                         T.C. Memo. 2001-198



                     UNITED STATES TAX COURT



                  ROBERT L. BECK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                 MARGUERITE BECK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14577-98, 14578-98.           Filed July 30, 2001.



     Robert L. Beck and Marguerite Beck, pro sese.

     Nancy Graml, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:    These cases were consolidated for trial,

briefing, and opinion.   By separate notices of deficiency,

respondent determined the following deficiencies, additions to
                                - 2 -

tax, and penalties with respect to each petitioner’s Federal

income taxes:1

                           Robert L. Beck

                               Additions to Tax     Penalties
                                                  1
         Year     Deficiency    Sec. 6651(a)(1)    Sec. 6663(a)
         1991       $50,232         $12,558          $37,674
         1992        50,051          12,513            37,538
         1993        58,916          14,729            44,187
         1994        83,789          20,947            62,842
         1995        79,636          23,049            59,727
            1
              The notice of deficiency states that if “it is
         determined the underpayment is not due to fraud, then
         the accuracy related penalty per Internal Revenue Code
         Section 6662(a) would be applicable.”


                           Marguerite Beck

                                     Additions to Tax
                                1
         Year     Deficiency     Sec. 6651(f)    Sec. 6654(a)
         1991       $43,671         $32,753        $2,496
         1992        41,045          30,784         1,790
         1993        50,049          37,537         2,097
         1994        68,890          51,667         3,575
         1995        76,387          57,290         4,142
            1
              The notice of deficiency states that if “it is
         determined the failure to file is not due to fraud,
         then the delinquency penalty rate of 25 percent, per
         Internal Revenue Code Section 6651(a) would be
         applicable.”

     In his answer to Robert L. Beck’s (Dr. Beck’s) petition,

respondent conceded the fraud penalties under section 6663(a) for




     1
       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.
                                 - 3 -

all years in issue, and asserted in the alternative accuracy-

related penalties under section 6662(a), as follows:

                                          Penalties
                    Year                 Sec. 6662(a)
                    1991                   $10,046
                    1992                    10,010
                    1993                    11,783
                    1994                    16,758
                    1995                    15,927

     In his answer to Marguerite Beck’s (Mrs. Beck’s) amended

petition, respondent conceded the additions to tax under section

6651(f) for fraudulent failure to file and asserted in the

alternative additions to tax for failure to file pursuant to

section 6651(a)(1) as follows:

                                   Additions to Tax
                    Year           Sec. 6651(a)(1)
                    1991                $10,918
                    1992                 10,261
                    1993                 12,512
                    1994                 17,223
                    1995                 19,097

     After concessions, the issues to be decided are:

(1) Whether Dr. Beck is entitled to dental-practice business

deductions greater than respondent has allowed; (2) whether for

years 1993, 1994, and 1995, Dr. Beck is entitled to claimed

losses allegedly arising from a horse operation; (3) whether Dr.

Beck is entitled to claimed net operating loss carryovers;

(4) whether Dr. Beck’s income from his dental practice and from

oil royalties constitutes community property, taxable one-half to

each petitioner for each year in issue; (5) whether Mrs. Beck
                               - 4 -

qualifies for relief pursuant to section 66(c); (6) whether

petitioners are liable for additions to tax pursuant to section

6651(a)(1) for failure to file timely returns; (7) whether Dr.

Beck is liable for accuracy-related penalties pursuant to section

6662(a); and (8) whether Mrs. Beck is liable for additions to tax

pursuant to section 6654(a) for underpayment of estimated taxes.2

Procedural Background

     On August 28, 1998, petitioners filed their petitions with

this Court.   They were then represented by John Wells (Wells).

By Court Order dated January 14, 1999, the cases were calendared

for trial at the session of the Court commencing May 17, 1999, at

Houston, Texas.

     On February 1, 1999, Wells filed a motion to withdraw as

counsel.   On February 3, 1999, the Court granted Wells’s motion.

     After unsuccessfully attempting to secure petitioners’

cooperation in preparing a stipulation of facts, on February 19,

1999, respondent sent a letter to each petitioner, requesting

them to respond in writing to his proposed stipulations of facts

and evidence contained in 110 separately numbered paragraphs.     On

the same date, respondent mailed to each petitioner and filed



     2
       Robert L. Beck’s (Dr. Beck’s) self-employment tax, self-
employment tax deduction, and the amounts of his allowable
personal exemption and standard deduction are computational.
Similarly, the amounts of Marguerite Beck’s (Mrs. Beck’s)
allowable personal exemption and standard deduction are
computational.
                              - 5 -

with the Court, pursuant to Rule 90, respondent’s request for

admissions, reflecting substantially the same matters contained

in respondent’s proposed stipulations of fact.

