                        T.C. Memo. 2006-239



                      UNITED STATES TAX COURT



                  CLIFF CONNORS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15063-05.                Filed November 7, 2006.



     William S. Neal, for petitioner.

     Theresa G. McQueeney, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined a deficiency of $80,269

in petitioner’s Federal income tax and additions to tax of

$18,061, $9,632, and $2,684 under sections 6651(a)(1) and (2) and

6654, respectively, for 2002.   Respondent conceded the section

6654 addition to tax in respondent’s objection to petitioner’s

motion to amend petition, filed on June 9, 2006.
                                 - 2 -

       After concessions by the parties, the issues for decision

are:

       (1) Whether payments made to petitioner, pursuant to a long-

term disability income settlement, by Connecticut General Life

Insurance Co. (Connecticut General) are taxable gross income to

petitioner in 2002;

       (2) whether Citibank interest income of $972, attributable

to the Quadrino & Schwartz, P.C. (Quadrino & Schwartz), escrow

account, and $15 of interest income from a U.S. savings bond are

taxable to petitioner in 2002;

       (3) whether petitioner is entitled to certain credits,

exemptions, or deductions in 2002;

       (4) whether petitioner is liable for the additions to tax

under section 6651(a)(1) and (2); and

       (5) whether petitioner’s proper filing status for 2002 is

married filing separately.

       Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

                          FINDINGS OF FACT

       Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.
                                 - 3 -

Petitioner resided in Woodhaven, New York, at the time that he

filed his petition.

     On July 5, 1990, petitioner was injured on the job while

employed as a salesman for American Cablevision of Queens

(American), a subsidiary of American Television & Communications

Corp. (ATC), now known as Time Warner.      Petitioner has not

returned to work since the time of the injury.      American

determined that petitioner was totally disabled as a result of

the injury.    Petitioner was covered, at the time, by a disability

insurance plan issued by Connecticut General, a subsidiary of

Cigna Group Insurance (Cigna).    Under the “Summary Plan

Description”, it is stated that “the cost of the Plan is paid by

the sponsor”.   The sponsor, as designated in the summary plan

description, was ATC.    The Group Long Term Disability Policy,

policy No. 0415174-03, effective January 1, 1983, provided that,

in the event of total disability, the insured would qualify for

the monthly benefit.    The monthly benefit for any month was

66-2/3 percent of the insured’s monthly basic earnings at the

time that he became totally disabled, less any applicable

adjustments.    Pursuant to this policy, Connecticut General paid

disability benefits to petitioner from October 1990 through March

1995.

     On or about April 1, 1995, Connecticut General ceased paying

disability benefits to petitioner.       Petitioner retained Quadrino
                               - 4 -

& Schwartz, on a contingent fee basis, to pursue litigation

against Connecticut General.   On November 20, 1998, Quadrino &

Schwartz filed a complaint on behalf of petitioner against

Connecticut General in the U.S. District Court, Southern District

of New York, docket No. 98 CV 8522 (JSM), seeking declaratory

relief that petitioner was disabled and covered under the terms

of the policy, payment of past due benefits, and payment of

continuing benefits.   Petitioner and Connecticut General settled

the case in July 2002.

     The settlement agreement, signed by petitioner, provided

that Connecticut General--

     shall issue a settlement check in the amount of * * *
     $252,317.62 payable to QUADRINO & SCHWARTZ as attorneys
     for CLIFF CONNORS for all of the back benefits which
     are payable under the terms of the policy and interest
     on all of the back benefits in the amount of * * * 4.5
     percent compounded annually.

Additionally, the settlement provided that Connecticut General

“shall pay future benefits to CLIFF CONNORS as per the terms of

the policy and issue monthly checks payable to ‘QUADRINO &

SCHWARTZ as Attorneys for CLIFF CONNORS.’”

     Connecticut General issued a settlement check to “Quadrino &

Schwartz as Attorneys for Cliff Connors” in the amount of

$252,317.62.   It also issued checks to “Cliff Connors c/o

Quadrino & Schwartz” for June and July disability payments.

