                               T.C. Memo. 2015-227



                         UNITED STATES TAX COURT



                   TERRY GENE AKEY, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent*



      Docket Nos. 18026-05, 18097-05,                Filed November 24, 2015.
                  28057-09.




      *
        On October 8, 2014, this Court filed T.C. Memo. 2014-211 in these
consolidated cases. On December 24, 2014, respondent notified the Court that
petitioner had filed a petition with the U.S. Bankruptcy Court for the Central
District of California on December 2, 2013, before the filing of our opinion but
after the filing of the petitions in these cases. Pursuant to 11 U.S.C. sec. 362(a)(8)
(2012), on September 1, 2015, we vacated our opinion and stayed the proceedings
in this Court. On September 18, 2015, respondent informed the Court that the
U.S. Bankruptcy Court had granted a discharge to petitioner on September 11,
2015, thereby terminating the automatic stay. See id. (c)(2). Accordingly, on
September 30, 2015, we lifted the stay in these cases and issued to petitioner an
order to show cause as to why our opinion should not be released and our
decisions entered. Petitioner has not responded to that order. The order to show
cause has been made absolute. This opinion therefore replaces T.C. Memo. 2014-
211 unchanged.
                                          -2-

[*2]          R disallowed P's costs of goods sold and deductions for
       expenses relating to his sports memorabilia activity and to his
       computer activity. R disallowed those costs and deductions relating
       to the memorabilia activity on the grounds that P had failed to show
       that the activity was an activity engaged in for profit or, if it was, that
       P had substantiated those expenditures. R disallowed the costs and
       deductions relating to the computer activity for lack of substantiation.

              1. Held: R's denial of deductions is sustained for P's lack of
       substantiation and, with respect to the memorabilia activity, because
       P failed to show that it was "for profit within the meaning of section
       183."

              2. Held, further, additions to tax sustained.



       Terry Gene Akey, pro se.

       Alexander D. DeVitis, Jeffrey D. Heiderscheit, Luanne S. Di Mauro,

Richard T. Cummings, Priscilla A. Parrett, and Katherine Holmes Ankeny, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


       HALPERN, Judge: Respondent determined deficiencies in, and additions

to, petitioner's Federal income tax as follows:
                                        -3-

                [*3]                           Additions to tax
                                            Sec.             Sec.
                Year    Deficiency       6651(a)(1)       6651(a)(2)
               2001        $43,988        $10,831             ---
               2002         36,268            8,160         $4,715
               2003         66,962         15,066            4,687

      Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

      The parties have entered into a stipulation of settled issues, agreeing to the

resolution of certain adjustments made by respondent and of other issues raised by

petitioner. We need not further concern ourselves with those adjustments and

issues. Other adjustments are purely computational and also do not require further

discussion. During the tax (calendar) years in issue petitioner engaged in an

activity involving sports memorabilia. We must determine whether that activity

was engaged in for profit. We must also determine petitioner's entitlement to

claim certain costs of goods sold and to deduct certain claimed business expenses.

Respondent also made an adjustment to petitioner's 2001 income of $7,524 for

unreported capital gains. Petitioner did not assign error to that adjustment in his

petition, which ordinarily would mean that the adjustment is deemed conceded.
                                          -4-

[*4] See Rule 34(b)(4); Funk v. Commissioner, 123 T.C. 213, 215 (2004). At

trial, petitioner made a vague assertion that capital gains for tax year 2001 were

still at issue in these cases. On brief, petitioner does not address that issue. If an

argument is not pursued on brief, we may conclude that it has been abandoned.

E.g., Mendes v. Commissioner, 121 T.C. 308, 312-313 (2003). We will, therefore,

sustain respondent's 2001 capital gains adjustment. Also, in identifying the

questions presented in his opening brief, petitioner discusses whether he received

disability payments and whether he is an independent contractor. If he means that

the wages he received from Emulex Corp. (Emulex) are disability payments and

that he received them as an independent contractor, he is not timely in raising

these issues. See Rule 41. Moreover, he reported those payments as wages on his

2001 return, and for 2002 and 2003 he conceded that those payments were wages.

We see no issue to address. Finally, we must determine whether petitioner is

subject to the additions to tax, on the basis of failure to timely file and on failure to

pay the tax due.
                                         -5-

[*5]                           FINDINGS OF FACT1

Introduction

       Some facts are stipulated and are so found. At the time he filed the petition,

petitioner resided in Athol, Massachusetts.

