                           T.C. Memo. 2001-302



                      UNITED STATES TAX COURT



                     DIANE GUSSIE, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15689-96.              Filed November 15, 2001.


     Diane Gussie, pro se.

     Taylor Cortright, for respondent.



                           MEMORANDUM OPINION


     GALE, Judge:   Respondent determined deficiencies in

petitioner’s Federal income tax and additions to tax as follows:

                                       Additions to Tax
     Year     Deficiency        Sec. 6651(a)(1) Sec. 6651(a)(2)
     1988       $48,547             $9,986           $11,096
     1989        20,574              1,069              1,188
     1992        16,281              3,025              2,286
     1993        16,458              3,647              1,783
     1994           208                100                 10
                                 - 2 -

       Subsequent to the filing of a timely petition, respondent’s

motion to strike with respect to the section 6651(a)(2)1

additions to tax was granted.

       After concessions, the issues remaining for decision2 are:

       (1)   Whether petitioner received nonemployee compensation of

$120,200 during 1988.     We hold that she did.

       (2)   Whether petitioner is entitled to certain deductions

she claims for her 1988 and 1993 tax years.       We hold that she is

not.

       (3)   Whether we have jurisdiction to order a refund or

credit to petitioner of a $3,441 overpayment she made with

respect to her 1989 Federal income tax liability.      We hold that

we do not.




       1
       Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the years at issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
       2
       Petitioner claimed, in her petition, that she “may be
entitled to a bad debt or other deduction” arising from a note
she received in exchange for a portion of her interest in Bankers
Mortgage Group, Inc. Petitioner did not present any evidence or
make any further argument regarding this claim. Accordingly, we
treat this claim as abandoned and do not address it herein. See
Bradley v. Commissioner, 100 T.C. 367, 370 (1993); Ryback v.
Commissioner, 91 T.C. 524, 566 n.19 (1988).
                               - 3 -

     (4)   Whether petitioner is liable for additions to tax under

section 6651(a)(1) for all years at issue except 1989.3   We hold

that she is.

     Some of the facts have been stipulated and are so found.     At

the time of filing the petition, petitioner resided in

Middleburg, Virginia.

     During the years at issue, petitioner was the sole

shareholder of Bankers Mortgage Group, Inc. (Bankers Mortgage), a

corporation engaged in the business of arranging mortgages and

selling real estate.

     Prior to receiving the statutory notice of deficiency,

petitioner had not filed Federal income tax returns for her 1988,

1989, 1992, 1993, or 1994 tax years.   Respondent prepared

substitute tax returns for each of these years based on

information returns received from third parties and issued a

statutory notice of deficiency on April 22, 1996, covering each

of the foregoing years.

Issue 1.   1988 Nonemployee Compensation

     On the basis of Forms 1099 he received, respondent

determined that petitioner received nonemployee compensation of

$120,200 during 1988.   Petitioner admits she received payments

totaling $119,581 from Bankers Mortgage during 1988.   She claims,


     3
       Respondent concedes that petitioner is not liable for a
sec. 6651(a)(1) addition to tax for 1989 because petitioner’s
prepayment credits exceeded her tax liability for that year.
                                - 4 -

however, that such payments represented loan repayments and that

the Form 1099 issued by Bankers Mortgage reporting nonemployee

compensation paid to her in that amount was erroneous.

Petitioner made no argument and offered no evidence to refute the

remaining $619 of respondent’s determination.

     Generally, the Commissioner’s notice of deficiency is

presumed to be correct, and the taxpayer bears the burden of

proving it is erroneous.    Rule 142(a); Welch v. Helvering, 290

U.S. 111 (1933).   Due to this presumption of correctness, we

generally do not look behind the notice of deficiency to examine

the evidence upon which the determination was made.     Dellacroce

v. Commissioner, 83 T.C. 269, 280 (1984).    The Court of Appeals

for the Fourth Circuit, where an appeal in this case would lie,

has held that a taxpayer may overcome the Commissioner’s

presumption of correctness by persuading the court with a

preponderance of the evidence that the Commissioner’s

determination is arbitrary and excessive.    Cebollero v.

Commissioner, 967 F.2d 986, 991 (4th Cir. 1992), affg. T.C. Memo.