     On April 2, 1999, Lorenzo W. Tijerina (Tijerina) filed an

entry of appearance on behalf of Dr. Beck.   Also on April 2,

1999, Dr. Beck filed a motion to continue the trial, on the

ground that Tijerina needed additional time to familiarize

himself with the case and consult with Dr. Beck and respondent’s

trial attorney.

     On April 5, 1999, respondent filed a motion for an order to

show cause why his proposed stipulations should not be deemed

accepted pursuant to Rule 91(f).

     On April 7, 1999, the Court entered two Orders:

(1) Extending the time to April 28, 1999, for petitioners to file

their responses to respondent’s requests for admissions; and

(2) ordering petitioners to show cause on or before April 28,

1999, why the facts and evidence set forth in respondent’s

proposed stipulations should not be accepted as established for

purposes of these cases.

     On April 29, 1999, Dr. Beck filed substantially identical

responses to both respondent’s request for admissions and the

Court’s Order to Show Cause Under Rule 91(f).    In his responses,

Dr. Beck refused to admit or stipulate anything except a few of

the most basic facts, often stating simply “Not Admitted” or
                               - 6 -

“Not Stipulated”, providing no reasons upon which he based his

refusal to admit or stipulate, contrary to the requirements of

Rules 90(c) and 91(f)(2).   Mrs. Beck filed no response to

respondent’s request for admissions or to the Court’s Order to

Show Cause pursuant to Rule 91(f).3

     On May 4, 1999, the Court granted Dr. Beck’s motion for a

continuance and discharged its Order to Show Cause Under Rule

91(f).   In the Court’s notice setting case for trial, dated May

21, 1999, the cases were calendared for trial at the session of

the Court commencing October 25, 1999, in Houston, Texas.

     On June 4, 1999, respondent once again filed a motion to

show cause why proposed facts in evidence should not be accepted

pursuant to Rule 91(f).   The subject matter of respondent’s Rule

91(f) motion was the facts and evidence set forth in those

paragraphs of respondent’s requested admissions and proposed

stipulations of facts to which Dr. Beck had failed to agree in

his previous responses.   On June 7, 1999, the Court granted

respondent’s motion and ordered petitioners to file a response

and show cause, on or before June 28, 1999 (subsequently,

enlarged to July 13, 1999, by Court Order dated June 30, 1999),

why the matters set forth in respondent’s motion papers should

not be deemed admitted for purposes of these proceedings.


     3
       Consequently, pursuant to Rule 90(c), each matter set
forth in respondent’s requested admissions was deemed admitted as
to Mrs. Beck.
                                 - 7 -

Petitioners filed no responses to the Court’s order.4    On July

29, 1999, the Court ordered that its June 7, 1999, Order to Show

Cause be made absolute.

     Consequently, all matters contained in respondent’s 110

paragraphs of requested admissions and proposed stipulations were

deemed admitted and/or stipulated by Mrs. Beck and either

actually admitted or stipulated or deemed stipulated by Dr. Beck.

     On October 20, 1999, Tijerina filed a motion to withdraw as

counsel.   The Court granted Tijerina’s motion.

     At trial, petitioners appeared pro sese.     Dr. Beck stated

that he had no objection to the admission into evidence of the

various documents that were the subject of respondent’s requested

admissions and proposed stipulations.

                          FINDINGS OF FACT

     The admitted facts, deemed stipulations, and corresponding

exhibits are incorporated herein by this reference.

     When petitioners filed their respective petitions, they each

resided in San Antonio, Texas.    Petitioners were married during

the years in issue, and continued to be married, though separated




     4
       The Court’s June 7, 1999, Order to Show Cause, sent by
certified mail to each petitioner, was returned unclaimed by Mrs.
Beck. The Court’s June 30, 1999, Order, which enlarged the time
for petitioners to respond to the June 7, 1999, Order to Show
Cause, also sent by certified mail to each petitioner, was not
returned unclaimed by either petitioner.
                                 - 8 -

and in the process of obtaining a divorce, at the time of trial.