Returns

       Petitioner requested an extension of time until August 15, 2002, to file his

2001 Federal income tax return. Petitioner filed that return, Form 1040, U.S.

Individual Income Tax Return, for 2001 on July 24, 2003.




       1
        Rule 151 governs briefs. Rule 151(e) specifies the form and content of
briefs, requiring, among other things, that a brief contain proposed findings of
fact. Rule 151(e)(3) provides in pertinent part that proposed findings of fact shall
consist of concise statements of essential fact accompanied by "references to the
pages of the transcript or the exhibits or other sources relied upon to support the
statement." At the close of the trial in these cases, the Court instructed the parties
with respect to briefs, and, specifically, we directed petitioner to Rule 151(e)(3)
and its requirement that proposed findings of fact be supported by references to
the transcript, exhibits, or other sources. Petitioner has in his briefs proposed
findings of fact but has not accompanied those proposed findings by references to
anything in the record. We have received into evidence eight binders of exhibits,
consisting of over 5,000 pages provided by petitioner. Because petitioner has
made it virtually impossible for the Court to verify any of his proposed findings
that were objected to by respondent, and because he has violated Rule 151(e)(3),
the Court, in making its findings, has disregarded all of petitioner's proposed
findings to which respondent has objected. See Van Eck v. Commissioner, T.C.
Memo. 1995-570, 1995 WL 700553, at *3.
                                        -6-

[*6] For 2002 and 2003, because he had not received returns from petitioner,

respondent prepared substitutes for returns for him in accordance with his

authority to do so provided by section 6020(b). Following respondent's sending

petitioner notices of deficiency for those two years (based on the substitutes for

returns), he received from petitioner Forms 1040 for those years. Respondent did

not process those returns.

Other Years

      Petitioner has a history of failing to file returns (1996 and 2010), and of

filing untimely returns (1995, 1997, 1998, 1999, 2000, and 2004).

Petitioner's Employment

      During the years in issue, petitioner worked full time as a quality assurance

engineer for Emulex.2 He received from Emulex wages of $150,763, $132,793,

and $152,819 for 2001, 2002, and 2003, respectively. Petitioner had zero withheld

from those wages for income tax, and he made no estimated tax payments towards

his 2002 and 2003 income tax liabilities.




      2
        Apparently, until March 2, 2001, petitioner was employed by Giganet Inc.,
which, on that date, was acquired by Emulex. For simplicity, we will assume
petitioner's employment by Emulex for all of 2001.
                                          -7-

[*7] Petitioner's Schedule C Activities

      Petitioner attached a Schedule C, Profit or Loss From Business, to the 2001

Form 1040 (2001 Schedule C). On that Schedule C, he described his principal

business or profession as "[n]etwork consulting/testing, sales software/sports

memor[a]bilia".

      Petitioner attached two Schedules C to the 2002 Form 1040. On the first

(2002 Schedule C1), he described his principal business or profession as

"memor[a]bilia/software sales/consulting". On the second (2002 Schedule C2), he

described his principal business or profession as "software consulting".

      Petitioner attached two Schedules C to the 2003 Form 1040. On the first

(2003 Schedule C1), he described his principal business or profession as "sales

memorabilia". On the second (2003 Schedule C2), he described his principal

business or profession as "software consulting, sales sports cards memorabilia".

      Petitioner reported income, cost of goods sold, expenses, and net profits on

those Schedules C as follows:
                                        -8-

   [*8]                                  Cost of
          Schedule           Income     goods sold    Expenses       Net profit

   2001 Schedule C           $26,213     $88,205       $81,300       -$143,292
   2002 Schedule C1            -0-          -0-         19,529          -19,529
   2002 Schedule C2           23,168     103,052        17,842          -97,726
   2003 Schedule C1            -0-          -0-         20,983          -20,983
   2003 Schedule C2           34,879     115,511        26,510         -107,142

      The expenses that petitioner reported on the Schedules C were in the

following categories: car and truck, commissions, depreciation, legal and

professional services, rent or lease of business property, supplies, travel, meals and

entertainment, utilities, and advertising. He reported no expense for insuring the

inventory of his sports memorabilia business. Petitioner paid no wages to anyone

during the years in issue.

