Fortunato J. Mendes v. Commissioner ( 2003 )

121 T.C. No. 19
UNITED STATES TAX COURT
FORTUNATO J. MENDES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16032-95. Filed December 11, 2003.
P has been continuously incarcerated since June 17,
1988. For P’s 1988 taxable year, R (1) determined a tax
deficiency based upon amounts reported on information
returns as having been paid to P during that year, (2)
imposed the 10-percent additional tax under sec. 72(t)(1),
I.R.C., and (3) determined that P was subject to additions
to tax under secs. 6651(a)(1), 6653(a)(1), and 6654, I.R.C.
More than 2 years after R issued the notice of deficiency, P
filed a 1988 return in which he reported the income from the
1988 information returns and listed deductions and
dependency exemptions, which, in total, exceeded the
reported income, thereby resulting in a zero tax liability
for 1988. P now denies (1) receipt of a portion of the
income reported on his 1988 return and (2) liability for the
10-percent additional tax under sec. 72(t)(1), I.R.C. R
denies that P is entitled to any of the claimed deductions
and dependency exemptions.
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1. Held: R’s adjustments to income and disallowance
of deductions and dependency exemptions claimed by P are
sustained.
2. Held, further, R’s imposition of the 10-percent
additional tax under sec. 72(t)(1), I.R.C., is sustained.
3. Held, further, R’s imposition of additions to tax
under secs. 6651(a)(1), 6653(a)(1), and 6654, I.R.C., are
sustained. P’s 1988 return, filed more than 2 years after
R’s issuance of the notice of deficiency, is disregarded for
purposes of computing the “required annual payment” under
sec. 6654(d)(1)(B)(i), I.R.C.
Fortunato J. Mendes, pro se.
Wilton A. Baker, for respondent.
HALPERN, Judge: By notice of deficiency dated May 3, 1995
(the notice), respondent determined a deficiency in and additions
to petitioner’s Federal income tax for calendar year 1988
(sometimes, the audit year) as follows:
Additions to Tax
Deficiency Sec. 6651(a)(1) Sec. 6653(a)(1) Sec. 6654
$8,487 $2,122 $424 $484
The adjustments giving rise to the deficiency are
respondent’s inclusion in income of amounts reported on
information returns as having been paid to petitioner during 1988
(sometimes, the income items), and his imposition of the
10-percent additional tax on early distributions from qualified
retirement plans, offset by his allowance of the standard
deduction and one personal exemption. In addition, respondent
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denies petitioner’s claim, raised at trial, to deductions,
losses, and additional personal exemptions on a 1988 Form 1040,
U.S. Individual Income Tax Return (the 1988 return), that
petitioner filed on or about May 14, 1997, more than 2 years
after the notice was issued.
The issues for decision are whether, for the audit year,
petitioner: (1) must include in gross income $40,347, consisting
of dividends, interest, capital gains, and a distribution from a
retirement account; (2) is entitled to itemized deductions of
$11,850; (3) sustained a deductible loss of $6,724 in connection
with his law practice; (4) sustained deductible losses totaling
$29,455 in connection with the management of certain rental real
property; (5) is entitled to dependency exemptions for three
children (the dependency exemptions); (6) is liable for the
10-percent additional tax on early distributions from qualified
retirement plans under section 72(t); and (7) is liable for
additions to tax under (A) section 6651(a)(1) for failure to
timely file the 1988 return, (B) section 6653(a)(1) for
negligence, and (C) section 6654 for failure to pay estimated
income tax.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
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Procedure. All dollar amounts have been rounded to the nearest
dollar. Petitioner bears the burden of proof. Rule 142(a)(1).1
FINDINGS OF FACT2
Some facts are stipulated and are so found. The stipulation
of facts, with accompanying exhibits, is incorporated herein by
this reference.
At the time the petition was filed, petitioner was
incarcerated at the Maryland House of Corrections in Jessup,
Maryland.
Petitioner has been continuously incarcerated since June 17,
1988, the date upon which he was arrested for the murder of an
individual who was scheduled to testify against him regarding a
cocaine trafficking charge. He was ultimately tried for and
convicted of first degree murder and sentenced to life
imprisonment with no chance of parole.3
1
Sec. 7491, which, under certain circumstances, shifts the
burden of proof to the Commissioner, is inapplicable because the
examination in this case began before July 22, 1998, the
effective date of that section. See Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(c), 112 Stat. 727.
2
Petitioner has failed to set forth objections to
respondent’s proposed findings of fact. Accordingly, we conclude
that petitioner concedes that respondent’s proposed findings of
fact are correct except to the extent that petitioner’s findings
of fact are clearly inconsistent therewith. See Jonson v.
Commissioner, 118 T.C. 106, 108 n.4 (2002).
3
Petitioner had previously been tried for and convicted of
distribution of cocaine and carrying a pistol without a license.
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Petitioner was a lawyer for 20 years. He was disbarred on
October 23, 1991, as a result of his convictions.
Petitioner paid no taxes and filed no return for the audit
year before the issuance of the notice. The additions to gross
income set forth in the notice were reported on information
returns (Forms 1099 or, in the case of Merrill Lynch Pierce
Fenner & Smith, Inc. (Merrill Lynch), an equivalent tax reporting
statement) as follows:
Payor Classification Amount
Merrill Lynch Short-term capital gain1 $27,573
Bank of New York Short-term capital gain1 2,802
First Investors Tax Interest 259
Exempt Fund
Sovran Bank, NA Interest 138
Commonwealth Savings Interest 5
& Loan
Merrill Lynch Dividends 540
Raytheon Co. Dividends 8
National Bank of Gross distribution from 9,022
Washington retirement account
Total 40,347
1
The $27,573 was reported by Merrill Lynch as “gross
proceeds from dispositions of securities”. Although the
information return from Bank of New York is not in evidence, we
assume it does the same with respect to the $2,802. On the 1988
return, petitioner reported both amounts as short-term capital
gain; i.e., he failed to report other than a zero basis for
either the IBM stock sold by Merrill Lynch or the security sold
by Bank of New York.
On or about May 14, 1997, more than 2 years after the notice
was issued, petitioner filed the 1988 return. On Schedules B,
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Interest and Dividend Income, and D, Capital Gains and Losses, he
listed all of the income items contained in the notice.4
On Schedule A, Itemized Deductions, of the 1988 return,
petitioner listed the following itemized deductions:
Real estate taxes $1,420
Deductible points (interest) 10,430
Total 11,850
On Schedule C, Profit or Loss From Business, petitioner
listed his principal business as “Lawyer”, and, on a cash basis
of accounting, showed zero gross receipts and total deductions of
$6,724, for a net loss of $6,724.
On Schedule E, Supplemental Income (plus attachments),
petitioner listed nine separate rental properties. He reported a
loss on each of the properties and, on four of the properties, he
reported zero rental income. He reported a total loss of $29,455
with respect to said properties.
Petitioner also claimed four personal exemptions: one for
himself and one for each of three children.
The combination of personal exemptions, itemized deductions,
and losses resulted in petitioner’s reporting zero taxable income
and zero tax due.
In the notice, respondent allowed petitioner one personal
exemption of $1,950 and the $3,000 standard deduction appropriate
4
In fact, petitioner double counted certain of the income
items. Respondent has not sought to add the duplicated income to
his proposed adjustment.
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for his filing status, married filing separately. In addition,
respondent treated the $9,022 distribution from the National Bank
of Washington as a premature distribution from a qualified
retirement plan and imposed the 10-percent additional tax ($902)
applicable to such distributions under section 72(t). Respondent
also imposed additions to tax under sections 6651(a), 6653(a)(1),
and 6654.
OPINION
I. Amounts Included in Gross Income
A. Identical Amounts Reported as Income by Petitioner
On the 1988 return, petitioner included in income all of the
items that are contained in the notice’s adjustment for
additional income. During the trial, however, petitioner stated
that he was contesting all but one of the income items: the $138
of interest from Sovran Bank.
