                  T.C. Summary Opinion 2007-18



                     UNITED STATES TAX COURT



                DEAN STROM KARNAZE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19235-05S.            Filed February 5, 2007.


     Dean Strom Karnaze, pro se.

     Jonathan A. Neumann, for respondent.



     DEAN, Special Trial Judge:     This case was heard pursuant to

the provisions of sections 6320(c), 6330(d), and 7463.    Unless

otherwise indicated, all section references are to the Internal

Revenue Code as amended, and all Rule references are to the Tax

Court Rules of Practice and Procedure.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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     The petition in this case was filed in response to a Notice

of Determination Concerning Collection Action(s) Under Section

6320 and/or 6330 (notice of determination) for 1996, 1997, 1998,

and 1999.   Petitioner does not dispute the amount of the

underlying taxes and interest owed for the years in issue.    What

petitioner does dispute is his liability for the additions to tax

under section 6651(a)(1) for failure to timely file returns,

section 6651(a)(2) for failure to timely pay the unpaid tax

reported on the returns, and section 6654 for failure to pay

estimated taxes.

                             Background

     The stipulated facts and the exhibits received into evidence

are incorporated herein by reference.     At the time the petition

in this case was filed, petitioner resided in Stockton,

California.

     Petitioner filed Federal tax returns for each year in issue

reporting taxes due as follows:

     Year         Date Due      Date Filed      Tax Due
     1996         10/15/97      06/12/98        $4,737
     1997         10/15/98      04/10/99         3,644
     1998         10/15/99      02/24/00         7,162
     1999         08/15/00      04/10/01         2,079

     At the time petitioner filed each return, he either did not

pay or made only small payments toward the amounts shown as taxes

on the returns.    Respondent assessed the amounts reported on
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petitioner’s returns plus statutory additions to tax as follows.1

                                         Additions to Tax
     Year         Sec. 6651(a)(1)      Sec. 6651(a)(2) Sec. 6654
     1996              $933.07              $308.52       $217.00
     1997               781.65               243.18        186.13
     1998             1,611.45               429.72        183.77
     1999               519.75                 ---         100.00

     On April 14, 2005, respondent filed a notice of Federal tax

lien against petitioner for income taxes for 1996, 1997, 1998,

and 1999.   On April 15, 2005, respondent sent to petitioner a

Notice of Federal Tax Lien Filing and Your Right to a Hearing

Under IRC 6320 for the years in issue.

     On May 23, 2005, petitioner filed a timely Form 12153,

Request for a Collection Due Process Hearing, for the years in

issue.   The hearing was conducted via telephone and written

correspondence with Settlement Officer Martin Splinter.       On

September 13, 2005, the Appeals Office issued to petitioner a

notice of determination sustaining respondent’s filing of the

Federal tax lien to collect petitioner’s unpaid taxes for the

years in issue.

                              Discussion

     Section 6320 entitles a taxpayer to notice of the taxpayer’s

right to request a hearing after a notice of lien is filed by the



     1
      After the tax and additions to tax were assessed for each
year, petitioner subsequently made payments on his tax
liabilities (tax, interest, additions to tax combined) for each
of the years in issue. Therefore, the amount of the outstanding
balance attributable to the additions to tax has yet to be
determined.
                                - 4 -
Commissioner in furtherance of the collection from the taxpayer

of unpaid Federal taxes.   If one is requested, the administrative

hearing is before the Appeals Office of the Internal Revenue

Service.   Sec. 6330(b)(1).   The taxpayer requesting the hearing

may raise any relevant issue with regard to the Commissioner’s

intended collection activities, including spousal defenses,

challenges to the appropriateness of the Commissioner’s intended

collection action, and alternative means of collection.    Secs.

6320(b) and (c), 6330(c); see Sego v. Commissioner, 114 T.C. 604,

609 (2000); Goza v. Commissioner, 114 T.C. 176, 180 (2000).

     The taxpayer may raise challenges “to the existence or

amount of the underlying tax liability”, however, only if he “did

not receive any statutory notice of deficiency for such tax

liability or did not otherwise have an opportunity to dispute

such tax liability.”   Sec. 6330(c)(2)(B).