      Petitioner reported Schedule C profits of $1,662, $1,404, and $1,213 for

1997, 1998, and 1999, respectively. Petitioner reported Schedule C losses for

2004 through 2008.

      In his software sales and computer and network consulting business, started

in 1984, petitioner offered to customers technical services, expertise in computer

networking, and software that he had developed.
                                        -9-

[*9] Petitioner has been engaged in the purchase and collection of sports-related

collectibles since 1986.

Business Practices

      During the years in issue, petitioner did not have a bank account, an

inventory system, an accounting system, or any books and records for his sports

memorabilia activity.

Respondent's Adjustments and Petitioner's Claims

      For 2001, respondent disallowed $71,198 of the $88,205 cost of goods sold

petitioner reported on the 2001 Schedule C. Respondent also disallowed $72,094

of the $81,300 of Schedule C expense deductions petitioner claimed on the 2001

Schedule C. For 2002, respondent would not reduce the deficiency he had

determined (on the basis of his substitute for 2002 return) by the $103,052 of cost

of goods sold and the $37,371 of expenses reported on the 2002 Schedules C1 and

C2, nor, for 2003, would he reduce the deficiency he had determined (on the basis

of his substitute for 2003 return) by the $115,511 of cost of goods sold and the

$47,493 reported on the 2003 Schedules C1 and C2.

Preparation of the Cases for Trial

      Petitioner did not cooperate in the preparation of these cases for trial.

Petitioner did not respond to respondent's attempt pursuant to Rule 91(a) to
                                         - 10 -

[*10] stipulate facts. Respondent then moved pursuant to Rule 91(f) to compel

stipulation. Petitioner failed to respond timely to our order to show cause why the

matters covered in the motion should not be deemed stipulated, and we made the

order absolute. Petitioner also failed to respond to respondent's informal request

for production of documents, and, on respondent's motion, we ordered petitioner

to produce the requested documents.

                                      OPINION

I.    Introduction

      A.     Issues

      Respondent argues, and we agree, that, during the years in issue, petitioner

carried on two activities the financial results of which he reported on the

Schedules C described above. Respondent accepts that petitioner's software sales

and computer and network consulting activity (computer activity) was an activity

engaged in for profit. He agrees that petitioner's losses attributable to that activity

are deductible to the extent that petitioner can identify the cost of goods sold and

expenses allocable to the activity and can substantiate that the claimed costs and

expenses were actually incurred and, with respect to the expenses, were ordinary

and necessary business expenses. Respondent believes that petitioner's second

Schedule C activity, his sports memorabilia activity, was not an activity he
                                         - 11 -

[*11] engaged in for profit, so that, pursuant to section 183, described infra, he

may not deduct his losses from that activity in excess of his profits from the

activity. Moreover, as with the computer activity, respondent believes that

petitioner has failed both to identify the cost of goods sold and expenses allocable

to the activity and to substantiate either.

      Petitioner defends against the additions to tax on the grounds that he had

reasonable cause for his tardiness.

      B.     Burden of Proof

      In general, the taxpayer bears the burden of proof. See Rule 142(a).

Section 7491(a)(1) may shift the burden of proof to the Commissioner as to factual

matters. However, section 7491(a)(1) applies only if, among other things, the

taxpayer complies with substantiation requirements, maintains all required

records, and cooperates with the Commissioner for witnesses, information,

documents, meetings, and interviews. See sec. 7491(a)(2)(A) and (B). A taxpayer

seeking to shift the burden of proof pursuant to section 7491(a)(1) has the burden

of showing that he has satisfied the section 7491(a)(2) preconditions. E.g., Allnutt

v. Commissioner, T.C. Memo. 2004-239, 2004 WL 2339813, at *4.

      Petitioner has failed to establish his compliance with the record

maintenance and cooperation requirements that are prerequisites to shifting the
                                        - 12 -

[*12] burden of proof to the Commissioner. Accordingly, petitioner bears the

burden of proof.

II.   Deficiencies in Tax

      A.     Section 183 For-Profit Requirement

             1.     Introduction

      Section 183(a) provides: "In the case of an activity engaged in by an

individual * * *, if such activity is not engaged in for profit, no deduction

attributable to such activity shall be allowed under this chapter except as provided

in this section." In general, section 183(b) allows deductions with respect to an

activity not engaged in for profit but only to the extent of the gross income from

the activity. Section 183(c) provides: "For purposes of this section, the term

'activity not engaged in for profit' means any activity other than one with respect

to which deductions are allowable for the taxable year under section 162 or under

paragraph (1) or (2) of section 212."