It has been held repeatedly that positions taken in a tax
return signed by a taxpayer may be treated as admissions. See
Waring v. Commissioner, 412 F.2d 800, 801 (3d Cir. 1969), affg.
T.C. Memo. 1968-126; Lare v. Commissioner, 62 T.C. 739, 750
(1974), affd. without published opinion 521 F.2d 1399 (3d Cir.
1975); Kaltreider v. Commissioner, 28 T.C. 121, 125-126 (1957),
affd. 255 F.2d 833 (3d Cir. 1958). As we recently stated in
Crigler v. Commissioner, T.C. Memo. 2003-93 (citing the foregoing
authorities): “petitioner * * * cannot * * * disavow * * *
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returns [prepared by him] without cogent proof that they are
incorrect.” As discussed infra in Section I.B. and C.,
petitioner has failed to furnish such proof.
B. Failure To Challenge Income Adjustments on Brief
Other than making a vague assertion that he “was requires
[sic] to and fully complied with the filing of * * * [the 1988
return] consistent with the 1099 information” (which suggests a
mistaken belief that such reporting was required even though
petitioner disputed the information), on brief, petitioner
challenges only one of the income items: the short-term capital
gain from the sale of 240 shares of IBM (the IBM stock).5 If an
argument is not pursued on brief, we may conclude that it has
been abandoned. See Clajon Gas Co. v. Commissioner, 119 T.C.
197, 213 n.17 (2002); Davis v. Commissioner, 119 T.C. 1 n.1
(2002); Nicklaus v. Commissioner, 117 T.C. 117, 120 n.4 (2001);
Rybak v. Commissioner, 91 T.C. 524, 566 n.19 (1988).
C. Sale of the IBM Stock--Alleged Theft of Sale Proceeds
Petitioner argues that there is no proof that Merrill Lynch
sold the IBM stock at petitioner’s request or that petitioner
received the proceeds of that sale. During the trial, petitioner
acknowledged that the Merrill Lynch tax reporting statement for
5
During the trial, petitioner admitted that the $9,022
received from the National Bank of Washington constituted a
premature distribution from a qualified retirement account. On
brief, he challenges only the imposition of the sec. 72(t)
10-percent additional tax on that distribution.
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1988, together with the monthly statements for 1988 (all of which
were placed in evidence during the trial) (the Merrill Lynch
statements) constitute a copy of his 1988 account activity with
Merrill Lynch. The monthly statement for June 1988 shows that,
on June 17, 1988 (the date of petitioner’s arrest and
incarceration), petitioner’s account was credited with $27,573
representing the proceeds from the sale of the IBM stock (the IBM
sale proceeds). It further shows that, after the sale, on June
21, 1988, a check for $22,960 was written on the account and
identified as a “withdrawal” from the account.
Whether or not Merrill Lynch sold the IBM stock at
petitioner’s request, there is no dispute that the stock was in
fact sold and that the IBM sale proceeds were credited to
petitioner’s Merrill Lynch account.
Pursuant to section 61(a)(3), gross income includes “[g]ains
derived from dealings in property”. Section 1.446-1(c)(1)(i),
Income Tax Regs., requires that, “under the cash receipts and
disbursements method in the computation of taxable income, all
items which constitute gross income * * * are to be included for
the taxable year in which actually or constructively received.”
Section 1.451-2(a), Income Tax Regs., provides that income is
constructively received by a taxpayer “in the taxable year during
which it is credited to his account, set apart for him, or
otherwise made available so that he may draw upon it at any
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time”. Pursuant to that regulation, the IBM sale proceeds were
constructively received by petitioner on June 17, 1988, when they
were credited to his Merrill Lynch account. Moreover, because
petitioner has failed to offer any evidence as to his holding
period for or basis in the IBM stock, the entire $27,573 is
includable in petitioner’s 1988 income as short-term capital
gain.
Petitioner’s primary argument for omitting the IBM sale
proceeds from his 1988 gross income is that he never received the
money. In essence, he alleges that the IBM sale proceeds were
taken from his account by a Merrill Lynch employee. By alleging
nonreceipt of the IBM sale proceeds, including the portion that
may have been represented by the $22,960 “withdrawal” from his
Merrill Lynch account, petitioner is, in effect, claiming a 1988
theft loss of the IBM sale proceeds rather than their
noninclusion in income.
Thomas P. McDonnell, a Merrill Lynch employee for 22 years,
who (at the time of the trial) was a Merrill Lynch vice president
and administrative manager responsible for certain “back office”
operations that occur in an office, testified that, pursuant to
Merrill Lynch’s normal practice, the IBM stock would have been
sold upon the placement of an order to sell (either by telephone
or in writing) by the legal or beneficial owner of the stock;
i.e., petitioner. Thereafter, the sale of the stock would have
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been verified with petitioner by telephone, and a confirmation of
the sale would have been mailed to him. Mr. McDonnell further
testified that, in accordance with standard brokerage industry
policy and standard Merrill Lynch firm policy (and absent
specific instructions to the contrary), if petitioner had
requested payment of the sale proceeds from a sale of securities,
a check would have been made payable to him as the owner of
record on the statement.6 He stated that such checks are sent by
regular, first class U.S. mail and that, if the check “expires”
(i.e., it is not cashed within a certain period of time), the
amount of the check is redeposited to the customer’s account.
Section 165 allows an individual taxpayer to deduct a theft
loss in the year during which the taxpayer discovers such loss.
See sec. 165(a), (c)(1), (e). Petitioner bears the burden of
proving that a theft (and not, for instance, merely a mysterious
disappearance of the property) has occurred and that the
requirements of section 165 have been met. See Rule 142(a);
Jacobson v. Commissioner, 73 T.C. 610, 613 (1979); Allen v.
Commissioner, 16 T.C. 163, 166 (1951) (absent positive proof, a
6
Mr. McDonnell testified that, because Merrill Lynch was
required to retain records of customer transactions for only 7
years, he was unable to produce copies of the transaction
confirmation slip, the canceled check, or any other records
specifically related to the 1988 sale of petitioner’s 240 shares
of IBM. In fact, he was “amazed” that the 1988 Merrill Lynch
statements pertaining to petitioner’s account were still
available in Merrill Lynch’s microfiche library.
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taxpayer must present evidence that reasonably leads the trier of
fact to conclude that the property was stolen). In this case,
petitioner has failed to establish even the reasonable likelihood
that the IBM sale proceeds were stolen by a Merrill Lynch
employee or, indeed, by anyone. His argument is premised solely
on respondent’s inability to prove that the IBM sale proceeds
were mailed to him or that someone at Merrill Lynch did not steal
those proceeds. Respondent bears no such burden. Petitioner
offers only his own testimony that he never received the IBM sale
proceeds coupled with his sheer speculation that, because of what
he perceives as Merrill Lynch’s inadequate internal procedures
for verifying the transmission to and receipt of money by its
customers, those sale proceeds must have been stolen. Such
speculation does not convince us that the IBM sale proceeds were,
in fact, stolen. Petitioner has offered no evidence that the
Merrill Lynch procedures described by Mr. McDonnell for handling
stock trades and the proceeds from those trades were not followed
in connection with the 1988 sale of petitioner’s IBM stock. As a
result, we conclude that petitioner has failed to carry his
burden of proving that he sustained a 1988 theft loss within the
meaning of section 165. Nor has he shown that any portion of the
IBM sale proceeds is otherwise deductible for that year as a loss
under that section.
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D. Conclusion
We sustain respondent’s determination to include $40,347 in
petitioner’s gross income for the audit year, and we hold that
petitioner is not entitled to a deduction for loss of the IBM
sale proceeds of $27,573 as an offset to that income inclusion.