Quadrino & Schwartz made payments to petitioner, out of the

escrow account maintained for petitioner, as follows:   $59,286.51
                                - 5 -

on July 28, 2002; $4,902 on August 23, 2002 (reflecting the June

and July monthly benefit payments); and $141,565.77 on

February 14, 2005.    Additionally, four monthly benefit payments

of $2,451 each, for August through November 2002, were received

on behalf of petitioner and mailed directly to him.   Connecticut

General issued a Form W-2, Wage and Tax Statement, to petitioner

in 2002, reflecting the $252,317.62 payment for past due benefits

and $17,157 of ongoing monthly benefit payments of $2,451 from

June 1 through December 31, 2002.   The Form W-2 did not reflect

any Federal income tax withholding.

     Additionally, during 2002, attorney’s fees were paid out of

the escrow account to Quadrino & Schwartz in the amount of

$6,595.72 on July 29, 2002; to William Neal (Neal), counsel of

record in this case, in the amount of $8,831.11 on August 5,

2002; and to Advance Settlement Funding in the amount of $14,200

on December 24, 2002.   A $25,000 payment was made to Quadrino &

Schwartz on February 14, 2005, as well.

     On September 24, 2002, Quadrino & Schwartz filed a complaint

in the Supreme Court of the State of New York, County of Nassau,

against petitioner.   Quadrino & Schwartz claimed that, despite

the terms of the retainer agreement between Quadrino & Schwartz

and petitioner, petitioner refused to honor the terms of the

agreement and refused to pay Quadrino & Schwartz 50 percent of

the recovery that petitioner received from Connecticut General.
                                - 6 -

Quadrino & Schwartz asserted a lien of 50 percent against the

recovery paid by Connecticut General, asserted a lien against

every monthly disability benefit payment paid by Connecticut

General to petitioner, and maintained that amount in the escrow

account until resolution of the dispute.

     Quadrino & Schwartz maintained the escrow account at

Citibank in 2002.    The escrow account schedule reflects that

interest of $3,186.49 was earned on the account from July 3,

2002, through February 14, 2005.    Petitioner also maintained an

individual bank account at Citibank.

     Petitioner was married to Lucy Lejin Qi Connors

(Mrs. Connors) on February 14, 2001.    Neither petitioner nor

Mrs. Connors filed a Federal income tax return for 2002 or paid

any taxes for that year.    A substitute return under section

6020(b) was prepared by the Internal Revenue Service for that

year on February 1, 2005.    Petitioner was a cash basis taxpayer

in 2002.

Procedural Matters

     Respondent sent a notice of deficiency for 2002 to

petitioner on May 27, 2005.    Petitioner filed the petition in

this case on August 15, 2005.    The petition placed in issue only

the insurance proceeds, alleging:

          4. The determination of the tax set forth in the
     said notice of deficiency is based upon the following
     errors:
                                 - 7 -

     a. that the disability income payments under an
     insurance policy are taxable.

          5. The facts upon which the petitioner relies, as
     the basis of petitioner’s case, are as follows: taxes
     are paid by the insurance company as provided by the
     insurance policy.

No other errors were pleaded.    At all times during this case,

petitioner was represented by Neal.      By notice served October 14,

2005, this case was set for trial in New York City on March 20,

2006.   Attached to the notice was the Court’s standing pretrial

order, which provided in part:

          Continuances will be granted only in exceptional
     circumstances. See Rule 133, Tax Court Rules of
     Practice and Procedure. * * * Even joint motions for
     continuance will not be routinely granted.