1990-618.   If a taxpayer proves that the Commissioner’s

deficiency determination is arbitrary, then the Commissioner

bears the burden of proving the existence and amount of the

deficiency.   Id. at 992.   Thus in order to overcome the

presumption of correctness accorded respondent’s determination,

petitioner must show by a preponderance of the evidence that the
                               - 5 -

payments she admits receiving from Bankers Mortgage represented

loan repayments that were erroneously reported as nonemployee

compensation.

     Petitioner introduced a document (Workpaper) she claims was

used by an accountant for Bankers Mortgage to prepare its 1988

Forms W-2, Wage and Tax Statement, and 1099-MISC, Miscellaneous

Income.   The Workpaper reflects that petitioner made loans to

Bankers Mortgage totaling $74,341.20 during 1987 and 1988.   It

also reflects that, during 1988, petitioner earned a salary of

$75,000 and commissions totaling $98,570 from Bankers Mortgage.

Petitioner claims that, due to financial difficulties, Bankers

Mortgage did not pay her the commissions she earned during 1988.

     Petitioner acknowledged that the Workpaper is ambiguous on

its face and could be interpreted to indicate either amounts

petitioner actually received from Bankers Mortgage or merely

amounts owed to her.   She did not, however, attempt to remove

such ambiguity by presenting testimony of the accountant

responsible for preparing the Workpaper.

     In addition to being ambiguous, the Workpaper is riddled

with inconsistencies and in many instances tends to refute rather

than support petitioner’s contentions.   The Workpaper suggests

that petitioner made loans to Bankers Mortgage totaling

$74,341.20 during 1987 and 1988 but does not indicate that any

loan repayments occurred in 1988, whereas petitioner contends
                                - 6 -

herein that she received loan repayments of $119,581 during that

year.    The Workpaper also suggests that petitioner’s salary in

1988 was $75,000, but petitioner has agreed in connection with

this case that it was $35,193, without making any effort to

explain the discrepancy.    Furthermore, the Workpaper’s recitation

that petitioner earned $98,570 in commissions and $75,000 in

salary is consistent with the proposition that she received at

least $119,581 in compensation from Bankers Mortgage during 1988.

Given the foregoing problems, the Workpaper, at most, supports an

inference that petitioner made some loans to Bankers Mortgage.

It does not, however, support a finding that respondent erred in

determining that petitioner received nonemployee compensation of

$119,581 from Bankers Mortgage during 1988.

     Petitioner did not present any other evidence from the books

and records of Bankers Mortgage to prove the existence of loans

or to clarify how Bankers Mortgage treated the payments in issue

for its own tax and financial reporting purposes.4   Her testimony

further indicated that the alleged loans were not evidenced by

promissory notes, were not secured by collateral, and did not

earn interest.


     4
       During pretrial proceedings, this Court repeatedly
informed petitioner of her responsibility to substantiate her
claim that the Form 1099 information Bankers Mortgage furnished
to respondent was erroneous. At trial, petitioner claimed to
possess the books and records of Bankers Mortgage but admitted
she never presented such documents to respondent and did not
bring them to the trial proceedings.
                                - 7 -

       The only other evidence petitioner proffered at trial was a

summary of the 1988 activity in her personal checking account

that she prepared in anticipation of trial, and the testimony of

a certified public accountant, Suk L. Lee, who prepared the 1988

Form 1040 that petitioner presented to respondent for purposes of

these proceedings.    Even if petitioner’s checking account summary

and Mr. Lee’s testimony are not rendered inadmissible under the

hearsay and best evidence rules, see Fed. R. Evid. 801 and 1001,

neither would be probative on the question of whether the

payments petitioner received from Bankers Mortgage in 1988 were

repayments of loans.

       On the basis of the record before us, we find that

petitioner has failed to carry her burden of proving that

respondent’s determination that she received $120,200 of

nonemployee compensation in 1988 was erroneous, and we sustain

it.5


       5
       Although sec. 6201(d), as amended by the Taxpayer Bill of
Rights 2, Pub. L. 104-168, sec. 602(a), 110 Stat. 1463 (1996),
imposes certain additional evidentiary burdens on the
Commissioner where a taxpayer asserts a “reasonable dispute” with
respect to an item of income reported on an information return by
a third party and the taxpayer has “fully cooperated” with the
Commissioner, that section is inapplicable in this case.