     In making a determination, the Appeals Officer is required

to take into consideration issues properly raised, the

verification that the requirements of applicable law and

administrative procedures have been met, and whether any proposed

collection action balances the need for efficient collection of

taxes with the legitimate concern of the person that any

collection action is no more intrusive than necessary.    Sec.

6330(c)(3).   Within 30 days after the Appeals Office issues a

notice of determination, the taxpayer may appeal the
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determination to the Tax Court, if the Court has jurisdiction

over the underlying tax liability.       Sec. 6330(d)(1).   The Court

has jurisdiction in this case.    For purposes of these provisions,

“underlying tax liability” includes additions to tax.        Katz v.

Commissioner, 115 T.C. 329, 339 (2000); Lites v. Commissioner,

T.C. Memo. 2005-206.

     Petitioner seeks abatement of the section 6651(a)(1)

additions to tax for late filing, of the section 6651(a)(2)

additions to tax for failure to timely pay the amounts shown as

taxes on the returns, and of the section 6654 additions to tax

for failure to pay estimated taxes.       Because petitioner self-

assessed his taxes for all years in issue, no statutory notice of

deficiency was issued.   See sec. 6201(a)(1).      Petitioner’s

challenge to the additions to tax at the hearing was proper.         See

secs. 6320(c), 6330(c)(2)(B); Downing v. Commissioner, 118 T.C.

22 (2002).   The Court reviews de novo respondent’s determination

with respect to the additions to tax for the years in issue.         See

Goza v. Commissioner, supra at 181-182.

Additions to Tax Under Section 6651(a)(1)

     Section 7491(c) imposes the burden of production in any

court proceeding on the Commissioner with respect to the

liability of any individual for penalties and additions to tax.

Higbee v. Commissioner, 116 T.C. 438, 446 (2001); Trowbridge v.

Commissioner, T.C. Memo. 2003-164, affd. 378 F.3d 432 (5th Cir.
                                 - 6 -

2004).    In order to meet the burden of production under section

7941(c), the Commissioner need only make a prima facie case that

imposition of the penalty or addition to tax is appropriate.

Higbee v. Commissioner, supra.

     The burden of proof remains on the petitioner, who must

prove that his failure to file timely was:   (1) Due to reasonable

cause, and (2) not due to willful neglect.   Sec. 6651(a); United

States v. Boyle, 469 U.S. 241, 245 (1985); Higbee v.

Commissioner, supra at 446-447.    A failure to file timely a

Federal income tax return is due to reasonable cause if the

taxpayer exercised ordinary business care and prudence and

nevertheless was unable to file the return within the prescribed

time.    Barkley v. Commissioner, T.C. Memo. 2004-287; sec.

301.6651-1(c)(1), Proced. & Admin. Regs.   Willful neglect means a

conscious, intentional failure or reckless indifference.      United

States v. Boyle, supra at 245.

     Respondent has carried his burden of production by

introducing into evidence certified copies of Form 4340,

Certificate of Assessments, Payments, and Other Specified

Matters, for 1996, 1997, 1998, and 1999, establishing that

respondent did not timely receive Federal income tax returns for

those years.   See Davis v. Commissioner, 115 T.C. 35, 40-41

(2000); Downey v. Commissioner, T.C. Memo. 2005-215.    In the
                                - 7 -

absence of evidence that petitioner timely filed his returns, the

Court finds that the returns were not timely filed.

     Petitioner introduced no evidence or any legally sufficient

reason for his failure to file timely returns.    Therefore, the

Court finds that petitioner is liable for additions to tax under

section 6651(a)(1) for failure to timely file his returns for the

years in issue.

Additions to Tax Under Section 6651(a)(2)
     Section 6651(a)(2) imposes an addition to tax for failure to

pay the amount shown as tax on the return on or before the date

prescribed for payment of that tax, unless the failure was due to

reasonable cause and not willful neglect.    See sec. 301.6651-

1(c)(1), Proced. & Admin. Regs.   Petitioner may demonstrate

reasonable cause for late payment by showing that he exercised

ordinary business care and prudence in providing for payment of

his tax liability and was nevertheless either unable to pay the

tax or would suffer an undue hardship if he paid on the due date.

Sec. 301.6651-1(c), Proced. & Admin. Regs.    The term “undue

hardship” means more than an inconvenience to the taxpayer, and

it must appear that substantial financial loss would result to

the taxpayer from making payments by the due date.    See sec.

