                          T.C. Memo. 2004-270



                        UNITED STATES TAX COURT



             JOHN AND YOON JA BIAZAR, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6424-01.              Filed November 29, 2004.


     John Biazar, pro se.

     Patrick W. Lucas, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:     Respondent determined the following

deficiencies in, additions to, and penalties on petitioners’

Federal income taxes:
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                         Additions to Tax           Penalties
  Year    Deficiency      Sec. 6651(a)(1)          Sec. 6662(a)

  1995     $78,073            $18,472               $15,615
  1996      55,863             13,053                11,173
  1997      71,468             17,061                14,294
  1998      41,628              ---                   8,326

Unless otherwise indicated, all section references are to the

Internal Revenue Code, and all Rule references are to the Tax

Court Rules of Practice and Procedure.   All figures are rounded

to the nearest dollar.

     After concessions,1 the issues for decision are (1) whether

petitioners are entitled to deduct expenses related to 97 Cents

Market (minimart) in amounts greater than those determined by

respondent for 1995, 1996, 1997, or 1998; (2) whether

petitioners’ gross receipts from the minimart should be increased

for 1995 or decreased for 1995, 1996, 1997, or 1998; (3) whether

petitioners are liable for an addition to tax pursuant to section

6651(a)(1) for 1995, 1996, and 1997; and (4) whether petitioners

are liable for a penalty pursuant to section 6662(a) for 1995,

1996, 1997, and 1998.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are




     1
        At trial, the parties stipulated or conceded most of the
adjustments contained in the notice of deficiency. The remaining
adjustments not addressed by this opinion are computational.
                                 - 3 -

incorporated herein by this reference.    At the time they filed

the petition, petitioners resided in Harbor City, California.

     On Schedules C, Profit or Loss From Business, of their

income tax returns for 1995, 1996, 1997, and 1998, petitioners

reported gross receipts from the minimart of $413,145, $437,331,

$509,512, and $487,614, respectively.     Petitioners signed their

1995 tax return on July 3, 1997, and respondent received their

1995 return on July 14, 1997.

     Petitioners reported to the State Board of Equalization that

their gross receipts from the minimart in 1995 were $419,509.

                                OPINION

I.   Burden of Proof:   Section 7491(a)

     At the conclusion of the trial, petitioners raised for the

first time the issue of the burden of proof shifting to

respondent pursuant to section 7491(a).    Petitioners’ case was

set for trial five times, petitioners received five standing

pretrial orders, and petitioners were warned on the record more

than once about the consequences of failure to comply with the

standing pretrial order.   Nonetheless, petitioners failed to

comply with several aspects of the standing pretrial order,

including failure to submit a trial memorandum.    Petitioners did

not introduce credible evidence with respect to the factual

issues relevant to ascertaining their liability.    See sec.
                               - 4 -

7491(a).   Accordingly, we conclude that pursuant to section

7491(a) the burden of proof does not shift to respondent.

II.   Remaining Schedule C Expenses

      Deductions are a matter of legislative grace, and

petitioners have the burden of showing that they are entitled to

any deduction claimed.   See Rule 142(a); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).   Petitioners presented no

evidence regarding the minimart’s expenses for 1995, 1996, 1997,

or 1998 that were not stipulated or conceded by respondent.

Accordingly, we sustain respondent’s determination regarding

these amounts.

III. Gross Receipts

      Petitioners argue that the amounts of gross receipts listed

on their 1995, 1996, 1997, and 1998 returns overstated their

actual gross receipts because the amounts listed erroneously

included loans2 made to John Biazar (petitioner) that he

deposited into the minimart’s bank accounts.

      Petitioner testified that he received the alleged loans as

checks and repaid the alleged loans via check.   Other witnesses

testified that they provided petitioner cash, and he provided

them cash, not checks.


      2
        We use the term “loan” for convenience only. We make no
finding that the amounts third parties provided petitioner were
in fact loans. We note that one witness testified that no
interest was charged on the alleged loans, and no loan agreements
were ever executed.
                                - 5 -

     The witnesses could not remember the exact amounts they

provided petitioner or exactly when the alleged loans were made

or repaid.   One witness changed three times his story about how

often he provided petitioner money.     One witness testified that

he provided petitioner approximately $40,000 per month during the

years in issue.    This amount alone (approximately $480,000 per

year) would almost equal or exceed the total gross receipts

reported during the years in issue.