           *      *      *       *       *      *      *

          ORDERED that all facts shall be stipulated to the
     maximum extent possible. All documentary and written
     evidence shall be marked and stipulated in accordance
     with Rule 91(b), unless the evidence is to be used
     solely to impeach the credibility of a witness.
     Objections may be preserved in the stipulation. If a
     complete stipulation of facts is not ready for
     submission at the commencement of the trial or at such
     other time ordered by the Court, and if the Court
     determines that this is the result of either party’s
     failure to fully cooperate in the preparation thereof,
     the Court may order sanctions against the uncooperative
     party. Any documents or materials which a party
     expects to utilize in the event of trial * * * but
     which are not stipulated, shall be identified in
     writing and exchanged by the parties at least 14 days
     before the first day of the trial session. The Court
     may refuse to receive in evidence any document or
     material not so stipulated or exchanged, unless
     otherwise agreed by the parties or allowed by the Court
     for good cause shown. It is further

           *      *      *       *       *      *      *
                                 - 8 -

          ORDERED that all parties shall be prepared for
     trial at any time during the term of the trial session
     unless a specific date has been previously set by the
     Court. * * *

     On January 3, 2006, respondent’s requests for admission were

served and filed, and, because petitioner failed to respond, the

facts therein were deemed admitted pursuant to Rule 90.   On

February 6, 2006, respondent filed a motion to compel production

of documents and a motion to compel responses to respondent’s

interrogatories.   Such requests had been served on petitioner on

December 30, 2005, and petitioner, though represented by Neal,

had not produced any documents or answered the interrogatories.

By order of the Court dated February 9, 2006, respondent’s

motions were granted in that petitioner was ordered to produce

the requested documents and to answer the interrogatories on or

before March 1, 2006.   On February 15, 2006, Neal filed a motion

to continue, alleging that petitioner was in China and could not

return for the trial.   Respondent objected to the motion to

continue on the grounds that--

          4. With regard to the March 1, 2006 discovery
     deadlines, it is respondent’s understanding that as
     early as the filing of the petition in this case,
     petitioner has had access to Cigna, who is the parent
     company for the 2002 payment made by Connecticut
     General * * *. Despite such access, petitioner has
     provided no documentation other than the initial
     disability insurance policy in support of the 2002
     payment of $269,474 at issue. Petitioner has provided
     no reasonable explanation regarding why he was unable
     to provide a copy of the 2002 settlement and/or the
     underlying terms and/or any documentation from the
                               - 9 -

     payer, Connecticut General * * * or Cigna to support
     the requested continuance.

          5. Petitioner recently traveled to China with no
     regard for the March 20, 2006 U.S. Tax Court calendar
     date. It is respondent’s understanding that petitioner
     did not leave until long after the October 14, 2005
     Notice Setting Case for Trial was issued.

          6. In support of petitioner’s continuance
     request, petitioner stated that he is infirm and
     permanently disabled. Such health condition is not
     recently contracted, and did not deter the petitioner
     from petitioning the Tax Court. Petitioner makes no
     claim that his health condition will be improved at
     some later date. As such, a continuance should not be
     granted based on petitioner’s health condition.

          7. Further, petitioner’s ability to complete a
     recent 14 to 17 hour flight to China despite his health
     condition supports the determination that petitioner
     could have appeared in Tax Court on March 20, 2006, had
     he not left the country. Lastly, petitioner should
     have considered the financial impact of his travel to
     China and his ability to return to the U.S. for the
     March 20, 2006 calendar prior to his departure.

     Petitioner’s motion to continue was denied because

petitioner was already in default of discovery obligations and

because the Court was not persuaded that petitioner could not or

should not be present at trial.   Moreover, the documents that

petitioner and Neal failed to produce would be the relevant

evidence as to the taxability of the insurance proceeds in

dispute.

     When the case was called for trial, Neal renewed the motion

for continuance, stating that petitioner was still out of the

country.   Neal asserted that petitioner had left for China before

the notice setting trial was served.   Although Mrs. Connors
                                - 10 -

testified, she did not indicate when petitioner left for China or

when he was expected to return.    The renewed motion was denied.

     During trial, Neal raised for the first time the claim that

petitioner was entitled to certain deductions, exemptions, and

credits.   The only evidence presented at trial was the testimony

of Mrs. Connors to say that she was married to petitioner, which

was already stipulated, that they had a daughter together, and

that petitioner had two sons.    Mrs. Connors testified that $5,000

was paid by petitioner on behalf of his two sons and that,

depending on circumstances, petitioner’s sons were with them

“once a week”.

