                  T.C. Summary Opinion 2003-28



                     UNITED STATES TAX COURT



     FREDERICK SMITH, JR. AND VANESSA SMITH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12110-01S.            Filed March 26, 2003.



     Frederick Smith, Jr., pro se.

     Donna Pahl, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.    The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.   Unless otherwise

indicated, subsequent section references are to the Internal
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Revenue Code in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

     Respondent determined a deficiency in petitioners’ Federal

income tax of $6,276 for 1997, an addition to tax under section

6651(a)(1) of $113, and an accuracy-related penalty under section

6662(a) of $1,255.   After concessions by petitioners,1 the issues

for decision are:    (1) Whether petitioners received $27,330 of

unreported income; (2) whether petitioners are liable for an

addition to tax under section 6651(a)(1); and (3) whether

petitioners are liable for an accuracy-related penalty under

section 6662(a).

     Respondent also determined that petitioners are not entitled

to certain miscellaneous itemized deductions claimed on Schedule

A, Itemized Deductions.    These adjustments are computational, and

petitioners have not disputed them; therefore, we need not

separately address them.   Respondent also determined that

petitioners are entitled to an additional deduction of $289 for

one-half of the self-employment tax determined in the

adjustments.




     1
        Petitioners concede that they failed to report $2,610 of
income received by petitioner Vanessa Smith (Mrs. Smith) from
“Off The Field Productions” in 1997, and that they filed their
1997 return on May 14, 1998, and, therefore, did not timely file.
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     Petitioners resided in Carson, California, at the time they

filed the petition.    Some of the facts have been stipulated and

are so found.

Discussion

     Petitioner Frederick Smith, Jr. (petitioner) worked as a

television engineer for approximately 25 years.    In 1997, he also

maintained a television production and web design sole

proprietorship doing business under the name of “Off The Field

Productions” (OTFP).   Petitioners claimed a loss of $23,236 on

Schedule C, Profit or Loss From Business, attached to their

Federal income tax return for 1997, from the OTFP activity.

     Mrs. Smith worked part-time for OTFP in 1997 performing

office work, such as bookkeeping.   She was also employed full-

time as an analyst for the University of California, Los Angeles,

Medical Center.

     OTFP produced a television show pilot in 1997 for Jill

Johnson (Ms. Johnson) called “The Fantasy Sports Zone” (FSZ).

Petitioner customarily prepared a proposed budget for a client as

an estimate of the cost of a project.   The budget for the FSZ

show was $65,000.

     Petitioners maintained an “Itemized Category Report” of

income and expenses for OTFP.   The Report reflects the following

three payments in 1997 relating to the FSZ show:
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     Fantasy Sports 25% D...   Fantasy Payment     16,250
     Fantasy 50% payment       Fantasy Payment     32,500
     Fantasy Fee Final/VSS     Fantasy Payment     20,170
                                                   68,920

On the 1997 Schedule C, petitioners reported gross receipts of

$60,245, total expenses of $83,481, and a loss of $23,236.

     Respondent determined in the notice of deficiency dated July

12, 2001,2 that petitioners failed to report income of $27,330.

Respondent determined petitioners’ unreported income by an

examination of petitioners’ records, including the business bank

account of OTFP.   The unreported income was determined as

follows:

           Deposits                    $87,765
           Less returned checks            190
           Net deposits                 87,575
           Gross receipts reported      60,245
           Unreported income            27,330

Respondent also determined that petitioners are liable for an

addition to tax under section 6651(a)(1) because the 1997 return

was not timely filed.   Further, respondent determined that

petitioners are liable for an accuracy-related penalty under




     2
        Petitioners have not argued that the period of
limitations for assessment under sec. 6501(a) expired though
respondent issued the notice of deficiency more than 3 years
after petitioners filed the 1997 return. The 1997 return was
filed May 14, 1998, and the notice of deficiency was issued on
July 12, 2001. In any event, since we conclude that petitioners
omitted from gross income an amount properly includable therein
which is greater than 25 percent of the amount of gross income
reported in the return, the 6-year period of limitations for
assessment is applicable. Sec. 6501(e)(1)(A).
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section 6662(a) because of negligence or disregard of the rules

or regulations.