Throughout the years in issue, petitioners resided together in

the State of Texas.

     Dr. Beck attended the University of Virginia, Duke

University, and Harvard University.      He has degrees in medicine

and dentistry.    During the years in issue, he was a self-employed

dentist in San Antonio, Texas.

     In 1987, the Texas State Board of Dental Examiners (the

board), created by the Texas legislature, revoked Dr. Beck’s

dental license.   In 1988, Dr. Beck filed suit in Texas State

court to set aside the revocation.       On April 1, 1992, the board

and Dr. Beck entered into an agreed board order pursuant to which

Dr. Beck’s license was suspended for 3 years with all but the

first 90 days being a probationary period.      The lawsuit brought

by Dr. Beck against the board was dismissed as moot.

     During this process, Mrs. Beck was active in efforts on her

husband’s behalf to dissolve the board.      She first contacted

Texas Attorney General Jim Maddox, and in 1989 she contacted

Texas Attorney General Richard “Racehorse” Haynes.      She

eventually persuaded a former board investigator to testify as a

witness for Dr. Beck at the hearings before the Texas State

legislature regarding dissolution of the board.5



     5
       The board was dissolved in 1994 and reestablished during
the 1995 Texas legislative session.
                               - 9 -

      During the years in issue, Mrs. Beck occasionally worked in

Dr. Beck’s dental office and participated in recruiting employees

for his dental practice (the dental practice).    A few times each

week, Mrs. Beck called the dental practice to ask the practice

administrator how much money the office received for the day.

      Mrs. Beck was a signatory on the dental practice’s bank

account at Nation’s Bank (the dental practice account).    From

December 1993 to January 1995, petitioners maintained a joint

personal account at Frost National Bank (the joint account).      In

addition, from November 1994 through January 1996, Mrs. Beck was

the sole signatory to an account at Frost National Bank (the

separate account).

     Dr. Beck employed a practice administrator who handled his

dental office affairs.   The practice administrator would fill out

checks to pay substantially all of the dental practice expenses.

Either Dr. Beck or Mrs. Beck would sign the checks.

     Dr. Beck accepted payment for his dental work in cash as

well as checks.   The dental practice offered its services at a

discount if the patient paid cash.     The dental practice employees

turned over to Dr. Beck all cash payments received.

      During 1993 and 1994, the dental practice would receive

from its patients, on average, $3,000 a day in cash.    From 1991

through 1994, only one cash deposit, in the amount of $2,000, was

made to the dental practice account.
                              - 10 -

     In 1994, Mrs. Beck deposited approximately $11,691 into her

separate account, mostly in cash.   In 1995, she made deposits of

approximately $54,616 into the separate account, mostly in cash.

The primary source of these deposits was income from the dental

practice.   In 1994, Mrs. Beck made cash deposits totaling at

least $6,120 to petitioners’ joint account.

     From 1977 through September 1995, Dr. Beck, either singly or

with his former wife, E. Roman Beck, owned or controlled the

ownership of more than 100 acres in Blanco Hills County Estate in

Bexar County, north of San Antonio, Texas (the Blanco property).

In a foreclosure sale on October 3, 1995, the Blanco property was

sold to an unrelated third party for $290,000.   On October 15,

1995, Mrs. Beck purchased the Blanco property from the third

party, in exchange for a note in the principal amount of

$331,845, executed by Mrs. Beck and secured by a lien on the

Blanco property.   Mrs. Beck used income from Dr. Beck’s dental

practice to purchase the Blanco property.

Petitioners’ Tax Returns

     Dr. Beck filed no Federal income tax returns for taxable

years 1991 through 1994 until September 1, 1995.6   For each year


     6
       Dr. Beck was granted extensions to file Federal income tax
returns for each of the taxable years in issue and filed his
returns on the dates indicated below:



                                                    (continued...)
                               - 11 -

in issue, Dr. Beck claimed a filing status of married, filing

separate.    Mrs. Beck filed no Federal income tax returns and paid

no estimated income taxes for any of the years in issue.

     For the years in issue, Dr. Beck reported on Schedule C,

Profit or Loss From Business (Sole Proprietorship), income and

expenses from “Dental Medical Services” as follows:

                                                     Net Profit
     Year      Gross Income      Total Expenses       (or Loss)
     1991        $388,429           $373,590           $14,839
     1992         551,770            579,198           (27,428)
     1993         592,960            529,114            63,846
     1994         645,960            585,831            60,129
     1995         562,892            377,218           185,674

     For each year in issue, Dr. Beck reported on Schedule E,

Supplemental Income and Loss, $1,020 net income from oil

royalties.