      Section 1.183-2(b), Income Tax Regs., sets forth a nonexclusive list of nine

factors to be considered when ascertaining a taxpayer's profit intent. Those factors

are: (1) the manner in which the taxpayer carries on the activity, (2) the expertise

of the taxpayer or his advisers, (3) the time and effort expended by the taxpayer in

carrying on the activity, (4) the expectation that assets used in the activity may
                                        - 13 -

[*13] appreciate in value, (5) the success of the taxpayer in carrying on other

similar or dissimilar activities, (6) the taxpayer's history of income or losses with

respect to the activity, (7) the amount of occasional profits, if any, which are

earned by the taxpayer, (8) the financial status of the taxpayer; and (9) elements of

personal pleasure or recreation. No single factor is conclusive, however, and we

may accord certain factors greater weight than others. See Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), aff'd without published opinion, 647 F.2d

170 (9th Cir. 1981); Allen v. Commissioner, 72 T.C. 28, 34 (1979).

      Petitioner testified that he had an honest objective of making a profit from

his sports memorabilia activity. He also testified that he added other products and

learned to grade card conditions in order to make the activity more profitable. In

determining whether petitioner had the requisite profit objective to avoid the

limitations of section 183, we give limited weight to his testimony and greater

weight to the objective factors listed above. See Keanini v. Commissioner, 94

T.C. 41, 46 (1990); Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), aff'd

without published opinion, 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a),

Income Tax Regs.
                                       - 14 -

[*14] Taking into account the factors set forth in section 1.183-2(b), Income Tax

Regs., and on the basis of the record as a whole, we conclude that the sports

memorabilia activity was not an activity entered into for profit, and we so find.

             2.    Application of the Profit Factors

      Numerous factors lead us to conclude that petitioner had no objective to

make a profit.

                   a.     Manner of Carrying On Activity

      Petitioner did not carry on this activity in a businesslike manner because he

failed to maintain complete and accurate books and records and did not change his

operating methods to increase profitability. See Engdahl v. Commissioner, 72

T.C. 659, 666-667 (1979); sec. 1.183-2(b)(1), Income Tax Regs. Nor did he

maintain a separate bank account for his sports memorabilia activity.

Notwithstanding the lack of evidence in the record, petitioner maintains that he

kept all receipts of his expenses and maintained separate bank accounts for his

business. However, even if we were to find his testimony credible, we have

previously recognized: "The purpose of maintaining books and records * * * is to

facilitate a means of periodically determining profitability and analyzing expenses

such that proper cost saving measures might be implemented in a timely and

efficient manner." Burger v. Commissioner, T.C. Memo. 1985-523, 1985 Tax Ct.
                                        - 15 -

[*15] Memo LEXIS 107, at *20, aff'd, 809 F.2d 355 (7th Cir. 1987). Petitioner

undertook no such financial analysis. He did not prepare budgets, income

statements, balance sheets, forecasts, or any other financial statement which would

lead us to believe that he used his purported records to improve his bottom line.

Moreover, although petitioner testified that he had a business plan for his

memorabilia activity, he failed to provide evidence of it.

      Petitioner contends that the expansion of his collectible memorabilia

activity into other sports-related products and learning to grade card conditions

demonstrates that he sought to improve the profitability of this activity during the

years in issue. We disagree. We find no significant undertaking by petitioner to

improve his overall profitability. On the contrary, according to the figures he

reported on his return, cost of goods sold exceeds gross receipts for all the years in

issue, which means that he continued to add to his inventory while consistently

selling his items for a fraction of their cost without due regard for the losses he

repeatedly occurred.

                    b.    Expertise

      Moreover, petitioner has not carried out this activity with any expertise or in

accordance with accepted business practices. See sec. 1.183-2(b)(2), Income Tax

Regs. At trial, petitioner testified that he was an expert because he "consulted
                                        - 16 -

[*16] industry price guides." However, he conceded during cross-examination

that collectors of sports cards and memorabilia, even those without a profit motive,

also purchase price guides. And while petitioner claims on brief that he "sought

expertise advice from Industry Leaders on how to make the business line of sports

related profitable several times a year", there is no evidence to support that claim.