II. Schedule A Itemized Deductions
We must decide whether petitioner is entitled to Schedule A
itemized deductions for the audit year consisting of real estate
taxes of $1,420 and “deductible points” (mortgage interest) of
$10,430. The 1988 return indicates that those amounts relate to
what was, before his incarceration, petitioner’s personal
residence in Fairfax, Virginia.
Petitioner has failed to substantiate his payment, during
1988, of any real property taxes with respect to his personal
residence; and, except for an undated, handwritten listing of
mortgage payments due with respect to various properties,
including his personal residence, and a computer printout which
appears to list mortgage payments due on that residence for
March, April, and May 1992, petitioner has failed to produce any
receipts or other evidence to corroborate his return position
that he made a 1988 payment of “deductible points”. Petitioner
did not claim a deduction for mortgage interest on what he claims
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is his 1987 return (the 1987 Form 1040),7 which indicates that
the property was not subject to a mortgage during that year; and,
although petitioner’s classification of the alleged $10,430
payment as “deductible points” may indicate that the property was
mortgaged in 1988, petitioner has failed to offer any evidence,
in the form of closing documents, canceled checks, etc., of the
mortgage or of the payment of “points” during 1988. Moreover,
petitioner has failed to provide even the minimal substantiation
of the payment of either points or real estate taxes that would
permit us to estimate allowable deductions as permitted under
Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). Even
under Cohan, there must be sufficient evidence in the record to
provide a basis upon which an estimate may be made. Vanicek v.
Commissioner, 85 T.C. 731, 742-743 (1985). Here, there is none.
Cf. Estate of Dickerson v. Commissioner, T.C. Memo. 1997-165
(taxpayer’s Schedule A deduction for mortgage interest sustained
on the basis of Cohan). Therefore, we reject petitioner’s claim,
raised at trial, to Schedule A itemized deductions.
7
We have received into evidence a copy of the 1987 Form
1040. That document is not signed by petitioner, but it is
signed by a return preparer (petitioner’s attorney) under what
appears to be a date of Aug. 2, 1990. It carries the annotation
“client copy”. We shall use that document for limited purposes,
as described below. We make no finding that the original of that
document was ever filed by petitioner.
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III. Schedule C Loss From Petitioner’s Law Practice
Next, we turn to the issue of whether petitioner sustained
a 1988 deductible loss of $6,724 associated with his law
practice.
Here, as in the case of petitioner’s Schedule A itemized
deductions, petitioner has offered no evidence to substantiate
the items (mortgage interest, utilities, telephone, depreciation,
laundry and cleaning, and bar membership dues) that constitute
the alleged deductible expenses. Here, too, petitioner has
failed to provide the minimal substantiation of the alleged
expenses that would permit us to estimate the allowable
deductions pursuant to Cohan v. Commissioner, supra. Therefore,
we reject petitioner’s claim, raised at trial, to a Schedule C.
loss.8
IV. Schedule E Losses From Real Property Rentals
Petitioner’s 1988 Schedule E indicates that, during the
audit year, petitioner owned nine rental properties, each of
8
Petitioner’s reporting of zero gross receipts from his
law practice during the audit year (the first 5-1/2 months of
which preceded his incarceration) indicates that the loss may be
disallowed on the alternative ground that, during that year,
petitioner did not conduct his law practice with a bona fide
intention of making a profit and may, in fact, have either
abandoned or at least temporarily discontinued the practice after
1987 when, according to the 1987 Form 1040, he earned a small
($1,698) profit on very low ($2,884) gross receipts. As
discussed more fully infra in section IV, losses incurred by an
individual in connection with a purported trade or business are
not allowable in the absence of a bona fide profit motive.
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which generated a loss for the year. Four of those properties
generated zero rental income, including the property with the
greatest loss and the most expenses. The Schedule E attached to
the 1987 Form 1040 indicates that four of the properties that
generated losses in 1988 also generated losses in 1987 and that
two of the properties that produced zero rental income in 1988
did the same in 1987.
The holding of real property for rental purposes normally
constitutes the use of the property in a trade or business. See
Lagreide v. Commissioner, 23 T.C. 508, 512 (1954). Losses
incurred by an individual in conducting a trade or business are,
subject to certain restrictions not here relevant, deductible
pursuant to section 165(a) and (c)(1).9 Losses are not
considered to have been incurred in a trade or business unless it
is shown that the activity in question was undertaken with the
primary motive or intention of making a profit. Lamont v.
9
SEC. 165. LOSSES.
(a) General Rule.--There shall be allowed as a
deduction any loss sustained during the taxable year and
not compensated for by insurance or otherwise.
* * * * * * *
(c) Limitation on Losses of Individuals.--In the case
of an individual, the deduction under subsection (a) shall
be limited to--
(1) losses incurred in a trade or business;
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Commissioner, 339 F.2d 377, 380 (2d Cir. 1964), affg. T.C. Memo.
1964-2; Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd.
without opinion 702 F.2d 1205 (D.C. Cir. 1983); Jasionowski v.
Commissioner, 66 T.C. 312, 319 (1976); sec. 1.183-2(a), Income
Tax Regs. Although a taxpayer’s expectation of profit need not
be reasonable, there must be a good faith objective of making a
profit. See Dreicer v. Commissioner, supra.
There is no evidence in the record that any of the
properties listed in the 1988 return has ever generated a profit,
or that petitioner expected that they would ever become
profitable, either individually or as a group. To the contrary,
petitioner, on brief, indicates that he never believed that his
rental properties would become profitable. For example, in
defense of his nonpayment of estimated taxes for the audit year,
petitioner states in his opening brief:
Petitioner cannot be held liable for failing
to file an estimated tax return because the
Petitioner did not owe any taxes and has
never owed any taxes to the Internal Revenue
Service in the more than 50 years he has been
filing income taxes. The deductions
Petitioner has used for this tax year and all
other tax years have always [been] in excess
of the income he has earned and therefore
Petitioner * * * had not [sic] duty to file
any estimated income tax. [Emphasis added.]
Similarly, in his reply brief, petitioner states:
There was not [sic] need to pay estimated tax
since I have never owed the IRS an estimated
tax in 20 years of practicing law and renting
properties.
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The foregoing statements are tantamount to an admission
that, regardless of the amount of (1) dividends, interest and/or
capital gains attributable to his Merrill Lynch account and/or
other sources and (2) profits from his law practice (for which
petitioner did report a small profit for 1987), petitioner always
anticipated that losses generated by his rental activities would
be sufficient to offset such income, thereby resulting in no tax
liability to petitioner. Moreover, for the audit year, the
reported expenses attributable to petitioner’s rental properties
were almost 250 percent greater than the reported rental income.
That disparity between expense and income further supports the
conclusion that petitioner operated his rental properties without
a good faith objective of generating a profit. Therefore, we
reject petitioner’s claim, raised at trial, to Schedule E losses.
V. The Dependency Exemptions
Section 151(a) and (c)(1) allows deductions for exemptions
for dependents. In order to be entitled to dependency exemptions
for three of his children, petitioner must show that each child
meets the statutory definition of “dependent”, which, under
section 152(a)(1), includes a son or daughter over half of whose
support, for the taxable year, is provided by the taxpayer.
Under section 151(c)(1)(B), each child must be either under 19
years of age or a student under 24 years of age, at yearend.
Petitioner offered no evidence that the foregoing statutory
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requirements were satisfied for the audit year. Therefore, we
reject petitioner’s claim, raised at trial, to deductions for
three dependency exemptions.
VI. Respondent’s Section 72(t) Determination
Section 72(t) provides, in pertinent part, as follows:
SEC. 72(t). 10-Percent Additional Tax on Early
Distributions From Qualified Retirement Plans.--
(1) Imposition of additional tax.--If any
taxpayer receives any amount from a qualified
retirement plan * * *, the taxpayer’s tax * * *
for the taxable year in which such amount is
received shall be increased by an amount equal to
10-percent of the portion of such amount which is
includable in gross income.