     As a defense to respondent’s determination of omitted

income, petitioners seek to characterize the $32,500 check issued

to OTFP by Ms. Johnson as a loan.        Petitioner and Ms. Johnson did

not execute a loan agreement with respect to the $32,500 payment.

Petitioner testified about the payment from Ms. Johnson.       He

indicated that it “was a personal loan made from Ms. Jill Johnson

to myself” and because it “was sealed with a hug and a handshake

outside of her –- outside of our Summer League offices in West

L.A., and if that was good enough for her, that was good enough

for me.”   According to petitioner, Ms. Johnson, a personal

friend, lent petitioner the money because he agreed to produce

the FSZ show.   OTFP used the $32,500 payment to: (1) Produce the

FSZ show; (2) to pay expenses on other projects; and (3) for

general office expenses.   Petitioner deposited the check into the

business bank account of OTFP.

     Petitioner testified that he did not have the funds

available to produce the FSZ show and required funds from Ms.

Johnson because he was in bankruptcy at the time.       Petitioner

produced a letter dated December 21, 1999, from Ms. Johnson which

indicated that she lent petitioner funds to assist in the

operations of OTFP.
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Analysis

     Generally, the burden of proof is on the taxpayer.    Rule

142(a)(1).   The burden of proof may shift to the Commissioner

under section 7491 if the taxpayer establishes compliance with

the requirements of section 7491(a)(2)(A) and (B) by

substantiating items, maintaining required records, and fully

cooperating with the Secretary’s reasonable requests.   Section

7491 is effective with respect to Court proceedings arising in

connection with examinations by the Commissioner commencing after

July 22, 1998, the date of its enactment by section 3001(a) of

the Internal Revenue Service Restructuring and Reform Act of

1998, Pub. L. 105-206, 112 Stat. 685, 726.   The burden of

production remains with the Commissioner with respect to the

taxpayer’s liability for any penalty or addition to tax.     Sec.

7491(c); Higbee v. Commissioner, 116 T.C. 438 (2001).

     It is not clear from the record when respondent commenced

the examination of petitioners’ return; therefore, we are

uncertain whether section 7491 is applicable.   Nevertheless,

petitioners have not established that they complied with its

requirements.   Accordingly, even if section 7491 were applicable,

we conclude that the burden of proof remains upon petitioners.

1.   Unreported Income

     Gross income means all income from whatever source derived.

Sec. 61.   When a taxpayer fails to provide adequate records
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substantiating income, the Commissioner is authorized to

reconstruct the taxpayer’s income by using any reasonable method

that clearly reflects income, including the use of bank deposit

records.    Sec. 446(b); Clayton v. Commissioner, 102 T.C. 632, 645

(1994).    Bank deposits are prima facie evidence of income.    Id.

at 645.    In calculating the taxpayer’s income, the Commissioner

must take into account any nontaxable source or deductible

expense of which he has knowledge.      Id. at 645-646.

     Indebtedness means “an unconditional and legally enforceable

obligation for the payment of money.”      Autenreith v.

Commissioner, 115 F.2d 856, 858 (3d Cir. 1940), affg. 41 B.T.A.

319 (1940).    The traditional indicia of bona fide indebtedness

include the existence of a note, an unconditional promise to

repay the principal, payment of interest, the existence of a

fixed repayment date or a fixed schedule for repayment, whether a

demand for repayment has been made, whether the borrower was

solvent at the time of the loan, and whether the parties’ records

reflect the transaction as a loan.      Bergersen v. Commissioner,

109 F.3d 56, 60 (1st Cir. 1997), affg. T.C. Memo. 1995-424;

Noguchi v. Commissioner, 992 F.2d 226 (9th Cir. 1993), affg. T.C.