Thus, aside from petitioner's self-serving testimony, he has provided no evidence

to show that he is an expert (or that he has consulted experts) in the field of sports

memorabilia.

                    c.    Time and Effort

      Additionally, petitioner has not shown that he devoted much of his personal

time and effort to carrying on this activity, nor did he withdraw from his full-time

occupation to devote his time and effort to the sports memorabilia activity. See id.

subpara. (3). Petitioner testified that he spent over 15 hours a day, every day,

conducting his sports memorabilia activity, and, in his opening brief, he claims

that he "did contribute * * * up to 12 hours a day 7 days a week on the sports

related line of the business." We find petitioner's assertions to be incredible,

particularly in the light of the fact that petitioner was employed full time by

Emulex during the years in issue.
                                         - 17 -

[*17]                d.    Expected Appreciation

        Moreover, petitioner could not realistically expect that the assets used in the

activity would appreciate. See sec. 1.183-2(b)(4), Income Tax Regs. He testified

that "it's pretty much common knowledge that sports cards, rookie cards of

superstars and Hall of Famers, increase in value", and he gave an example of a

1902 Honus Wagner card, stating that "in 2001, the card sold for $1.1 million. In

2002, that same card sold for $2.8 million." Although he admits that he does not

own a 1902 Honus Wagner card (there is only one known to be in existence), he

uses it as an example of how "sports memorabilia and sports cards do appreciate in

value." Petitioner's expectation of future appreciation in his sports memorabilia

collection is vague and highly speculative. He has not shown that he maintained

an itemized list of the individual items in his inventory. In the absence of such a

list, he had no apparent means of tracking the appreciation of individual items,

making it impossible to determine which items to hold and which to sell.

        Besides, we would expect that, if petitioner truly believed that his sports

memorabilia activity would become profitable through the appreciation of his

inventory, he would have insured his collection. He had no insurance expenses,

suggesting that he was not concerned with protecting his investment. Such
                                        - 18 -

[*18] behavior is inconsistent with investment for long-term appreciation. See

Rodriguez v. Commissioner, T.C. Memo. 2013-221, at *35.

                    e.    History

       Additionally, petitioner has a history of substantial losses including the

years in issue and minimal, if any, profits from his sports memorabilia activity.

See sec. 1.183-2(b)(6), Income Tax Regs. Petitioner testified that "[f]rom 1982 to

1999, I showed a profit on every year in the range of $12,000 to $18,000."

However, he presented no evidence in support of that self-serving assertion.

Petitioner did report minimal Schedules C profits of $1,662, $1,404, and $1,213

for 1997, 1998, and 1999, respectively, but failed to show that they were generated

by the sports memorabilia activity as opposed to the computer activity. Even if

petitioner did realize an economic profit from his sports memorabilia activity, the

minimal amount of this profit bears little weight in establishing a primary profit

motive. See id. subpara. (7) ("An occasional small profit from an activity

generating large losses, or from an activity in which the taxpayer has made a large

investment, would not generally be determinative that the activity is engaged in

for profit.").

       Petitioner argues that unforeseen circumstances resulted in his continuing

losses. Petitioner claims that the use of steroids in major league baseball greatly
                                        - 19 -

[*19] reduced the value of his sports memorabilia collection. Petitioner has not

shown, however, that his sports memorabilia activity would have been profitable if

events beyond his control had not occurred. See Burger v. Commissioner, 809

F.2d at 360 n.8. We decline to find that the losses can be attributed to the use of

steroids in sports.

                      f.   Financial Status

      Finally, that a taxpayer has substantial income from sources other than the

activity may indicate that the activity is not engaged in for profit. See sec. 1.183-

2(b)(8), Income Tax Regs. That is particularly the case where losses from the

activity generate substantial tax benefits or where there are personal or

recreational elements involved. See id. subpara. (9).

      During the subject years, petitioner earned a steady salary from Emulex on

which he subsisted. This salary enabled him to pursue his longtime passion of

collecting sports memorabilia while the reported losses from that activity were

used to reduce his taxable income. See Giles v. Commissioner, T.C. Memo. 2005-

28; sec. 1.183-2(b)(8) and (9), Income Tax Regs.