     For taxable years 1993, 1994, and 1995, Dr. Beck reported

losses on Schedule F, Profit or Loss From Farming, of $98,850,

$76,700, and $9,854, respectively, relating to an alleged horse

operation.   For 1993 and 1994, these reported losses include

claimed losses of $30,000 and $25,000, respectively, described on

each Schedule F simply as “ONE DEAD HORSE”.


     6
      (...continued)
     Taxable                       Date due with
      Year      Date due        Extensions granted     Date filed
      1991    Apr. 15, 1992       Aug. 15, 1992       Sept. 1, 1995
      1992    Apr. 15, 1993       Aug. 15, 1993       Sept. 1, 1995
      1993    Apr. 15, 1994       Aug. 15, 1994       Sept. 1, 1995
      1994    Apr. 15, 1995       Aug. 15, 1995       Sept. 1, 1995
      1995    Apr. 15, 1996       Oct. 15, 1996       Oct. 16, 1996
                                - 12 -

     For each year in issue, Dr. Beck claimed net operating loss

(NOL) carryovers as follows:

                   Year              NOL Carryover
                   1991                $367,251
                   1992                 318,145
                   1993                 377,950
                   1994                 408,759
                   1995                 424,310

Notices of Deficiency

     In the notice of deficiency issued to Dr. Beck, respondent

determined that Dr. Beck had claimed and failed to substantiate

certain Schedule C deductions as follows:

               Claimed            Respondent’s
              Deductible        Determination of     Adjustment to
   Year        Expenses        Deductible Expenses   Taxable Income
   1991        $382,205              $88,407            $293,798
   1992          591,436             270,839             320,597
               1
   1993          542,044             288,668             253,376
               1
   1994          600,159             247,194             352,965
   1995          377,218             110,174             267,044
          1
            As previously indicated, for years 1993 and
     1994, petitioner’s claimed Schedule C deductions were
     $529,114 and $585,831, respectively. In the notice of
     deficiency, respondent appears to have overstated the
     amounts of deductions claimed by Dr. Beck for 1993 and
     1994, resulting in excessive adjustments to taxable
     income for these 2 years. We expect these errors to be
     corrected in the Rule 155 computation.

     Based on these adjustments, respondent redetermined Dr.

Beck’s Schedule C income for each year in issue and allocated

one-half of that income, along with one-half of Schedule E

royalty income reported by Dr. Beck for each year in issue, to

Mrs. Beck as her community property income.    Accordingly, in

separate notices of deficiency, respondent determined that Mrs.
                             - 13 -

Beck had unreported income and that Dr. Beck is entitled to a

corresponding deduction for the community property split of his

income, as follows:

               Year                      Amount
               1991                    $154,829
               1992                      147,095
                                       1
               1993                      159,121
                                       1
               1994                      207,057
               1995                      226,869
          1
            As previously described, it appears that for
     1993 and 1994 respondent has overstated the amount of
     Dr. Beck’s Schedule C income, thus resulting in an
     overstatement of the amounts of community property
     income for 1993 and 1994. We expect these errors to be
     corrected in the Rule 155 computation.

     Respondent disallowed entirely the Schedule F farm losses

that Dr. Beck claimed for 1993, 1994, and 1995, on the ground

that Dr. Beck had not established that each claimed loss

“constitutes an ordinary and necessary business expense, was

expended, or was expended for the designated purpose.”

Respondent also disallowed the NOL carryforward deductions that

Dr. Beck claimed for each year in issue, on the ground that Dr.

Beck had “neither established * * * [his] entitlement under the

Internal Revenue Code to [claim] a net operating loss nor

substantiated the amount of any loss.”

                             OPINION

Dr. Beck’s Schedule C Deductions

      For each year in issue, respondent disallowed a portion of

Dr. Beck’s claimed Schedule C expenses as described above.
                              - 14 -

     Deductions are strictly a matter of legislative grace;

petitioners bear the burden of proving that they are entitled to

any deductions claimed.   INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992).

     Section 162(a) allows a deduction for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on

a trade or business.   Taxpayers must maintain records sufficient

to establish the amount of their income and deductions.   Sec.

