 68,890 51,667 3,575
1995 76,387 57,290 4,142
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.
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all years in issue, and asserted in the alternative accuracy-
related penalties under section 6662(a), as follows:
Penalties
Year Sec. 6662(a)
1991 $10,046
1992 10,010
1993 11,783
1994 16,758
1995 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:
Additions to Tax
Year Sec. 6651(a)(1)
1991 $10,918
1992 10,261
1993 12,512
1994 17,223
1995 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
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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. On
the same date, respondent mailed to each petitioner and filed
2
Robert L. Beck’s (Dr. Beck’s) self-employment tax, self-
employment 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.
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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
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“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.
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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.
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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. He has degrees in medicine
and dentistry. 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.
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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.
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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...)
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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:
Net Profit
Year Gross Income Total Expenses (or Loss)
1991 $388,429 $373,590 $14,839
1992 551,770 579,198 (27,428)
1993 592,960 529,114 63,846
1994 645,960 585,831 60,129
1995 562,892 377,218 185,674
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 Date due with
Year Date due Extensions granted Date filed
1991 Apr. 15, 1992 Aug. 15, 1992 Sept. 1, 1995
1992 Apr. 15, 1993 Aug. 15, 1993 Sept. 1, 1995
1993 Apr. 15, 1994 Aug. 15, 1994 Sept. 1, 1995
1994 Apr. 15, 1995 Aug. 15, 1995 Sept. 1, 1995
1995 Apr. 15, 1996 Oct. 15, 1996 Oct. 16, 1996
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For each year in issue, Dr. Beck claimed net operating loss
(NOL) carryovers as follows:
Year NOL Carryover
1991 $367,251
1992 318,145
1993 377,950
1994 408,759
1995 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 Respondent’s
Deductible Determination of Adjustment to
Year Expenses Deductible Expenses Taxable Income
1991 $382,205 $88,407 $293,798
1992 591,436 270,839 320,597
1
1993 542,044 288,668 253,376
1
1994 600,159 247,194 352,965
1995 377,218 110,174 267,044
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.
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Beck had unreported income and that Dr. Beck is entitled to a
corresponding deduction for the community property split of his
income, as follows:
Year Amount
1991 $154,829
1992 147,095
1
1993 159,121
1
1994 207,057
1995 226,869
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.
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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.
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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.
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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. A spouse’s personal
earnings are community property. 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
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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...)
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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).
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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 income-
producing 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.
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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”. H. Rept. 98-432 (Part 2), at 1503
(1984). 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).
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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. See Butler v. Commissioner, 114 T.C.
12
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.
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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
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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
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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. Bloch v. Commissioner, T.C.
Memo. 1992-1. 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.
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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. Sec.
6662(b)(1). Negligence is the lack of due care or failure to do
what a reasonable and ordinarily prudent person would do under
the same circumstances. Neely v. Commissioner, 85 T.C. 934
(1985). 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
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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.