Memo. 1991-227; Goldstein v. Commissioner, T.C. Memo. 1980-273.

Because of the repayment obligation, loan proceeds do not qualify

as gross income to the taxpayer.     Commissioner v. Tufts, 461 U.S.

300, 307 (1983).    Interest is the payment for the use or
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forbearance of money.     Deputy v. du Pont, 308 U.S. 488, 498

(1940).

     Whether a payment constitutes income when received depends

on the parties’ rights and obligations at the time that the

payment was made.    Commissioner v. Indianapolis Power & Light

Co., 493 U.S. 203, 211 (1990).    Whether a payment is either

includable in the gross income of the recipient or is not taxable

to the recipient (e.g., as a gift) must be reached on

consideration of all factors.    See Commissioner v. Duberstein,

363 U.S. 278, 288, 292 (1960) (reversing Court of Appeals and

affirming the Tax Court, finding that a purported gift was a

recompense for past services or an inducement for the taxpayer to

be of further service in the future).

     The payment lacks many of the traditional indicia of debt.

See Bergersen v. Commissioner, supra.     Petitioner and Ms. Johnson

did not execute a note.    As of the time of trial, petitioner had

not paid either principal or interest.    Repayment was due upon

demand by Ms. Johnson, but she had not demanded payment of either

principal or interest.    Petitioner lost contact with Ms. Johnson,

and petitioner was uncertain even how to locate Ms. Johnson at

the time of trial.

     The $32,500 payment is reflected in petitioners’ records as

an income item with two other items of income received from FSZ.

Petitioner failed to provide the Court with a reasonable
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explanation as to why this item should be treated as a loan when

OTFP records reflected the $32,500 as income.    We also note that

petitioners’ record of payments from FSZ ($68,920) is

approximately consistent with the budget of $65,000.

     Based on the foregoing we conclude that the $32,500 was not

a loan, and respondent’s determination of omitted income is

sustained.

2.   Section 6651(a)(1) Addition to Tax

     Respondent determined that petitioners are liable for an

addition to file under section 6651(a)(1) for failure to file

their return timely.    The parties stipulated that petitioners

filed the return for the 1997 tax year late, on May 14, 1998.

     Petitioners have not argued or presented any evidence that

would indicate that their failure to file timely was due to

reasonable cause.   Accordingly, respondent’s determination is

sustained.

3.   Section 6662(a) Accuracy-Related Penalty

     Section 6662 provides that if any portion of any

underpayment required to be shown on a return is due to

negligence or disregard of the rules or regulations, then a

taxpayer will be liable for a penalty equal to 20 percent of the

underpayment of tax required to be shown on the return that is

attributable to the taxpayer’s negligence or disregard of the

rules or regulations.    Sec. 6662(a) and (b)(1).   “Negligence”

includes any failure to make a reasonable attempt to comply with
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the provisions of the Code.   Sec. 6662(c).   “Disregard” includes

any careless, reckless, or intentional disregard.     Id.

     The penalties provided for in section 6662 will not be

imposed with respect to any portion of an underpayment if it is

shown that there was reasonable cause for such portion and that

the taxpayer acted in good faith with respect to such portion.

Sec. 6664(c)(1).   Whether the taxpayer has acted with reasonable

cause and in good faith is determined by relevant facts and

circumstances, including the taxpayer’s own efforts to assess his

proper tax liability.   Stubblefield v. Commissioner, T.C. Memo.

1996-537; sec. 1.6664-4(b), Income Tax Regs.

     There is no support in this record that the payment

petitioners received was a loan.    There is nothing in the record

that indicates that the underpayment was due to reasonable cause

or that petitioners acted in good faith.    Respondent is sustained

on this issue.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                      Decision will be entered

                                 for respondent.