6001; sec. 1.6001-1(a), (e), Income Tax Regs.

     Dr. Beck has offered no credible evidence to establish that

he is entitled to deduct claimed Schedule C expenses greater than

the amounts that respondent has determined to be allowable.7

Consequently, we sustain respondent’s determinations disallowing

the claimed deductions.




     7
       Dr. Beck claimed that his accounting records were stored
in a “black box” at his office and that this box was mistakenly
removed and disposed of by office cleaning people in February
1995. Dr. Beck’s contention is not credible in light of his
deemed stipulations of fact. The deemed stipulations indicate
that according to the office cleaning people involved in the
incident and the police officer who filed a report of the
incident, the dimensions of the discarded box were approximately
9 by 12 by 4 inches. The deemed stipulations also indicate that
Dr. Beck’s 1995 business and accounting records took up several
five-drawer filing cabinets. In any event, Dr. Beck has not
attempted to substantiate his claimed deductions by
reconstructing any expenditures through other credible evidence.
Cf. Watson v. Commissioner, T.C. Memo. 1988-29.
                                - 15 -

Dr. Beck’s Schedule F Deductions

     In taxable years 1993, 1994, and 1995, Dr. Beck claimed

Schedule F losses relating to an alleged horse operation.

Respondent disallowed these losses in their entirety.

     Dr. Beck presented no evidence to demonstrate the existence

of any horse activity.   He failed to present any records relating

to the alleged horse activity or to otherwise substantiate or

even explain the losses asserted on his returns.8     Moreover, Dr.

Beck did not establish that the alleged horse activity was

conducted with the primary purpose of making a profit.

     Dr. Beck has failed to establish that he is entitled to

deduct the claimed Schedule F losses.      Consequently, we sustain

respondent’s determinations disallowing the claimed Schedule F

losses.

Net Operating Loss Carryovers

     Dr. Beck claimed, and respondent disallowed, substantial net

operating loss carryover deductions for each year in issue.

     In the case of net operating loss deductions, as with other

deductions, Dr. Beck bears the burden of proving that he is

entitled to the claimed deductions.      See Rule 142(a); United

States v. Olympic Radio & Television, 349 U.S. 232, 235 (1955);



     8
       In particular, with respect to the losses of $30,000 and
$25,000, claimed in 1993 and 1994, respectively for “ONE DEAD
HORSE”, Dr. Beck established neither the existence nor demise of
any horse.
                               - 16 -

Jones v. Commissioner, 25 T.C. 1100, 1104 (1956), revd. and

remanded on other grounds 259 F.2d 300 (5th Cir. 1958); Leitgen

v. Commissioner, T.C. Memo. 1981-525, affd. per curiam without

published opinion 691 F.2d 504 (8th Cir. 1982).

     Dr. Beck presented no evidence regarding any of his claimed

NOL carryover deductions.    Accordingly, Dr. Beck has failed to

establish that he is entitled to the claimed NOL carryover

deductions.   We sustain respondent’s determination disallowing

these deductions.

Community Property Under Texas State Law

     Texas is a community property State.    See Tex. Const. art.

16, sec. 15; Tex. Fam. Code Ann. sec. 5.01 (Vernon 1993).    Under

Texas law, community property consists of all property acquired

by either spouse during marriage, except for property acquired by

gift, devise, or descent, or (with certain exceptions) in

recovery for personal injuries sustained by a spouse in marriage.

Tex. Fam. Code Ann. sec. 5.01.    Property possessed by either

spouse during or at dissolution of the marriage is presumed to be

community property--a presumption rebuttable with clear and

convincing evidence.   Id. at sec. 5.02.    A spouse’s personal

earnings are community property.    Winger v. Pianka, 831 S.W.2d

853, 857 (Tex. App. 1992).

     Because each spouse is owner of one-half of all community

property, each spouse is liable for Federal income taxes on such
                               - 17 -

share.    United States v. Mitchell, 403 U.S. 190 (1971); Hopkins

v. Bacon, 282 U.S. 122, 126-127 (1930); Bowling v. United States,

510 F.2d 112, 113 (5th Cir. 1975); Johnson v. Commissioner, 72

T.C. 340, 343 (1979).

     Petitioners were married to each other throughout the years

in issue.   Respondent determined that Dr. Beck’s Schedule C and

Schedule E net profits were community income during the years in

issue and that each petitioner is liable for Federal income tax

on one-half of this community income.   Neither Dr. Beck nor Mrs.