     At the conclusion of the trial petitioner was directed, on

the record and by order to show cause, to make an offer of proof

that would justify reopening the record as to evidence regarding

petitioner’s liability for penalties in the event the disability

payments were taxable.   The Court left open the possibility of

petitioner’s testimony if he returned from China.   Neal was told

“you’re going to have to make a specific statement as to when

Mr. Connors will be available in New York or Washington to

testify.   He can give you an affidavit about what he wants to

testify about, and Respondent can decide whether they want to

cross-examine.”   He was also informed that any affidavits

provided as part of the offer of proof regarding petitioner’s

reliance on tax advice from third parties and professionals
                                - 11 -

should be very specific and detailed.    “[H]e is going to have to

show that he provided specific information to specific

professionals about the facts of the 2002 situation, not just

that he had an impression based on what occurred before that.”

Petitioner was also directed that any motion for leave to amend

the petition regarding additional issues that petitioner wanted

to raise that had not yet been pleaded, such as deductions, be

filed by May 22, 2006.   Neal was told at trial that

Mrs. Connors’s testimony needed to be substantiated by documents

showing what petitioner paid for the support of his sons, what

the custody arrangements were in 2002, and whether there were any

agreements regarding support.    He was told that he also needed to

include in the offer of proof applicable caselaw to support the

claims for deductions, exemptions, and credits.

     Petitioner’s motion to amend the petition and petitioner’s

offer of proof were filed on May 19, 2006.   The proposed amended

petition failed to identify any specific deductions to which

petitioner would be entitled, failed to contain clear and concise

assignments of error on the part of respondent or any clear and

concise statements of fact on which petitioner based an

assignment of error, and failed to allege any specific facts with

respect to the additions to tax.    The proposed amended petition

disputed the taxability of the insurance benefits and stated:

          The facts upon which the petitioner relies, as the
     basis of petitioner’s case, are as follows: Taxes are
                              - 12 -

     paid by the insurance company as provided by the
     insurance policy; he actually received a reduced amount
     of funds in 2002 from his federal court case, and
     lawyers therein withheld most of said funds pending
     outcome of the other case on attorney fees for the
     federal court case; further, he did indeed pay premiums
     for health and disability insurance coverage through
     his employer, Time Warner; and that, if any deficiency
     is sustained against him, then he is entitled to such
     exemptions, credits and deductions including earned
     income credit as allowed for a married man with three
     children and others that apply to his circumstances.

There were no documents, records, or affidavits attached to the

offer of proof to substantiate any of the statements made

therein.

     Additionally, petitioner never sought to be relieved of the

deemed admissions in this case.   The deemed admissions include

that petitioner paid no premiums toward his insurance policy,

that Connecticut General’s 2002 payment of $269,474 to petitioner

was in satisfaction of the insurance company’s requirement to pay

to petitioner 66-2/3 percent of his salary as a disability

payment, that the 2002 Form W-2 for $269,474 included no Federal

income tax withholding, that petitioner earned interest income of

$972 and $15 from Citibank in 2002 on the escrow account and a

U.S. savings bond, respectively, that petitioner’s failure to

file timely the 2002 tax return was not due to reasonable cause

and was due to willful neglect, and that the section 6651(a)(1)

and (2) additions to tax are applicable for 2002.

     Respondent objected to the motion to amend the petition and

to reopening the record.   By order dated June 27, 2006, the Court
                              - 13 -

concluded that nothing would be gained by reopening the record

for further evidence and that justice does not require that

petitioner be permitted to amend the petition; this case was

submitted on the evidentiary record as of March 21, 2006.     On

review of the entire record, we conclude that petitioner’s

testimony would not affect the result in this case.

                              OPINION

     Under section 7491(a), the burden of proof on any factual

issue relevant to ascertaining the taxpayer’s tax liability

shifts from the taxpayer to the Commissioner if the taxpayer

produces credible evidence with respect to such factual issue.