Petitioner admits receipt of $9,022 from the National Bank
of Washington during the audit year, and he further admits that
the money was distributed from “a 401 or some type of retirement
account”, indicating his acknowledgment that the distribution is
subject to section 72(t)(1). Petitioner argues, however, that
the $9,022 constituted a net distribution and that the bank
withheld the 10-percent tax from the gross amount of the
withdrawal. Petitioner further alleges that it is common
practice for banks to collect the 10-percent additional tax on
early distributions from qualified retirement plans.
Once again, other than his self-serving testimony,
petitioner has offered no evidence in support of his position, no
bank statements or other evidence that would corroborate his
assertion that the tax was withheld or that it is common practice
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(and was common practice during the audit year) for banks to
withhold the tax. This Court is not bound to accept a taxpayer’s
self-serving, unverified, and undocumented testimony. Shea v.
Commissioner, 112 T.C. 183, 189 (1999). Therefore, we sustain
respondent’s imposition of the 10-percent additional tax on early
distributions from qualified retirement plans.
VII. Additions to Tax
A. Respondent’s Section 6651(a)(1) Determination
Section 6651(a)(1) provides for an addition to tax in the
event a taxpayer fails to file a timely return (determined with
regard to any extension of time for filing), unless it is shown
that such failure is due to reasonable cause and not due to
willful neglect. The amount of the addition is equal to 5
percent of the amount required to be shown as tax on the
delinquent return for each month or fraction thereof during which
the return remains delinquent, up to a maximum addition of 25
percent for returns more than 4 months delinquent.
The 1988 return was not filed until on or about May 14,
1997, more than 8 years after the April 17, 1989, due date. See
sec. 6072(a).10 Petitioner argues that, because he believed in
good faith that his attorney had timely filed a 1988 return for
him, the failure to timely file the return was due to reasonable
10
There is no evidence that petitioner timely sought to
extend the Apr. 17 due date.
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cause. Petitioner points to a letter from his attorney dated
June 14, 1990, in which she states that she is in the process of
preparing returns for 1984, 1985, and 1987, and that, upon
completion of those returns, she “will go back and finish 1983 *
* *, 1986, 1988 and 1989.” Both petitioner’s attorney and the
Internal Revenue Service (IRS) Philadelphia Service Center later
confirmed that she never filed a 1988 return for petitioner.
There is no record as to when petitioner might have given
his attorney the records needed to prepare his 1988 return. The
fact that, as of June 14, 1990, she had not even begun to prepare
the return indicates that petitioner could not have believed in
good faith that it would be timely filed by April 17, 1989.
Moreover, even if we were able to find such good faith reliance
by petitioner, it would not constitute “reasonable cause” for
purposes of section 6651(a). “The failure to make a timely
filing of a tax return is not excused by the taxpayer’s reliance
on an agent, and such reliance is not ‘reasonable cause’ for a
late filing under § 6651(a)(1).” United States v. Boyle, 469
U.S. 241, 252 (1985). Nor did the mere fact of petitioner’s
incarceration at the time his 1988 return was due constitute
reasonable cause for his failure to file the return. See
Llorente v. Commissioner, 74 T.C. 260, 268-269 (1980), affd. in
part and revd. in part on another issue 649 F.2d 152 (2d Cir.
1981). Therefore, we sustain respondent’s imposition of a
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25-percent addition to tax under section 6651(a).
B. Respondent’s Section 6653(a)(1) Determination
Section 6653(a)(1) imposes an addition to tax equal to 5
percent of the entire underpayment if any portion of such
underpayment is due to negligence or intentional disregard of
rules or regulations (without distinction, negligence). An
underpayment, for purposes of section 6653(a), is the amount by
which the tax liability exceeds the tax shown on a timely filed
return. Secs. 6653(c)(1), 6211(a). Inasmuch as the 1988 return
was not timely filed, the amount shown on a timely filed return
is zero, and the underpayment equals the entire tax liability.
Emmons v. Commissioner, 92 T.C. 342, 348-349 (1989), affd. on
another issue 898 F.2d 50 (5th Cir. 1990). When an underpayment
is caused by the taxpayer’s failure to timely file an income tax
return, the underpayment is due to negligence if the taxpayer
lacks reasonable cause for the failure. See id. at 349-350.
Because we find that petitioner lacked reasonable cause for his
failure to timely file the 1988 return, it follows, and we find,
that his underpayment was due to negligence. Id.
Moreover, we reach the same result even if we view the issue
to be whether petitioner had a reasonable basis for the
underpayment itself. Section 6653(g) provides that any portion
of an underpayment that is attributable to a taxpayer’s failure
to report income shown on an information return shall be treated
- 23 -
as due to negligence in the absence of clear and convincing
evidence to the contrary. Petitioner argues that he “could not
have filed a tax * * * [return] on 1099 forms he never received
due to his incarceration.” He also implies that, because he
never paid taxes (on account of the excess of his rental property
and other allegedly deductible expenses and exemptions over his
total income), he had a reasonable basis for believing that he
did not owe tax for the audit year. Even if we accept as fact
that petitioner did not receive the 1988 information returns
mailed to him, he must have known of the investments that gave
rise to them.11 Therefore, he should have been aware of all or a
portion of the income generated by those investments and of the
probability that information returns had been issued with respect
to those investments. There is no evidence that he could not
have arranged for the information returns to be sent to him in
prison. In addition, petitioner’s consistent adherence to an
improper reporting position for prior years with respect to the
deductibility of losses from his rental properties (discussed
supra in Section IV) does not constitute a reasonable basis for
believing that there was no tax due for the audit year. As a
result, petitioner has failed to rebut the presumption of
negligence, under section 6653(g), arising out of his failure to
11
Income from several of the same investments was listed
on the 1987 Form 1040.
- 24 -
report the income listed on the 1988 information returns mailed
to him.
We sustain respondent’s determination under section
6653(a)(1).
C. Respondent’s Section 6654 Determination
1. Introduction
Section 6654 provides for an addition to tax in the event of
an underpayment of a required installment of individual estimated
tax. Sec. 6654(a) and (b). As relevant to this case, each
required installment of estimated tax is equal to 25 percent of
the “required annual payment”, which in turn is equal to the
lesser of (1) 90 percent of the tax shown on the individual’s
return for that year (or, if no return is filed, 90 percent of
his or her tax for such year), or (2) if the individual filed a
return for the immediately preceding taxable year, 100 percent of
the tax shown on that return. Sec. 6654(d)(1)(A), (B)(i) and
(ii). The due dates of the required installments for a calendar
taxable year are April 15, June 15, and September 15 of that year
and January 15 of the following year. Sec. 6654(c)(2). For
purposes of section 6654, an individual’s tax consists of income
tax and self-employment tax and is determined before the
application of any wage withholding credit12 (but after the
12
Under sec. 6654(g)(1), wage withholding credits are
treated as payments of estimated tax.
- 25 -
application of other allowable credits). Sec. 6654(f); see sec.
31. Except in very limited circumstances not applicable to this
case, see sec. 6654(e)(3)(B), section 6654 provides no exception
for reasonable cause or lack of willful neglect.
There are two mechanical exceptions to the applicability of
the section 6654 addition to tax. First, as relevant to this
case, the addition is not applicable if the tax shown on the
individual’s return for the year in question (or, if no return is
filed, the individual’s tax for that year), reduced for these
purposes by any allowable credit for wage withholding, is less
than $500.13 Sec. 6654(e)(1). Second, the addition is not
applicable if the individual’s tax for the preceding taxable year
was zero. Sec. 6654(e)(2).