Beck presented any evidence to contest respondent’s

determination.9

     We sustain respondent’s determination on this issue.

Relief From Liability Pursuant To Section 66(c)

     In her petition, Mrs. Beck contends that she “is legally an

‘innocent spouse.’”   Because Mrs. Beck and Dr. Beck did not file

a joint return for any year in issue, the provisions of section

6015 for relief from joint and several liability on joint returns

are inapplicable.10   Consequently, we construe Mrs. Beck’s prayer


     9
       The deemed admissions and deemed stipulations state that
Dr. Beck’s income reported on Schedule C and Schedule E was
community income during the years in issue.
     10
       Mrs. Beck filed her petition on Aug. 28, 1998. Effective
July 22, 1998, former sec. 6013(e) was repealed and
simultaneously replaced by sec. 6015 as part of the Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
105-206, sec. 3201(a), 112 Stat. 734. Sec. 6015 provides several
avenues of relief from joint and several liability, all
                                                    (continued...)
                             - 18 -

for relief as arising under section 66(c), which provides relief

from income tax liability with respect to unreported community

income in certain circumstances.   Section 66(c) provides:

          SEC. 66(c). Spouse Relieved of Liability in
     Certain Other Cases.--Under regulations prescribed by
     the Secretary, if–-

               (1) an individual does not file a joint
          return for any taxable year,

               (2) such individual does not include in
          gross income for such taxable year an item of
          community income properly includible therein
          which, in accordance with the rules contained
          in section 879(a), would be treated as the
          income of the other spouse,

               (3) the individual establishes that he
          or she did not know of, and had no reason to
          know of, such item of community income, and

               (4) taking into account all facts and
          circumstances, it is inequitable to include
          such item of community income in such
          individual’s gross income,

     then, for purposes of this title, such item of
     community income shall be included in the gross income
     of the other spouse (and not in the gross income of the
     individual). Under procedures prescribed by the
     Secretary, if, taking into account all the facts and
     circumstances, it is inequitable to hold the individual
     liable for any unpaid tax or any deficiency (or any
     portion of either) attributable to any item for which
     relief is not available under the preceding sentence,
     the Secretary may relieve such individual of such liability.




     10
       (...continued)
conditioned on the electing individual’s having made a joint
return for the year in question. See sec. 6015(a), (b)(1)(A),
and (c)(1); Rev. Proc. 2000-15, 2000-5 I.R.B. 447 (Jan. 31,
2000).
                              - 19 -

     Respondent does not dispute that Mrs. Beck meets the

requirements of section 66(c)(1) and (2).   Respondent contends,

however, that she fails to meet the requirements of section

66(c)(3) and (4).   For the reasons discussed below, we agree with

respondent.

     Mrs. Beck has failed to establish that she did not know of

the subject items of community income, within the meaning of

section 66(c)(3).   Whether a taxpayer has knowledge of an item of

community income is determined by reference to knowledge of a

particular income-producing activity, rather than of the exact

amount of community income.   See McGee v. Commissioner, 979 F.2d

66, 70 (5th Cir. 1992) (and cases cited therein), affg. T.C.

Memo. 1991-510; Roberts v. Commissioner, 860 F.2d 1235, 1239-1240

(5th Cir. 1988), affg. T.C. Memo. 1987-391.   Here, Mrs. Beck

clearly was aware that Dr. Beck’s dental practice was an income-

producing activity.   Mrs. Beck occasionally worked in Dr. Beck’s

office, often called the office to determine how much money Dr.

Beck earned on a given day, and during the last 2 years in issue

made substantial deposits of income from the dental practice into

her separate bank account and into petitioners’ joint bank

account.   After Dr. Beck’s dental license was revoked, she was

actively involved in seeking to have the board dissolved, thus

demonstrating engagement in his business affairs.
                              - 20 -

Petitioners have presented no evidence to establish that Mrs.

Beck was unaware of the Schedule E community income.

     Mrs. Beck has also failed to establish that it would be

“inequitable” within the meaning of section 66(c)(4) to include

her community share of Dr. Beck’s earnings in her income.    The

legislative history of section 66(c)(4) indicates that an

important factor to consider in this regard is “whether the

spouse [who is seeking relief under section 66(c)] benefitted

from the untaxed income”.   H. Rept. 98-432 (Part 2), at 1503

(1984).   As previously discussed, in 1994 and 1995, Mrs. Beck

made significant deposits of dental practice income into her

separate bank account and petitioners’ joint bank accounts.11      In

1995, Mrs. Beck used dental practice income in purchasing the

more than 100 acres of the Blanco property.   Mrs. Beck has not

shown that she did not benefit from the community property

income.