             3.       Conclusion: Weighing the Factors

      None of the factors support the existence of a profit motive, and all relevant

factors weigh against the existence of a profit motive. We conclude that petitioner
                                        - 20 -

[*20] did not pursue his sports memorabilia activity during the years in issue with

a predominant, primary, or principal profit objective. It follows that section 183

limits the allowable deductions to the amount of gross income generated from that

activity.

       B.    Whether Petitioner Is Entitled to Any of the Schedule C Deductions

       Even were we to find that petitioner engaged in the sports memorabilia

activity for profit (for which deductions were allowable under section 162 or

section 212(1) or (2)), we would still not allow petitioner's claimed costs of goods

sold and deductions--either for that activity or for his computer activity--because

petitioner has failed to substantiate both the fact of the expenditures themselves

and, with respect to his claimed business deductions, that they were ordinary and

necessary business expenses. See sec. 162(a).

       In general, section 162 allows a deduction for "all the ordinary and

necessary expenses paid or incurred during the taxable year in carrying on any

trade or business". When called upon by the Commissioner, a taxpayer must

substantiate his expenses. See, e.g., Park v. Commissioner, T.C. Memo. 2012-279,

at *4; see also sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Moreover, certain

deductions, including those relating to travel, meals, and entertainment, are subject

to heightened substantiation requirements. See sec. 274(d). In deciding whether a
                                        - 21 -

[*21] taxpayer has satisfied his or her burden of substantiating a deduction, we are

not required to accept the taxpayer's self-serving testimony. Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986).

      In support of his claim that he has adequately substantiated all of his

deductions, petitioner offers us eight five-inch-thick looseleaf binders containing

thousands of pages of papers. Petitioner has ignored our specific instructions that

he substantiate the total income from both Schedule C activities for each year, that

he show the income allocable to the computer activity, that he show the income

allocable to the sports memorabilia activity, and that he substantiate all of his

expenses relating to each one of the activities. We need not (and will not)

undertake the task of sorting through the voluminous evidence petitioner has

provided in an attempt to see what is, and what is not, adequate substantiation of

the items on petitioner's returns. Petitioner has failed to carry his burden of

proving his claimed costs of goods sold and deductions. See Patterson v.

Commissioner, T.C. Memo. 1979-362, 1979 Tax Ct. Memo LEXIS 162, at *7

(determining that the taxpayer failed to carry his burden of proving trade or

business items in that he "has chosen to rely on what may be termed the 'shoebox

method' of attaching photocopies of numerous cash register tapes and of similar

bits of paper to his returns, without making any effort on the returns or on brief,
                                        - 22 -

[*22] and only a slight effort in oral testimony, to link any item to a deductible

trade or business expense transaction"). Therefore, we sustain respondent's

disallowance of the claimed expenses.

III.   Additions to Tax

       Section 6651(a)(1) provides for an addition to tax in the event a taxpayer

fails to timely file a return (determined with regard to any extension of time for

filing) unless the taxpayer shows that such failure is due to reasonable cause and

not due to willful neglect. The addition equals 5% 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% for returns

more than four months delinquent. Id.

       Section 6651(a)(2) imposes an addition to tax when a taxpayer fails to pay

the amount of tax shown on a return by the prescribed date unless the taxpayer

shows that such failure is due to reasonable cause and not due to willful neglect.

The addition equals 0.5% of the tax for each month or fraction thereof during

which the tax remains unpaid, up to a maximum addition of 25%. Under section
                                         - 23 -

[*23] 6651(g)(2), a substitute for return prepared pursuant to section 6020(b) is

treated as the taxpayer's return for purposes of section 6651(a)(2).3

      With respect to both the section 6651(a)(1) and (2) additions to tax,

respondent bears the burden of coming forth with evidence that imposition of the

addition is appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446-447

(2001); see also sec. 7491(c). The parties have stipulated (and we find) that

petitioner failed timely to file his tax returns for the years in issue. They have also

stipulated (and we have found) that petitioner had zero withheld from his Emulex

wages for 2002 and 2003 and that he made no estimated tax payments towards his

2002 and 2003 income tax liabilities (as determined by respondent). Accordingly,

we conclude that respondent has produced sufficient evidence to show that the

section 6651(a)(1) and (2) additions to tax are appropriate, unless petitioner

proves that either or both of his failure to file and failure to pay were due to

reasonable cause and not due to willful neglect.