Petitioner argues that he “cannot be held liable for failing
to file an estimated tax return because the Petitioner did not
owe any taxes”. Respondent’s deficiency determination for the
audit year, which we sustain in full herein, shows that, contrary
to petitioner’s argument, petitioner did, in fact, owe taxes for
the audit year. That does not dispose of the matter, however.
There remains the issue of whether petitioner may rely on having
satisfied the requirement of section 6654(d)(1)(A) and (B) that
the amount of each of his estimated tax installments for the
13
Effective for taxable years beginning after Dec. 31,
1997, the threshold amount is $1,000. Taxpayer Relief Act of
1997, Pub. L. 105-34, sec. 1202(a), 111 Stat. 994.
- 26 -
audit year (in this case, zero) was equal to 25 percent of the
lesser of (1) 90 percent of the tax shown on his return for that
year or, alternatively, (2) 100 percent of the tax shown on his
return for the prior year, 1987.
2. Satisfaction of Section 6654(d)(1)(B)(i)
The 1988 return, filed on or about May 14, 1997, shows a
zero tax liability for that year. If the 1988 return constitutes
a valid return for purposes of section 6654(d)(1)(B)(i), there
can be no underpayment of a required installment of estimated tax
since there are no required installments due when there is no tax
liability shown on the return as filed; i.e., 25 percent of zero
equals zero.
We have repeatedly held that a taxpayer’s estimated tax
liability is based upon the taxpayer’s tax liability as stated on
the original tax return as filed, and not upon the notice of
deficiency amount or the ultimate tax liability (here, one and
the same and referred to, for convenience, as the ultimate tax
liability). See Gleason v. Commissioner, T.C. Memo. 1990-110;
Warda v. Commissioner, T.C. Memo. 1988-572; Sampson v.
Commissioner, T.C. Memo. 1986-231; see also Weir v. Commissioner,
T.C. Memo. 2001-184. Moreover, the sufficiency of estimated tax
payments has been determined with respect to the tax liability
shown on the taxpayer’s return for the preceding taxable year
pursuant to section 6654(d)(1)(B)(ii), rather than with respect
- 27 -
to the ultimate tax liability for the taxable year in issue, even
when the return for the preceding year was held to have
fraudulently understated income, Schwarzkopf v. Commissioner, 246
F.2d 731, 734-735 (3d Cir. 1957), affg. on other issues and
remanding on that issue T.C. Memo. 1956-155, or when such return
was not filed until after the due date, Rev. Rul. 2003-23, 2003-8
I.R.B. 511; see also Rev. Rul. 80-355, 1980-2 C.B. 374 (“return
for the taxable year” is joint return filed after due date as
replacement for separate returns filed before due date).
None of the above-cited authorities address circumstances in
which the taxpayer’s original return was filed after a notice of
deficiency had been issued. In this case, the 1988 return was
filed more than 2 years after issuance of the notice (May 14,
1997, versus May 3, 1995) and almost 22 months after the filing
of the petition on July 17, 1995. Under those circumstances we
will disregard the 1988 return as we do not consider it to be a
“return” for purposes of section 6654(d)(1)(B)(i).14 To hold
14
There is no inconsistency between our treating
petitioner’s reporting of the amounts listed on Schedules B and D
of the 1988 return as an admission that those amounts are
includable in 1988 gross income, see the discussion supra in
Section I.A., and our finding herein that the 1988 return is not
a “return” for purposes of sec. 6654(d)(1)(B)(i). The former
conclusion is based upon caselaw which treats a taxpayer’s return
position as an admission by the taxpayer that that position is
correct. That characterization of a taxpayer’s return position
is not contingent upon a finding that the return itself
constitutes a valid return for purposes of various provisions of
the Internal Revenue Code (e.g., secs. 6501(a), 6651(a)(1),
(continued...)
- 28 -
otherwise would, in effect, negate the application of the portion
of section 6654(d)(1)(B)(i) that defines the term “required
annual payment” “if no return is filed” as “90 percent of the tax
for * * * [the taxable] year”. As regards any taxable year for
which the taxpayer failed to file a return and received a
deficiency notice that included a proposed section 6654 addition
to tax, the taxpayer would be able to negate the addition to tax
simply by filing a return for that year that showed a tax
liability less than the quarterly estimated payments actually
made or, if none had been made, that showed a zero tax liability.
Such a result is inconsistent with both the purpose and function
of section 6654(d)(1)(B)(i).
In Evans Cooperage Co. v. United States, 712 F.2d 199 (5th
Cir. 1983), the Court of Appeals for the Fifth Circuit
characterized as a “safe harbor” the provision of the corporate
estimated tax that shields a corporation from an addition to tax
if the estimated tax paid during the year is at least equal to
the amount of tax shown on the return of the corporation for the
preceding taxable year (section 6655(d)(1), during 1976 and 1977,
the audit years in that case). Id. at 201. The Court of Appeals
described and commented on the legislative purpose of the
14
(...continued)
6654(d)(1)(B)) with respect to which the filing of a valid return
gives rise to (or limits) specific rights or actions of either
the taxpayer or the Government.
- 29 -
preceding-year-return safe harbor as follows:
This objective of the safe harbor provision -- to
provide a predictable escape from any possible penalty
liability -- would be defeated if penalties for
underpayment of estimated taxes during the year were
based, not on the easily determinable amount reflected
on the preceding year’s return, but instead upon the
ultimate tax liability, possibly determined by adverse
tax audit, a year or so after the tax year for * * *
which the estimated tax installments were paid. * * *
[Id. at 204.]
“Safe harbor” also is an apt description of the identical
preceding-year-return rule applicable to individuals, sec.
6654(d)(1)(B)(ii), and it is an apt description of the rule,
applicable to both corporations and individuals, limiting the
required annual payment of estimated tax to the tax shown on the
return (if one is filed) for the taxable year in question, secs.
6654(d)(1)(B)(i) and 6655(d)(1)(B)(i).
Our decision is consistent with the “objective of the safe
harbor provision” referred to by the Court of Appeals in Evans
Cooperage. Petitioner’s failure to file a return prior to
respondent’s issuance of the notice presents us with a situation
that is the exact opposite of that referred to in Evans
Cooperage, where the filing of returns preceded the audit. Here,
upon issuance of the notice, it is the tax liability determined
by respondent that is the “easily determinable amount” and it is
the return amount that is “possibly determined” in some later
year. In effect, petitioner, by not filing the 1988 return prior
to issuance of the notice, has waived his right to the
- 30 -
“predictable escape from any possible penalty liability” that
would have been afforded by that return.
Our decision is also consistent with Congress’s evident plan
for the application of section 6654. Rules governing the
assessment, collection, and payment of the section 6654 addition
are found in section 6665. In pertinent part, section 6665(a)
provides that (1) the section 6654 addition is to be paid upon
notice and demand and is to be assessed, collected, and paid in
the same manner as taxes, and (2) references in the Internal
Revenue Code to “tax” imposed shall be deemed also to refer to
the addition to tax.15 Section 6665(b)(2), however, makes the
15
In full, sec. 6665 provides:
Sec. 6665. APPLICABLE RULES
(a) Additions Treated As Tax.– Except as otherwise
provided in this title –
(1) the additions to the tax, additional amounts,
and penalties provided by this chapter shall be paid
upon notice and demand and shall be assessed,
collected, and paid in the same manner as taxes; and
(2) any reference in this title to “tax” imposed
by this title shall be deemed also to refer to the
additions to the tax, additional amounts, and penalties
provided by this chapter.
(b) Procedure For Assessing Certain Additions To Tax.–
For purposes of subchapter B of chapter 63 (relating to
deficiency procedures for income, estate, gift, and certain
excise taxes), subsection (a) shall not apply to any
addition to tax under section 6651, 6654, 6655; except that
it shall apply–
(continued...)