     Petitioner testified that Mr. Rothchild, petitioners’ return

preparer for 1995, 1996, 1997, and 1998, included in gross

receipts the alleged loans petitioner deposited into the

minimart’s bank accounts.    No evidence corroborated that

petitioner deposited any of the alleged loans into the minimart’s

bank accounts.    Meredith J. Polk, a C.P.A. later hired by

petitioner for the audit and this case, testified that he did not

know how Mr. Rothchild arrived at the gross receipts figures on

the 1995, 1996, 1997, and 1998 returns.

     The testimony of petitioner and other witnesses regarding

the alleged loans was general, vague, conclusory, questionable,

and contradictory in certain material respects.    Under the

circumstances presented here, we are not required to, and

generally do not, rely on petitioner’s testimony regarding the

alleged loans to decide whether petitioners’ gross receipts are

less than the amounts reported on their tax returns.    See Lerch
                               - 6 -

v. Commissioner, 877 F.2d 624, 631-632 (7th Cir. 1989), affg.

T.C. Memo. 1987-295; Geiger v. Commissioner, 440 F.2d 688, 689-

690 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-159;

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).     There is no

credible evidence (1) regarding the amounts of alleged loans

received during the years in issue, (2) that petitioner ever

deposited the alleged loans into the minimart’s bank accounts, or

(3) that the amounts of gross receipts listed on the 1995, 1996,

1997, and 1998 returns included the alleged loans.

     We treat the gross receipts listed on petitioners’ returns

as admissions that petitioners had gross receipts of at least

those amounts.   See Lare v. Commissioner, 62 T.C. 739, 750

(1974), affd. without published opinion 521 F.2d 1399 (3d Cir.

1975).   The evidence presented at trial is unpersuasive and

insufficient to support lower gross receipts figures.

Additionally, petitioners reported $6,364 more in gross receipts

for 1995 to the State Board of Equalization than to the Internal

Revenue Service.   Respondent determined that petitioners’ gross

receipts should be increased by this amount for 1995.

Accordingly, we sustain respondent’s determination regarding

petitioners’ gross receipts for 1995.
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IV.   Additions to Tax and Penalties

      A.   Burden of Production:   Section 7491(c)

      Section 7491(c) provides that the Commissioner will bear the

burden of production with respect to the liability of any

individual for additions to tax and penalties.    “The

Commissioner’s burden of production under section 7491(c) is to

produce evidence that it is appropriate to impose the relevant

penalty, addition to tax, or additional amount”.     Swain v.

Commissioner, 118 T.C. 358, 363 (2002); see also Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).    If a taxpayer files a

petition alleging some error in the determination of an addition

to tax or penalty, the taxpayer’s challenge will succeed unless

the Commissioner produces evidence that the addition to tax or

penalty is appropriate.    Swain v. Commissioner, supra at 363-365.

The Commissioner, however, does not have the obligation to

introduce evidence regarding reasonable cause or substantial

authority.    Higbee v. Commissioner, supra at 446-447.   Section

7491(c) applies to examinations commenced after July 22, 1998.3

Id. at 440.


      3
        As petitioners alleged in the petition that respondent’s
additions to tax and penalties determinations were in error,
including the determination for their 1998 tax year, respondent
cannot claim to be surprised that sec. 7491(c) would be in issue
in this case. See Swain v. Commissioner, 118 T.C. 358, 363-365
(2002); Hildebran v. Commissioner, T.C. Memo. 2004-42.
                                 - 8 -

       At trial, petitioners submitted a letter addressed to them

from respondent that states:    “Your Federal income tax return for

the year shown below has been selected for examination.”       The tax

year indicated is 1995.    The letter is signed by Revenue Agent

Dwight Krstulja.    The typewritten date on the letter of “09-15-

98” is crossed out and “11-03-98” is handwritten in.     The

typewritten appointment date on the letter of “Friday, October

23, 1998” is crossed out and “Tuesday December 8, 1998” is

handwritten in.    The letter continues:   “This is a field

examination and will be conducted at your place of business or

other convenient location.”

       Attached to this letter is an information document request

(IDR).    The IDR bears a typewritten date of “09-15-98” and a

handwritten date of “11-3-98”.    The IDR also references the

October 23, 1998, scheduled appointment.

       Respondent contends the audit began before July 22, 1998.