      3
        We note in passing that, while a properly made substitute for return is
necessary before a sec. 6651(a)(2) addition to tax for failure to pay the tax shown
on return can be imposed on a nonfiler, a substitute for return is not a prerequisite
to the Commissioner's determining a deficiency in tax. E.g., Roat v.
Commissioner, 847 F.2d 1379, 1381-1382 (9th Cir. 1988) ("Deficiency procedures
set out in the Internal Revenue Code * * * do not require the Commissioner to
prepare a return on a taxpayer's behalf before determining and issuing a notice of
deficiency."); accord Watson v. Commissioner, T.C. Memo. 2007-146, aff'd, 277
Fed. Appx. 450 (5th Cir. 2008).
                                         - 24 -

[*24] A failure to file is due to reasonable cause if a taxpayer "exercised ordinary

business care and prudence and was nevertheless unable to file the return within

the prescribed time". Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.; see also

United States v. Boyle, 469 U.S. 241, 246 (1985). A failure to pay tax will be

considered to be due to reasonable cause if the taxpayer exercised ordinary care

and prudence in providing for her tax liability but was unable to pay. See sec.

301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect is interpreted as a

"conscious, intentional failure or reckless indifference." Boyle, 469 U.S. at 245.

      In part, petitioner argues that he was unable to file and unable to pay his tax

on account of illness. A taxpayer's disability may constitute reasonable cause for

failure to file returns. Id. at 248 n.6; see, e.g., Rappaport v. Commissioner, T.C.

Memo. 2006-87, 2006 WL 1083434, at *5. At trial, in response to the Court's

inquiry as to his defense to the additions to tax, petitioner attributed his nonfiling

to the fact that "I had major health problems starting in November of 2000 and

continued on as total disability until February of 2002." Petitioner has provided

limited substantiation of his medical problems. He has proffered a handwritten

note from a doctor stating that he had surgery on November 1, 2001, and could not

return to work until December 20, 2001, and an email stating that petitioner was

not at work from October 25, 2001, through January 20, 2002. Those documents
                                        - 25 -

[*25] alone do not explain why petitioner was unable to timely file his 2001, 2002,

and 2003 tax returns. Because of extensions, his return for tax year 2001 was not

due until August 15, 2002, leaving him sufficient time in which to timely file that

return. The documents certainly do not explain why petitioner was unable to

timely file his 2002 and 2003 tax returns. Further weighing against petitioner is

the fact that he is a chronic late filer. See Judge v. Commissioner, 88 T.C. 1175,

1189-1191 (1987) (finding history of delinquency relevant to lack of reasonable

cause for late filing). And while we do not minimize the difficulties that may have

arisen on account of his illness, the fact remains that petitioner remained gainfully

employed, earning significant income during 2001 through 2003, and, apparently,

was able to attend to business matters and to his collectibles activity during the

period.

      Petitioner also avers that he was unable to timely file his tax returns for the

years in issue because a break-in at his warehouse in November of 2000 left his

entire warehouse in disarray and he was therefore unable to complete an inventory

check required for filing. That testimony alone does not explain why petitioner

was unable to timely file his 2001, 2002, and 2003 tax returns, all of which were

due well after the purported break-in. On the basis of the foregoing, we hold that

petitioner did not have reasonable cause for his failure to timely file. Accordingly,
                                       - 26 -

[*26] we sustain respondent's determination of the section 6651(a)(1) addition to

tax for all the years in issue.

       Petitioner makes the same claim of reasonable cause with respect to the

section 6651(a)(2) addition to tax as he does with respect to the section 6651(a)(1)

addition, viz, that he had major health problems and that the break-in at his

warehouse prevented him from conducting an inventory check. But reasonable

cause for purposes of section 6651(a)(2) depends upon whether the taxpayer,

notwithstanding the exercise of ordinary business care and prudence, was in fact

unable to pay or would suffer undue hardship if payment were made. E.g., Bray v.

Commissioner, T.C. Memo. 2008-113; sec. 301.6651-1(c)(1), Proced. & Admin.

Regs. Petitioner offered no evidence showing the foregoing. Accordingly, we

sustain respondent's determination of the section 6651(a)(2) additions to tax for

the years in issue.


                                                     Decisions will be entered under

                                                Rule 155.