- 31 -
deficiency procedures, found in sections 6211 through 6216 (the
deficiency procedures), inapplicable to the section 6654 addition
except in one instance. In effect, section 6665(b)(2) makes the
deficiency procedures inapplicable to the addition if the
taxpayer has filed a return for the year in question. The
Commissioner is thus free to assess and collect any section 6654
addition based upon the tax shown on the taxpayer’s return as
filed without the need first to issue a notice of deficiency.
The one instance in which the deficiency procedures do apply to
the addition is where the taxpayer has failed to file a return
for the year in question. Sec. 6665(b)(2).
The deficiency procedures prescribe a comprehensive set of
rules that, with limited exceptions, the Commissioner must follow
before he is free to assess and collect certain taxes, including
the income tax. The term “deficiency” is defined in section
6211(a)(1)(A). Generally, a deficiency is the excess of “the tax
imposed” over the tax shown on the taxpayer’s return if the
taxpayer makes a return showing an amount of tax. Id.
Obviously, the “return” referred to in that definition must be a
15
(...continued)
(1) in the case of an addition described in
section 6651, to that portion of such addition which is
attributable to a deficiency in tax described in
section 6211; or
(2) to an addition described in section 6654 or
6655, if no return is filed for the taxable year.
- 32 -
return made before the Commissioner determines a deficiency based
upon that return. If he determines that there is a deficiency,
the Commissioner is authorized by section 6212(a) to mail notice
thereof to the taxpayer by certified or registered mail. If the
taxpayer has made no return by the time the Commissioner mails
him notice of a deficiency, then, for purposes of determining the
tax shown on his return, the taxpayer is deemed to have made a
return showing zero tax.16 Also, if the taxpayer has made no
return by that time, then, by virtue of section 6665(a)(2) and
(b)(2), the term “tax imposed” is deemed to include the section
6654 addition to tax, and the addition is part of the deficiency.
Pursuant to section 6213(a), unless there is substantial doubt as
to the collectibility of the deficiency, such as to justify a
jeopardy assessment under section 6861, no assessment of the
deficiency (including the section 6654 addition) may be made
until the expiration of 90 (or, in certain cases, 150) days after
the Commissioner has mailed notice of the deficiency to the
taxpayer or, if a petition is filed with this Court, until the
decision of this Court has become final.
In short, the term “deficiency” includes the section 6654
addition in a no-return situation, and, once the Commissioner has
16
See sec. 301.6211-1(a), Proced. & Admin. Regs., which
provides in pertinent part that “[i]f no return is made * * * for
the purpose of the definition ‘the amount shown as the tax by the
taxpayer upon his return’ shall be considered as zero.”
- 33 -
determined that there is a deficiency and has mailed notice
thereof to the taxpayer, the deficiency procedures limit the
Commissioner’s authority to assess and collect both the
underlying tax and the addition. If we were to treat a post-
notice original return (post-notice return) as a return for
purposes of the section 6654(d)(1)(B)(i) safe harbor, then
sections 6665(b)(2) and 6213(a) would be in conflict. If a post-
notice return were a return for purposes of the safe harbor, then
section 6665(b)(2) would allow the Commissioner to disregard the
deficiency procedures and immediately assess and collect any
unpaid section 6654 addition. Section 6213(a) prohibits the
Commissioner from immediately assessing and collecting the
section 6654 addition in a post-notice return situation, however,
because section 6665(b)(2) indisputably makes the deficiency
procedures applicable to the section 6654 addition if the
taxpayer has made no return when the Commissioner issues a notice
of deficiency.17 If we disregard the post-notice return for
purposes of both sections 6654(d)(1)(B)(i) and 6665(b)(2), we are
able to avoid a conflict and interpret sections 6213, 6654, and
17
We recognize that, in this case, the 1988 return showed
a loss. Therefore, based upon that return, petitioner had no
obligation to pay estimated taxes, and any issue concerning the
Commissioner’s inability immediately to assess a sec. 6654
addition to tax by virtue of sec. 6213(a) would be moot.
Nonetheless, not every post-notice return will foreclose a
section 6654 addition, which addition, in the absence of sec.
6213(a), would immediately be assessable.
- 34 -
6665 in a way that makes sense.
We shall disregard the 1988 return for purposes of
determining whether petitioner satisfies the return-filed safe
harbor of section 6654(d)(1)(B)(i).
Because petitioner made no estimated tax payments for the
audit year, he necessarily failed the alternative safe harbor of
section 6654(d)(1)(B)(i) to make estimated tax payments equal to
“90 percent of the tax” (i.e., his ultimate tax
liability) for the audit year.18
3. Satisfaction of Section 6654(d)(1)(B)(ii)
As noted supra in Section II, the trial record does not
establish that petitioner ever filed a return for 1987. Because
there is no return “for the preceding taxable year”, petitioner
may not rely on the safe harbor provided by section
6654(d)(1)(B)(ii).19
18
We also disregard the 1988 return for purposes of sec.
6654(e)(1), and, because petitioner’s 1988 ultimate tax liability
exceeds $500, the exception provided by that paragraph if no
return is filed is inapplicable.
19
Also, because petitioner’s 1987 tax was more than zero
(the 1987 Form 1040 showed a tax due of $206 and a notice of
deficiency issued for 1987 showed a tax deficiency of $2,331),
the exception provided by sec. 6654(e)(2) is inapplicable.
- 35 -
4. Conclusion
We sustain respondent’s determination under section 6654.
Decision will be entered
for respondent.
Reviewed by the Court.
WELLS, COHEN, GERBER, CHIECHI, GALE, THORNTON, HAINES,
GOEKE, WHERRY, KROUPA, and HOLMES, JJ., agree with this majority
opinion.
SWIFT, J., concurs.
- 36 -
VASQUEZ, J., concurring: I concur with the result reached
by the majority that petitioner is liable for the addition to tax
pursuant to section 6654. I write separately, however, to
emphasize that our well-established precedent enunciated in Beard
v. Commissioner, 82 T.C. 766, 777 (1984), affd. per curiam 793
F.2d 139 (6th Cir. 1986), resolves this issue.
The Internal Revenue Code does not define the term “return”.
See sec. 6011; Swanson v. Commissioner, 121 T.C. 111, 122-123
(2003). Based on the Supreme Court’s precedent in Zellerbach
Paper Co. v. Helvering, 293 U.S. 172, 180 (1934), and Florsheim
Bros. Drygoods Co. v. United States, 280 U.S. 453, 464 (1930),
this Court has established a four-part test to determine whether
a document submitted by the taxpayer is a valid return. In order
to qualify as a return, the document must meet the following
requirements:
First, there must be sufficient data to calculate tax
liability; second, the document must purport to be a
return; third, there must be an honest and reasonable
attempt to satisfy the requirements of the tax law; and
fourth, the taxpayer must execute the return under
penalties of perjury.
Beard v. Commissioner, supra at 777. We apply this test to
“returns” for purposes of section 6501,1 section 6651(a)(1),2
1
See, e.g., ICI Pension Fund v. Commissioner, 112 T.C. 83,
88-89 (1999); Joseph v. Commissioner, T.C. Memo. 1996-77.
2
See, e.g., Cabirac v. Commissioner, 120 T.C. 163, 168-170
(continued...)
- 37 -
section 6653(a),3 section 6662,4 section 6013,5 section 6033,6
section 6651(f),7 section 6511,8 section 6011,9 section 6012,10
section 6072,11 and former section 6661,12 among others. Other
Federal courts rely on and apply this test to determine whether a
return is valid.13 Situations where we have not applied Beard
are when the particular Code section supplies a definition of
2
(...continued)
(2003); Janpol v. Commissioner, 102 T.C. 499, 503, 505 (1994);
Beard v. Commissioner, 82 T.C. 766, 780 (1984), affd. per curiam
793 F.2d 139 (6th Cir. 1986); Unroe v. Commissioner, T.C. Memo.
1985-149; Counts v. Commissioner, T.C. Memo. 1984-561, affd. 774
F.2d 426 (11th Cir. 1985).