Sec. 7491(a)(1).   However, section 7491(a)(1) applies with

respect to an issue only if the taxpayer has complied with the

requirements under the Code to substantiate any item, has

maintained all records required under the Code, and has

cooperated with reasonable requests by the Commissioner for

witnesses, information, documents, meetings, and interviews.       See

sec. 7491(a)(2)(A) and (B).   Under section 7491(c), respondent

has the burden of production with respect to the liability of any

individual for any penalty or addition to tax.

     Petitioner failed to maintain adequate records or to produce

credible evidence.   Therefore, the burden of proof has not

shifted to respondent under section 7491(a)(1).   In regard to the

additions to tax, petitioner has admitted that no tax return was
                                - 14 -

filed by petitioner for 2002 and that no taxes were paid.

Respondent has shown that the substitute return filed on behalf

of petitioner for 2002 met the requirements of section 6020(b).

See infra p. 24.   Therefore, respondent has met the burden of

production under section 7491(c).    See Higbee v. Commissioner,

116 T.C. 438, 446-447 (2001).

Disability Benefit Payments

     The benefits in dispute in this case were paid pursuant to a

policy obtained through petitioner’s employer.     Section 61(a)

includes in gross income “all income from whatever source

derived”, unless otherwise provided.     Section 105(a) provides

that amounts received by an employee through accident or health

insurance are includable in the gross income of the employee to

the extent such amounts are attributable to contributions by the

employer that were not includable in the gross income of the

employee or are paid by the employer.     Therefore, benefits

received under a plan are includable in petitioner's income

unless the contributions were includable in petitioner's gross

income.   Tuka v. Commissioner, 120 T.C. 1, 4 (2003), affd. 85

Fed. Appx. 875 (3d Cir. 2003).

     Gross income does not include amounts received through

accident or health insurance for personal injuries or sickness to

the extent such amounts are attributable to contributions by the

employer that were includable in the gross income of the employee
                              - 15 -

or are paid for by the employee.   See sec. 104(a)(3).   Therefore,

petitioner may exclude the amounts he received if he paid

premiums for the disability plan or if his employer paid premiums

and the premiums were includable in his gross income.    See Tuka

v. Commissioner, supra at 3; Miley v. Commissioner, T.C. Memo.

2002-236.   In Tuka, the Court stated:

     Although section 104(a)(3) is not explicit on the
     subject, it clearly contemplates that exemption of
     benefits depends on whether contributions to an
     accident and health insurance plan involve after-tax
     dollars. Indeed, if an employee is to exclude
     disability benefits attributable to employer
     contributions, those contributions must have been
     includable in the employee's gross income. * * *
     [Tuka v. Commissioner, supra at 4.]

If an employer is the sole purchaser of a policy of accident or

health insurance for its employees (on either a group or

individual basis), the exclusion provided under section 104(a)(3)

does not apply to any amounts received by his employees through

such fund or insurance.   Sec. 1.104-1(d), Income Tax Regs.

     Petitioner argues that the benefits he received are not

includable in his income because he paid the premiums for the

policy.   The policy specifically states that the plan was paid

for by ATC, the parent of petitioner’s employer.   Petitioner does

not dispute the assertion by Connecticut General, relied on by

respondent, in a stipulated exhibit, that the premiums paid were

not included in his taxable income.    Petitioner has presented no

evidence, reason, or authority to apply the exception under
                               - 16 -

section 104(a)(3).    Additionally, a fact deemed admitted under

Rule 90 is that petitioner did not pay premiums toward his

insurance policy.    Therefore, the disability payments made by

Connecticut General to petitioner are not excluded from

petitioner’s gross income by section 104(a)(3).    See Tuka v.

Commissioner, supra at 4; sec. 1.104-1(d), Income Tax Regs.; see

also Emerson v. Commissioner, T.C. Memo. 2000-137; Rabideau v.

Commissioner, T.C. Memo. 1997-230.