The Court kept the record open for 30 days after the trial for

respondent to submit evidence as to when the audit of

petitioners’ returns began.    Respondent submitted a memorandum

from “MACS Coordinator” to “Examiner” in the Southern California

District and a tax module for petitioners.     The top of the tax

module bears the following notation:     “Thu, 18 Dec 1997, 8:24

am.”    Neither the tax module nor respondent explains what this
                               - 9 -

date means or how it indicates when the examination of

petitioners’ returns began for the years in issue.

     The memorandum does not bear petitioners’ names or Social

Security numbers.   The name of the examiner is not given.   The

exact date of the memorandum is unclear.   The top of the

memorandum lists “Rev 11/97” with no indication what “Rev” means.

The facts of the memorandum are equally vague.   The memorandum

states:   “The taxpayer operates a Schedule C business with gross

receipts of over $200,000, and also claims Earned Income Credit.”

Petitioners reported gross receipts of more than $200,000 and

claimed an earned income credit in 1995, 1996, and 1997; however,

we note that the memorandum uses the singular “taxpayer” and the

facts listed are not necessarily unique to petitioners.

Additionally, the memorandum begins:   “This case has been

identified”, suggesting that the case is being referred for an

audit rather than that an audit already had begun.

     We conclude that the letter sent to petitioners by Revenue

Agent Krstulja and the IDR attached to it are more persuasive

evidence of the date the examination in this case commenced.

Accordingly, section 7491(c) applies to this case as the

examination commenced after July 22, 1998.   See Higbee v.

Commissioner, supra.
                                 - 10 -

     B.     Section 6651(a)(1)

     Respondent determined that petitioners are liable for an

addition to tax pursuant to section 6651(a)(1) for 1995, 1996,

and 1997.    Section 6651(a)(1) imposes an addition to tax for

failure to file a return on the date prescribed (determined with

regard to any extension of time for filing), unless such failure

is due to reasonable cause and not due to willful neglect.

            1.   1995

     Petitioners signed their 1995 tax return on July 3, 1997,

and respondent received their 1995 return on July 14, 1997.

Accordingly, respondent met his burden of production for the

section 6651(a)(1) addition to tax for 1995.    Petitioners have

not established that their failure to timely file for 1995 was

due to reasonable cause.    See Higbee v. Commissioner, supra at

446-447.    Accordingly, petitioners are liable for the section

6651(a)(1) addition to tax for 1995.

            2.   1996 and 1997

     Petitioners’ 1996 and 1997 returns submitted to the Court

bear no “received” stamp, and the date block is blank.    No other

evidence was submitted regarding when these returns were filed.

We conclude that respondent has failed to meet his burden of

production for the section 6651(a)(1) addition to tax for 1996
                               - 11 -

and 1997.    Accordingly, petitioners are not liable for the

section 6651(a)(1) addition to tax for 1996 and 1997.

     C.     Section 6662

     Pursuant to section 6662(a), a taxpayer may be liable for a

penalty of 20 percent on the portion of an underpayment of tax

(1) attributable to a substantial understatement of tax or (2)

due to negligence or disregard of rules or regulations.       Sec.

6662(b).    Whether applied because of a substantial understatement

of tax or negligence or disregard of rules or regulations, the

accuracy-related penalty is not imposed with respect to any

portion of the underpayment as to which the taxpayer acted with

reasonable cause and in good faith.     Sec. 6664(c)(1).   The

decision as to whether the taxpayer acted with reasonable cause

and in good faith depends upon all the pertinent facts and

circumstances.    See sec. 1.6664-4(b)(1), Income Tax Regs.

     Negligence includes any failure to make a reasonable attempt

to comply with the Internal Revenue Code.     Sec. 6662(c).

Respondent established that petitioners failed to maintain

records as required by section 6001 and failed to substantiate

items properly.    Sec. 1.6662-3(b)(1), Income Tax Regs.

Accordingly, respondent met his burden of production for the

section 6662 penalty for the years in issue.
                             - 12 -

     Petitioners failed to establish that they had reasonable

cause or acted in good faith in failing to maintain records for,

and failing to substantiate, Schedule C expenses for the years in

issue or for understating their gross receipts for 1995.

Accordingly, petitioners are liable for the section 6662(a)

penalty for 1995, 1996, 1997, and 1998.

     To reflect the foregoing,


                                          Decision will be entered

                                   under Rule 155.