     The last sentence of section 66(c) (the section 66(c)

equitable relief provision) provides for relief from liability if

“it is inequitable to hold the individual liable for any unpaid



     11
       The record does not reveal whether Mrs. Beck made similar
deposits in other years in issue. The record contains no
evidence to indicate that she did not benefit from the dental
practice income or from the Schedule E income. We cannot assume
that the missing evidence would be favorable to Mrs. Beck.
Indeed, the normal inference is that the missing evidence would
be unfavorable. See Pollack v. Commissioner, 47 T.C. 92, 108
(1966), affd. 392 F.2d 409 (5th Cir. 1968).
                                - 21 -

tax or any deficiency * * * attributable to any item for which

relief is not available” under section 66(c)(1) through (4).       The

section 66(c) equitable relief provision was enacted on July 22,

1998, and applies to any liability for tax arising after such

date or arising on or before such date and remaining unpaid as of

such date.   See Internal Revenue Service Restructuring and Reform

Act of 1998 (RRA 1998), Pub. L. 105-206, secs. 3201(b), 3202(g),

112 Stat. 734, 740.   As Mrs. Beck’s liability for tax arose prior

to July 22, 1998, and remains unpaid, the section 66(c) equitable

relief provision is effective with respect to the instant case.

     Respondent contends that denial of relief under the section

66(c) equitable relief provision is not subject to judicial

review.   We disagree.    The section 66(c) equitable relief

provision was enacted in the same section of the same legislation

that created a similar equitable relief provision under section

6015(f).12   See RRA 1998 sec. 3201(b), 112 Stat. 734.   We have

previously held that in a deficiency proceeding we have authority

to review respondent’s denial of equitable relief under section

6015(f) as part of our traditional authority in deficiency

proceedings to render an opinion regarding affirmative defenses

raised by the taxpayer.    See Butler v. Commissioner, 114 T.C.


     12
       Sec. 6015(f) provides that if, taking into account all
the facts and circumstances, it is inequitable to hold the
individual liable for any unpaid tax or any deficiency, and
relief is unavailable under sec. 6015(b) or (c), the Secretary
may relieve such individual of the liability.
                              - 22 -

276, 287-292 (2000); see also Fernandez v. Commissioner, 114 T.C.

324, 328-332 (2000) (Tax Court has authority in “stand alone”

petition filed pursuant to section 6015(e)(1)(A) to review denial

of relief under section 6015(f)).   For the same reasons discussed

in Butler v. Commissioner, supra, we conclude that in this

deficiency proceeding we have authority to review respondent’s

denial of equitable relief under the last sentence of section

66(c).

     Consistent with our enunciated standard of review for

respondent’s denial of equitable relief under section 6015(f),

see Fernandez v. Commissioner, supra at 331; Butler v.

Commissioner, supra at 291-293, we review the Commissioner’s

denial of equitable relief under section 66(c) for abuse of

discretion.

     Mrs. Beck has not established that respondent abused his

discretion in refusing her request for equitable relief.     As

previously discussed, the record indicates that Mrs. Beck was

involved in Dr. Beck’s dental practice, was aware of the dental

practice income, and benefited substantially therefrom.    The

record is devoid of evidence that she was unaware of the Schedule

E income.   Moreover, Mrs. Beck has failed to establish that she

would suffer economic hardship if the relief were not granted.

Finally, by persistently failing to comply with the Rules and

Orders of this Court and by failing to cooperate with respondent
                              - 23 -

in preparing this case for trial, Mrs. Beck has demonstrated a

lack of good faith that we believe is indicative of a lack of

respect for the Federal income tax laws and the processes of this

Court.

     In sum, Mrs. Beck has not established that respondent would

have abused his discretion in denying any request for relief

under section 66(c).

Additions to Tax for Failure To File Timely Returns

     Section 6651(a)(1) imposes an addition to tax for failure to

file a timely return unless the taxpayer establishes that the

failure “is due to reasonable cause and not due to willful

neglect”.   Respondent contends that Dr. Beck is liable for

section 6651(a)(1) additions to tax for failure to file timely

returns for 1991, 1992, 1993, and 1994, and that Mrs. Beck is

liable for the section 6651(a)(1) addition to tax for each year

in issue.