     In the alternative, petitioner argues that the exception

under section 105(c) applies because the amounts he received were

“based on the type and severity of his injuries suffered by

himself and not because of his position, salary, investment or

other extraneous factors related to his company or employment.”

     Section 105(c) provides an exception to includability for

amounts received by an employee through accident or health

insurance to the extent attributable to employer contributions

that were not includable in an employee’s gross income.    Under

section 105(c), amounts attributable to employer contributions

are excluded from gross income to the extent such amounts

(1) constitute “payment for the permanent loss or loss of use of

a member or function of the body, or the permanent disfigurement”

of the taxpayer, and (2) are computed “with reference to the

nature of the injury without regard to the period the employee is

absent from work.”
                              - 17 -

     Under the terms of the policy, long-term disability benefits

were based on petitioner’s monthly basic earnings at the time

that he became totally disabled.   The benefit payments that

petitioner received at the time of his disability, as well as the

payments made pursuant to the settlement agreement, were based on

the terms of the policy and the coverage it provided and not by

reference to the nature of petitioner’s injury.   Petitioner has

offered no evidence to the contrary.   Additionally, a fact deemed

admitted under Rule 90 is that Connecticut General’s payment of

$269,474 to petitioner was in satisfaction of the insurance

company’s requirement to pay 66-2/3 percent of his salary as a

disability payment.   Therefore, the exception under section

105(c) is not applicable.

     Finally, on brief, petitioner argues that “on settlement of

that case * * * [he] did not receive all that money, oh no, he

received much, much less money from that case.”   He argues that

Quadrino & Schwartz retained the larger portion of the lawsuit

settlement and denied him access to most of his funds.

Additionally, petitioner argues that the $141,565.77 payment made

to petitioner on February 14, 2005, from the Quadrino & Schwartz

escrow account should not be taxable to him in 2002 because he is

a cash basis taxpayer.

     As a general rule, when a taxpayer’s litigation recovery

constitutes income, the taxpayer is taxable on the contingent fee
                              - 18 -

portion of the litigation recovery.    Commissioner v. Banks, 543

U.S. 426 (2005).   Section 212 allows a deduction for all of the

ordinary and necessary expenses paid or incurred during the

taxable year for the production or collection of income.    Sec.

212(1).   The attorney’s fees paid by petitioner would be allowed

as a itemized deduction under this section.   The deduction would,

however, be subject to the 2-percent floor under section 67

because it does not fall under any of the section 67(b)

exclusions.   Respondent has conceded that petitioner may deduct

his attorney’s fees of $29,626.83 ($6,595.72 + $8,831.11 +

$14,200 = $29,626.83) incurred in 2002 as a miscellaneous

itemized deduction for that year under section 67, subject to the

2-percent floor.   See Commissioner v. Banks, supra at 432.

     In regard to the insurance benefit paid to petitioner in

2002, section 451(a) provides that the amount of any item of

gross income shall be included in the gross income for the

taxable year in which received by the taxpayer unless, under the

method of accounting used in computing taxable income, such

amount is to be properly accounted for in a different period.

Income is constructively received by a taxpayer in the taxable

year in which such income is credited to the taxpayer’s account,

is set apart for the taxpayer, or is otherwise made available so

that the taxpayer could have drawn upon it during the taxable

year if notice of intention to withdraw had been given.    Income
                              - 19 -

is not constructively received if the taxpayer’s control of its

receipt is subject to substantial limitations or restrictions.

Sec. 1.451-2(a), Income Tax Regs.; see Childs v. Commissioner,

103 T.C. 634, 654 (1994), affd. 89 F.3d 856 (11th Cir. 1996).

     Generally, receipt of payment by an agent is constructive

receipt by the principal.   Md. Cas. Co. v. United States, 251

U.S. 342, 346-347 (1920); Joyce v. Commissioner, 42 T.C. 628, 639

(1964); see also Burkes v. Commissioner, T.C. Memo. 1998-61.     In

Gale v. Commissioner, T.C. Memo. 2002-54, funds from a lawsuit

against United Ready Mixed were paid at the taxpayer’s direction,

under the terms of a settlement agreement signed by the taxpayer,

to the taxpayer’s attorney, to be deposited into an attorney-

client trust account.   The funds were placed into the trust

account pending resolution of a dispute about attorney’s fees.