1.6161-1(b), Income Tax Regs.

     At the time petitioner filed his returns, he made small

payments towards his tax liabilities for 1996, 1997, and 1999,

and he made no payment toward his tax liability for 1998.    The
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bulk of the amount shown as tax on the return for each of the

years in issue remained unpaid as of the respective due dates.

     Petitioner contends that he did not remit full payments for

the years in issue because of hardship due to his divorce and

subsequent loss of employment.    Petitioner has not shown that he

would have suffered substantial financial loss if he had paid his

taxes by the due date.   Moreover, adverse economic conditions do

not necessarily constitute reasonable cause because almost every

nonwillful failure to pay taxes is the result of financial

difficulties.   See Estate of Hartsell v. Commissioner, T.C. Memo.

2004-211; Wolfe v. United States, 612 F. Supp. 605, 607-608 (D.

Mont. 1985), affd. on other grounds 798 F.2d 1241 (9th Cir.

1986).

     The Court therefore finds that petitioner failed to

demonstrate that his failure to timely pay the taxes shown on the

returns for the years in issue was due to reasonable cause and

not willful neglect.   See sec. 301.6651-1(c), Proced. & Admin.

Regs.; sec. 1.6161-1(b), Income Tax Regs.   Accordingly,

petitioner is liable for the additions to tax under section

6651(a)(2) for the years in issue.

Additions to Tax Under Section 6654

     Section 6654 imposes an addition to tax for failure to make

timely and sufficient payments for estimated taxes.   In order for

respondent to satisfy his burden of production under section
                                 - 9 -

7491(c), he must produce evidence necessary to enable the Court

to conclude that the taxpayer had an obligation to make an

estimated tax payment.     Wheeler v. Commissioner, 127 T.C. 200,

211 (2006).   Specifically, respondent must produce evidence

showing that the taxpayer had a “required annual payment” as

defined by section 6654(d)(1)(B) for the year in issue.        Id.

     The section 6654 addition to tax is calculated with

reference to four required installment payments of the taxpayer’s

estimated tax liability.    Sec. 6654(c)(1).   Each required

installment of estimated tax is equal to 25 percent of the

“required annual payment”.    Sec. 6654(d)(1)(A).

     Under section 6654(d)(1)(B), “required annual payment” means

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.

     Clause (ii) shall not apply if the preceding taxable
     year was not a taxable year of 12 months or if the
     individual did not file a return for such preceding
     taxable year.

     Respondent produced a Form 4340 for 1996 establishing that

petitioner filed a tax return for 1996 reporting a tax liability

of $4,737.    This evidence is sufficient for the Court to make the

analysis required by section 6654(d)(1)(B)(i).      Respondent,

however, failed to introduce evidence showing whether petitioner
                              - 10 -
filed a return for the preceding taxable year, i.e., 1995, and if

he did, the amount of tax shown on that return.   Without that

evidence, the Court cannot identify the amount equal to 100

percent of the tax shown on petitioner’s 1995 return.

     The Court cannot conclude that petitioner had a required

annual payment for 1996 because respondent failed to produce

sufficient evidence, as required by section 7491(c), to allow the

Court to complete the comparison required by section

6654(d)(1)(B).   See Wheeler v. Commissioner, supra.      Accordingly,

petitioner is not liable for an addition to tax under section

6654 for 1996.

     Respondent met his burden of production under section

7491(c) for 1997, 1998, and 1999.   The evidence produced was

sufficient for the Court to make the required comparison under

section 6654(d)(1)(B) and to make a determination that petitioner

had a required annual payment for each of those years.

     The section 6654 addition to tax is mandatory unless

petitioner can place himself within one of the computational

exceptions provided by section 6654(e).    Recklitis v.

Commissioner, 91 T.C. 874, 913 (1988); Grosshandler v.

Commissioner, 75 T.C. 1, 20-21 (1980).    Petitioner did not pay

the estimated taxes for 1997, 1998, and 1999.   Moreover,

petitioner failed to show that his failure to timely pay

estimated taxes qualifies for one of the exceptions under section
                               - 11 -
6654(e).    Accordingly, petitioner is liable for additions to tax

under section 6654 for 1997, 1998, and 1999.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                          Decision will be entered

                                     under Rule 155.