3
See, e.g., Cavanaugh v. Commissioner, T.C. Memo. 1991-
407, affd. without published opinion 986 F.2d 1426 (10th Cir.
1993); Unroe v. Commissioner, supra; Counts v. Commissioner,
supra.
4
See Williams v. Commissioner, 114 T.C. 136, 140 (2000).
5
See, e.g., Sloan v. Commissioner, 102 T.C. 137, 147
(1994), affd. 53 F.3d 799 (7th Cir. 1995); Hintenberger v.
Commissioner, T.C. Memo. 1990-36, affd. without published opinion
922 F.2d 848 (11th Cir. 1990); Britt v. Commissioner, T.C. Memo.
1988-419.
6
See, e.g., Martin Fireproofing Profit Sharing Plan &
Trust v. Commissioner, 92 T.C. 1173, 1193 (1989).
7
See Dunham v. Commissioner, T.C. Memo. 1998-52.
8
See Turco v. Commissioner, T.C. Memo. 1997-564.
9
See, e.g., Galuska v. Commissioner, 98 T.C. 661, 668-669
(1992), affd. 5 F.3d 195 (7th Cir. 1993); Beard v. Commissioner,
supra at 780.
10
See Beard v. Commissioner, supra at 780.
11
See id. at 773.
12
See Eckel v. Commissioner, T.C. Memo. 1990-174.
13
See, e.g., In re Hatton, 220 F.3d 1057, 1060 (9th Cir.
2000); In re Hindenlang, 164 F.3d 1029, 1033 (6th Cir. 1999).
- 38 -
“return” for purposes of that code section only, such as in
section 6103(b)(1).14
Furthermore, whether a return constitutes a valid return15
for purposes of section 6654 is not a novel issue to the Court.
We have applied Beard in more than 35 cases involving section
6654.16
The document filed by petitioner contains sufficient data to
calculate a tax liability, purports to be a return, and is signed
under the penalty of perjury. The issue is whether it is an
honest and reasonable attempt to satisfy the requirements of the
tax law.
In deciding whether the document filed is an “honest and
reasonable attempt to satisfy the requirements of the tax law”,
courts have analyzed whether the return filed can still serve a
14
Sec. 6103(b)(1) provides:
(1) Return.--The term “Return” means any tax or
information return, declaration of estimated tax, or
claim for refund required by, or provided for or
permitted under, the provisions of this title which is
filed with the Secretary by, or on behalf of, or with
respect to any person, and any amendment or supplement
thereto, including supporting schedules, attachments,
or lists which are supplemental to, or part of, the
return so filed.
15
The majority makes no finding as to whether petitioner’s
1988 tax return is invalid, or whether it is valid but will
nonetheless be disregarded.
16
See, e.g., Cabirac v. Commissioner, supra at 170; Howard
v. Commissioner, T.C. Memo. 2000-222; Sochia v. Commissioner,
T.C. Memo. 1998-294; Turco v. Commissioner, supra; Swaim v.
Commissioner, T.C. Memo. 1996-545; Sochia v. Commissioner, T.C.
Memo. 1995-475, affd. without published opinion 116 F.3d 478 (5th
Cir. 1997); Sickler v. Commissioner, T.C. Memo. 1994-462;
Cavanaugh v. Commissioner, supra.
- 39 -
purpose, or have any effect, under the Code. In re Hindenlang,
164 F.3d 1029, 1034 (6th Cir. 1999) (document filed post-
assessment not a valid return under Beard); In re Hatton, 220
F.3d 1057, 1061 (9th Cir. 2000) (“belated acceptance of
responsibility * * * does not constitute an honest and reasonable
attempt to comply with the requirements of the tax law” when
taxpayer filed a document purporting to be a return post-
assessment). This inquiry is proper under the third prong of the
Beard test.
Petitioner’s 1988 tax return was due on or before April 17,
1989. See secs. 6072(a), 7503. In this case, petitioner filed
his 1988 “return” on or about May 14, 1997, more than 8 years
after the due date. This was more than 2 years after he received
the May 3, 1995, notice of deficiency, which certainly put him on
notice that his 1988 return had not been filed.17 Further,
petitioner did not file his purported “return” until more than 21
months after he filed his petition with the Court on July 17,
1995. The adjustments in the notice of deficiency were
determined without the benefit of petitioner’s “return”. In
applying the facts as found by the majority opinion to the test
set forth in Beard, it is evident under the facts of this case
that petitioner’s filing of the purported “return” was not an
honest and reasonable attempt to comply with the tax laws.
17
It appears petitioner was put on notice that his 1988
tax return had not been filed as early as June 14, 1990, when he
received a letter from his attorney, who was preparing his tax
returns, which stated she had not yet filed a return for 1988.
See majority op. p. 21.
- 40 -
Petitioner made no estimated tax payments for 1988. There
is no record that petitioner filed a return for 1987. Petitioner
has not shown that he falls within any of the exceptions to the
6654(a) addition to tax. See sec. 6654(e); Grosshandler v.
Commissioner, 75 T.C. 1, 20-21 (1980). For these aforementioned
reasons, respondent’s additions to tax under section 6654(a)
should be sustained.
- 41 -
GOEKE, J., concurring: I agree with the reasoning and the
result reached by the majority. I write regarding the
application of section 6654 only to clarify why the approach used
in this case is consistent with our normal practice of applying
the return test set forth in Beard v. Commissioner, 82 T.C. 766
(1984), affd. per curiam 793 F.2d 139 (6th Cir. 1986).
We have applied the Beard test in many different contexts.1
We have even relied on Beard in determining whether a return was
filed and the taxpayers were liable for the addition to tax under
1
See, e.g., Swanson v. Commissioner, 121 T.C. 111, 123-125
(2003) (whether a substitute for return constituted a return
within the meaning of 11 U.S.C. sec. 523(a)(1)(B) (2000));
Williams v. Commissioner, 114 T.C. 136, 140 (2000) (accuracy-
related penalty under section 6662(a)); ICI Pension Fund v.
Commissioner, 112 T.C. 83, 88 (1999) (period of limitations under
sec. 6501); Galuska v. Commissioner, 98 T.C. 661, 668-669 (1992)
(statutory limitations on time for filing claims for credit or
refund or limitations on any amount of any credit or refund
allowable for purposes of secs. 6011(a), 6511(b), and 6512(b)),
affd. 5 F.3d 195 (7th Cir. 1993); Martin Fireproofing v.
Commissioner, 92 T.C. 1173, 1192 (1989) (addition to tax for
failure to timely file under sec. 6651(a)(1) and filing of
information return under sec. 6033); Beard v. Commissioner, 82
T.C. 766, 780 (1984) (applying test for purposes of secs. 6011,
6012, 6072, and 6651(a)(1)), affd. per curiam 793 F.2d 139 (6th
Cir. 1986); Rodriguez v. Commissioner, T.C. Memo. 2003-153
(collection case under sec. 6330 where issue was whether returns
were filed for purposes of deciding whether respondent’s failure
to consider offer in compromise was an abuse of discretion);
Dunham v. Commissioner, T.C. Memo. 1998-52 (fraudulent failure to
file under sec. 6651(f)); Eckel v. Commissioner, T.C. Memo. 1990-
174 (addition to tax for substantial underpayment under former
sec. 6661); Hintenberger v. Commissioner, T.C. Memo. 1990-36
(return status under sec. 6013), affd. without published opinion
922 F.2d 848 (11th Cir. 1990); Counts v. Commissioner, T.C. Memo.
1984-561 (addition to tax for negligence under former sec.
6653(a)), affd. 774 F.2d 426 (11th Cir. 1985).