     It is undisputed that Dr. Beck did not timely file Federal

income tax returns for taxable years 1991, 1992, 1993, and 1994.

Dr. Beck has not established that he had reasonable cause for his

failure to file timely returns.   Accordingly, Dr. Beck is liable

for the section 6651(a)(1) addition to tax for taxable years

1991, 1992, 1993, and 1994.

     Mrs. Beck failed to file a Federal income tax return for any

year in issue.   In her petition, Mrs. Beck contends that she “is
                               - 24 -

legally impaired (as a result of mental illness, traumatic

epilepsy, and brain damage) from comprehending or understanding

the nature and requirements of the Internal Revenue Code.”

     A taxpayer’s mental incapacity may constitute “reasonable

cause” for failure to file returns.     Bloch v. Commissioner, T.C.

Memo. 1992-1.    Judging by Mrs. Beck’s demeanor at trial and her

testimony, which was lucid and coherent, displaying at most

naivety and poor judgment rather than mental incompetence, and in

the absence of any medical evidence to the contrary,13 we are

unconvinced that Mrs. Beck was so mentally impaired that she

could not appreciate her legal duty to file returns and pay

taxes, particularly during the years in issue, when she was

actively engaged in the conduct of Dr. Beck’s dental practice.

     Mrs. Beck has not established that she had reasonable cause

for her failure to file timely returns.    Accordingly, Mrs. Beck

is liable for the section 6651(a)(1) addition to tax for each

year in issue.



     13
       At trial, the Court admitted into evidence, over
respondent’s objections, a letter that Dr. Beck alleged was sent
to respondent’s auditing agent, which Dr. Beck alleged to contain
medical reports regarding Mrs. Beck’s “emotional instability and
sensitivity.” After trial, it was discovered that Dr. Beck had
failed to relinquish to the Court this exhibit and other exhibits
that he had proffered and that had been marked for
identification. On Nov. 1, 1999, and Nov. 3, 1999, the Court’s
trial clerk contacted Dr. Beck and requested that he return the
exhibits to complete the record in this case. After receiving no
response, on Feb. 9, 2000, the Court ordered the missing exhibits
stricken from the record of these cases.
                               - 25 -

Dr. Beck’s Liability for Accuracy-Related Penalties

     Respondent contends that for each year in issue Dr. Beck is

liable for the section 6662(a) accuracy-related penalty.      Section

6662(a) imposes a 20-percent penalty on any portion of an

underpayment that is attributable to, among other things,

negligence or disregard of the rules or regulations.      Sec.

6662(b)(1).    Negligence is the lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

the same circumstances.    Neely v. Commissioner, 85 T.C. 934

(1985).    No penalty shall be imposed under section 6662(a) with

respect to any portion of an underpayment if it is shown that

there was reasonable cause and that the taxpayer acted in good

faith.    Sec. 6664(c).

     Dr. Beck failed to produce evidence to substantiate the

deductions he claimed on his Schedules C and F.      His failure to

maintain and to produce records of his business activities shows

not only negligence but intentional disregard of rules and

regulations requiring a taxpayer to keep permanent records

sufficient to establish his gross income and deductions.      See

Crocker v. Commissioner, 92 T.C. 899, 917 (1989); Schroeder v.

Commissioner, 40 T.C. 30, 34 (1963).

     Dr. Beck has come forward with no evidence to establish that

he acted in good faith.    As previously discussed, Dr. Beck’s

claims that office cleaning people accidentally discarded all his

business records are not credible.      Dr. Beck is liable for the
                              - 26 -

section 6662(a) accuracy-related penalty with regard to his

entire underpayment for each year in issue.

Mrs. Beck’s Liability for Section 6654(a) Additions to Tax

     Respondent determined that for each year in issue, Mrs. Beck

is liable for the section 6654(a) addition to tax for

underpayment of estimated tax by an individual.   During the years

in issue, Mrs. Beck filed no returns and paid no estimated taxes.

     Mrs. Beck has not shown that any of the exceptions contained

in section 6654(e) apply.   Therefore, we hold that she is liable

for the section 6654(a) addition to tax for each year in issue.

     To reflect the foregoing and concessions by respondent,


                                    Decisions will be entered

                               under Rule 155.