However, the Court stated in Gale:

     There is no need to consider the doctrine of
     constructive receipt because petitioner did not delay
     United Ready Mixed's payment.12 As between petitioner
     and United Ready Mixed, the settlement amount was fully
     paid in 1992. United Ready Mixed retained no interest
     in the funds after they were paid, at petitioner's
     direction pursuant to the terms of the settlement
     agreement, to petitioner's attorney. Any restriction
     placed on the use of the settlement proceeds after
     payment by United Ready Mixed, whether the restriction
     was placed on the funds voluntarily by petitioner or
     through acts by petitioner's creditors, does not delay
     petitioner's receipt of the income for income tax
     purposes. [Gale v. Commissioner, supra; citations
     omitted.]
          12
            “Constructive receipt” as defined in sec.
     1.451-2(a), Income Tax Regs., is a legal term of art
                              - 20 -

     that applies when payment has not been effected because
     of the payee's postponing payment. The term
     "constructive receipt" could also be used in its
     vernacular sense for any payment not physically
     received by the taxpayer. A taxpayer has “constructive
     receipt”, in its vernacular sense, of funds paid
     directly to the taxpayer's agents or creditors. The
     legal doctrine of constructive receipt defined in sec.
     1.451-2(a), Income Tax Regs., however, does not apply
     to completed payments received by a payee's agents or
     creditors. We have used the term "taxable receipt" to
     distinguish between physical receipt and nonphysical
     receipt that the law treats as received for tax
     purposes.

     Connecticut General placed no restrictions on petitioner's

use of the funds, and the payment was made to petitioner's

attorneys on petitioner’s behalf at petitioner's direction

pursuant to the settlement agreement.   The Supreme Court has

observed that client and lawyer are in “a quintessential

principal-agent relationship” and that it is “appropriate to

treat the full amount of the recovery as income to the

principal.”   Commissioner v. Banks, supra at 436.   Petitioner's

counsel was acting as petitioner's agent and petitioner's

creditor in receiving and holding the funds.   Settlement proceeds

paid by Connecticut General in 2002 constitute income to

petitioner in 2002.   Petitioner thus had taxable receipt of the

income in 2002.   See Gale v. Commissioner, supra; see also

Sullivan v. Commissioner, T.C. Memo. 1999-341.

Citibank Interest Income

     Gross income means all income from whatever source derived.

Sec. 61(a).   Under section 61(a)(4), interest is includable in
                              - 21 -

gross income.   Petitioner objected to respondent’s assertion that

he received taxable interest income of $972 in 2002 on the

interest-bearing escrow account with Quadrino & Schwartz.       The

stipulated schedule of the escrow balance shows that interest of

$3,186.49 was earned on the account and was reflected in the

February 14, 2005, payment made to petitioner.     Respondent

asserts that $972 of that amount is attributable to 2002.

Petitioner has failed to present any reasonable dispute with

respect to respondent’s assertion.     In these circumstances,

respondent was entitled to rely on third-party information.       See

sec. 6201(d); Parker v. Commissioner, 117 F.3d 785 (5th Cir.

1997); Silver v. Commissioner, T.C. Memo. 2005-281.     Petitioner

also objected to respondent’s assertion that petitioner received

$15 of taxable interest income for savings bonds in 2002.       The

earned interest of $972 and $15 in 2002 was deemed admitted

pursuant to Rule 90 when petitioner failed to respond to the

request for admissions.   Therefore, petitioner has taxable

interest income of $987 for 2002.

Credits, Exemptions, and Deductions

     Petitioner argues that he is entitled to dependency

exemptions for his wife and three children under sections 151 and

152 and to the child tax credit under section 24.     Petitioner

belatedly made these claims and was afforded the opportunity to

file a motion to amend the petition; however, the proposed
                               - 22 -

amended petition that accompanied his motion failed to identify

any specific deductions or credits to which petitioner would be

entitled.