- 42 -
section 6654 where the document purporting to be a return was
filed before the notice of deficiency was issued. See, e.g.,
Turco v. Commissioner, T.C. Memo. 1997-564; Morgan v.
Commissioner, T.C. Memo. 1987-184, affd. without published
opinion 869 F.2d 1495 (7th Cir. 1989). However, the Beard test
has not been applied in some circumstances where the statutory
scheme directs a different inquiry. Cabirac v. Commissioner, 120
T.C. 163, 170 (2003) (a return prepared by the Secretary under
section 6020(b) treated as a return filed by the taxpayer for
purposes of determining the addition to tax under section
6651(a)(2)); Spurlock v. Commissioner, T.C. Memo. 2003-124
(same); Janpol v. Commissioner, 102 T.C. 499, 501-502 (1994)
(Beard does not apply in determining period of limitations for
purposes of the tax imposed by section 4975 because section
6501(l)(1) specifically references a return that does not require
all the information mandated under Beard), supplementing 101 T.C.
518 (1993); see also sec. 6103(b) (definition of return for
purposes of confidentiality and disclosure of returns and return
information).
As explained by the majority, the statutory scheme mandates
that a document filed after a notice of deficiency has been
issued is not a return for purposes of section 6654. In future
cases where the statutory scheme does not provide the appropriate
inquiry to be used to determine whether a return was filed, we
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should continue to adhere to our well-established practice of
applying the Beard test to answer the question.
WHERRY and KROUPA, JJ., agree with this concurring opinion.
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FOLEY, J., dissenting: Petitioner’s valid return, which
should be the basis for calculating the section 6654 penalty, is
disregarded by the majority and “not [considered] * * * to be a
‘return’ for purposes of section 6654(d)(1)(B)(i).” Majority op.
p. 27. There is no authority for the majority’s holding, and it
is contrary to the unambiguous terms of the statute.
Section 6654 provides for an addition to tax if the taxpayer
fails to make the “required annual payment”. Sec. 6654(a) and
(b). The “required annual payment” is:
the lesser of (i) 90 percent of the tax shown on the
return for the taxable year (or, if no return is filed,
90 percent of the tax for such year), or (ii) 100
percent of the tax shown on the return of the
individual for the preceding taxable year. [Sec.
6654(d)(1)(B)(i) and (ii); emphasis added.]
The majority recognizes that these are “mechanical rules”, yet,
presumably acknowledging that the terms of the statute are
satisfied, states that “the issue [is] * * * whether petitioner
may rely on having satisfied the requirement of section
6654(d)(1)(A) and (B)”. Majority op. p. 25. The statute is
unambiguous, and the taxpayer may certainly “rely” on having met
its terms. The statute does not refer to a return filed prior to
an Internal Revenue Service audit or a return filed prior to the
issuance of a notice of deficiency. A valid return will suffice-
–without regard to when it is filed.
We need not, however, adhere to a literal application of a
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statute if such adherence produces an outcome that is
“demonstrably at odds” with clearly expressed congressional
intent to the contrary, Griffin v. Oceanic Contractors, Inc.,
458 U.S. 564, 571 (1982), Peaden v. Commissioner, 113 T.C. 116,
122 (1999), or results in an outcome so absurd “as to shock the
general moral or common sense”, Tele-Communications, Inc. v.
Commissioner, 95 T.C. 495, 507 (1990). The majority does not set
forth a convincing case that either of these exceptions to the
plain language doctrine are applicable. Instead, the majority
disregards petitioner’s valid return “to avoid a conflict and
interpret sections 6213, 6654 and 6665 in a way that makes
sense.” Majority op. pp. 33-34. The purported conflict (i.e.,
regarding respondent’s ability to assess the penalty while we
have jurisdiction) has already been addressed and resolved by
Powerstein v. Commissioner, 99 T.C. 466, 472-473 (1992). In
Powerstein, the taxpayers filed amended returns subsequent to
filing their petition, and we held that after we obtain
jurisdiction respondent may be enjoined, pursuant to section
6213(a), from making an assessment. See Naftel v. Commissioner,
85 T.C. 527, 529-530 (1985) (stating that after we obtain
jurisdiction we do not lose it).
The majority provides that Schwarzkopf v. Commissioner, 246
F.2d 731 (3d Cir. 1957), and Rev. Rul. 2003-23, 2003-8 I.R.B.
511, do not “address circumstances in which the taxpayer’s
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original return was filed after a notice of deficiency had been
issued.” Majority op. p. 27. I agree. These authorities,
however, support the proposition that we should follow the
statute and let the chips fall where they may. Schwarzkopf v.
Commissioner, supra at 734-735 (stating that a taxpayer may rely
on the tax shown on a return from the preceding year even when
the return is held to have fraudulently understated income); Rev.
Rul. 2003-23, 2003-8 I.R.B. 511 (stating that a taxpayer may rely
on the tax shown on an untimely return for purposes of
determining estimated tax payments).
In a further attempt to justify its holding, the majority
expresses concern that taxpayers “would be able to negate the
addition to tax simply by filing a return for that year that
showed a tax liability less than the quarterly estimated payments
actually made or, if none had been made, that showed a zero tax
liability.” Majority op. p. 28. As Judge Vasquez’s concurring
opinion emphasizes, long-standing precedent authorizes us to find
that a return is invalid if the taxpayer does not make an honest
and reasonable attempt to satisfy the requirements of the tax
law. Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 180
(1934); Florsheim Bros. Drygoods Co. v. United States, 280 U.S.
453, 462 (1930); Beard v. Commissioner, 82 T.C. 766, 777 (1984),
affd. 793 F.2d 139 (6th Cir. 1986). Thus, if the majority found
that petitioner’s return was filed with the intent to avoid the
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estimated tax penalty, it could conclude that the return is
invalid. Yet, the majority does not make such a finding.
Undeterred by an unambiguous statute and a valid return, and
citing Evans Cooperage Co. v. United States, 712 F.2d 199, 204
(5th Cir. 1983), a readily distinguishable case, the majority
summarily reasons that its “decision is consistent with the
‘objective of the safe harbor provision’”. Majority op. p. 29.
In Evans Cooperage, the taxpayer contended that the
calculation of the estimated tax penalty should be based on its
amended return, rather than its timely filed original return.
The court held that the phrase “return of the corporation for the
preceding taxable year”, in section 6655(d)(1), refers to the
timely filed return for that year and not any subsequently filed
amended return. Id. at 204. We are not faced, however, with a
question of which return should be taken into account because
petitioner did not file an amended return. We simply must
determine whether to accept or disregard petitioner’s valid
return.
The majority acknowledges that petitioner’s case is the
“exact opposite of that referred to in Evans Cooperage”.
Majority op. p. 29 (emphasis added). I agree. In Evans
Cooperage, the court required the taxpayer to use its original
return to calculate the penalty. The majority, on the other
hand, states that petitioner “waived his right” relating to the
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only return he filed and is prohibited from using such return to
calculate the penalty. Majority op. p. 29.
If Evans Cooperage is to be cited for anything, it should be
cited for the proposition that the Court is obligated to follow
the statute. Indeed, in response to one of petitioner’s
contentions, the court stated:
It may be inequitable * * * to assess a penalty for
underpayment of estimated tax, that is based upon the
originally mistaken figure of income for the year,
rather than upon the actual income for the year as
ultimately determined. However, Congress unambiguously
has provided otherwise, and the provision, if indeed
inequitable, is for Congress to amend, not the courts.
[Evans Cooperage Co. v. United States, supra at 205;
fn. ref. omitted and emphasis added.]
Similarly, we are required to follow statutory mandates and
address, rather, than “disregard”, salient facts. If there is a
perceived problem with the statute, Congress must address the
matter.
LARO and MARVEL, JJ., agree with this dissenting opinion.