     Mrs. Connors testified that petitioner had three children,

one of whom was in China with him.      Her testimony is insufficient

to show that petitioner was entitled to a dependency exemption

for any of his children under sections 151 and 152, to the child

tax credit under section 24, or to any other credits for 2002.

Neither at trial nor in the offer of proof did petitioner present

sufficient information concerning custody of his children or

respective contributions to their support.     Additionally,

although Mrs. Connors testified that she did not work in 2002,

her testimony, as well as petitioner’s failure to provide any

information as to her support, is insufficient to show that

petitioner would be entitled to a dependency exemption for her.

Additions to Tax

     Respondent determined an addition to tax under section

6651(a)(1) for the year in issue.    Section 6651(a)(1) provides

for an addition to tax of 5 percent of the tax required to be

shown on the return for each month or fraction thereof for which

there is a failure to file, not to exceed 25 percent.     The

addition to tax for failure to file is not imposed if it is shown

that the failure to file did not result from willful neglect and

was due to reasonable cause.   See United States v. Boyle, 469
                                - 23 -

U.S. 241, 245 (1985).    To prove reasonable cause, a taxpayer must

show that he or she exercised ordinary business care and prudence

but nevertheless could not file the return when it was due.     See

Crocker v. Commissioner, 92 T.C. 899, 913 (1989); sec. 301.6651-

1(c)(1), Proced. & Admin. Regs.     Because petitioner failed to

present a reasonable explanation for his failure to file and

failed to allege any specific facts with respect to the addition

to tax, and because liability for the addition to tax was deemed

admitted pursuant to Rule 90, respondent's determination with

respect to the addition to tax under section 6651(a)(1) is

sustained.

     Additionally, respondent determined an addition to tax under

section 6651(a)(2) for failure to pay tax.     Section 6651(a)(2)

provides for an addition to tax of 0.5 percent per month up to

25 percent for failure to pay the amount shown on a return.     This

addition to tax, however, applies only in the case where a return

has been filed.   See Spurlock v. Commissioner, T.C. Memo. 2003-

124; see also Burr v. Commissioner, T.C. Memo. 2002-69, affd. 56

Fed. Appx. 150 (4th Cir. 2003); Heisey v. Commissioner, T.C.

Memo. 2002-41, affd. 59 Fed. Appx. 233 (9th Cir. 2003).     Under

section 6651(g)(2), a return that the Secretary prepared under

section 6020(b) is treated as “the return filed by the taxpayer

for purposes of determining the amount of the addition” under

section 6651(a)(2).     For these purposes, a section 6020(b)
                              - 24 -

return, in the context of section 6651(a)(2) and (g)(2), “must be

subscribed, it must contain sufficient information from which to

compute the taxpayer’s tax liability, and the return form and any

attachments must purport to be a ‘return’.”   Spurlock v.

Commissioner, supra; see also Cabirac v. Commissioner, 120 T.C.

163, 170-171 (2003).   Respondent has satisfied the requirements

under sections 6651(a)(2), (g)(2), and 6020(b).   Because

petitioner has failed to allege any specific facts with respect

to the addition to tax, and because liability for the addition to

tax was deemed admitted pursuant to Rule 90, the addition to tax

under section 6651(a)(2) is sustained.

Filing Status

     Section 1(d) provides that every married individual who does

not make a single return jointly with his spouse has a filing

status of married filing separately.   Petitioner and Mrs. Connors

did not file a joint return for 2002, and there is no reliable

evidence that they ever intended to file a joint return for 2002.

Therefore, petitioner’s filing status for 2002 is married filing

separately.

     We have considered the arguments of the parties that were

not specifically addressed in this opinion.   Those arguments are

either without merit or irrelevant to our decision.
                        - 25 -

To reflect respondent’s concessions,


                                   Decision will be entered

                              under Rule 155.