     Sec. 6201(d) was effective as of July 30, 1996. Although
the petition in this case was filed on July 22, 1996, the trial
was conducted on Apr. 6, 2000. Assuming arguendo (i) that sec.
6201(d) is effective for purposes of this case, and (ii) that
petitioner has asserted a “reasonable dispute” concerning the
item of income reported on the Form 1099 issued by Bankers
Mortgage, sec. 6201(d) would nonetheless be inapplicable because
                                                   (continued...)
                               - 8 -

Issue 2.   Petitioner’s Claimed Deductions for 1988 and 1993

     The remaining dispute for 1988 concerns petitioner’s claim

to a commission expense deduction in the amount of $10,000.6    The

only dispute in 1993 involves petitioner’s claim to various

deductions, the precise nature of which is not clear from the

record.7

     Deductions are a matter of legislative grace, and a taxpayer

must substantiate amounts claimed as deductions by maintaining

records adequate to establish such entitlement.   Sec. 6001;

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec.


     5
      (...continued)
petitioner has not “fully cooperated” with respondent as required
by the statute. Sec. 6201(d) provides that full cooperation
includes “providing * * * access to and inspection of all * * *
documents within the control of the taxpayer” if reasonably
requested. Petitioner admits possessing the books and records of
Bankers Mortgage yet never provided such records to respondent
despite respondent’s repeated requests that petitioner
substantiate her claims regarding the Form 1099 from Bankers
Mortgage. Thus, with respect to this item of income, petitioner
has not “fully cooperated”, and sec. 6201(d) is inapplicable.
See McQuatters v. Commissioner, T.C. Memo. 1998-88.
     6
       Petitioner claimed this deduction as a Schedule C, Profit
or Loss From Business, expense on the 1988 Form 1040 she
submitted to respondent in connection with these proceedings.
Respondent allowed the other Schedule C expenses that petitioner
claimed on the Form 1040 but contends that petitioner has not
adequately substantiated that the $10,000 represented a
deductible expense rather than a capitalizable cost related to
the acquisition of real estate.
     7
       Petitioner claimed various expenses on a 1993 Form 1040
that she submitted to respondent shortly before trial.
Respondent agreed to allow certain deductions listed on Schedule
A and Schedule C of the Form 1040 that respondent concedes were
adequately substantiated but contends that all remaining
deductions claimed by petitioner have not been substantiated.
                                - 9 -

1.6001-1(a), Income Tax Regs.    Petitioner did not present any

evidence to substantiate her claim to the deductions in question

for either of the years at issue.    Accordingly, we hold that

petitioner is not entitled to them.

Issue 3.   Petitioner’s 1989 Overpayment

     The parties have agreed that petitioner’s withholdings

exceeded her tax liability for 1989 by $3,441.     Although

petitioner did not request a refund or credit of this overpayment

in the petition, we find that this issue was tried by consent

under Rule 41(b) as respondent listed the overpayment dispute as

an issue for trial in his pretrial memorandum.

     Respondent concedes that petitioner’s 1989 Federal income

tax withholdings exceeded her tax liability by $3,441 but argues

that this Court lacks jurisdiction to award a refund or credit of

this overpayment because the period of limitations has expired.

Generally, this Court has jurisdiction to award a refund or

credit for overpayments of tax paid within one of two applicable

look-back periods:   (1) The 2 years before respondent issued the

notice of deficiency, or (2) the 3 years before the taxpayer

filed his or her return.   Secs. 6511(b)(2), 6512(b)(3)(B);

Commissioner v. Lundy, 516 U.S. 235, 241-242 (1996); Smathers v.

Commissioner, T.C. Memo. 2000-113.      In this case the 2-year look-

back period applies because petitioner did not file a tax return

before respondent issued the notice of deficiency.      Commissioner

v. Lundy, supra at 243.    Thus we have jurisdiction to award a
                              - 10 -

refund or credit only if petitioner paid the tax at issue within

the 2 years preceding the April 22, 1996, issuance of the notice

of deficiency.8   Under section 6513(b)(1), the withholding taxes

making up petitioner’s overpayment for 1989 were deemed paid on

April 15, 1990.   As the tax at issue was paid more than 2 years

prior to the issuance of the notice of deficiency, this Court

lacks jurisdiction to award a credit or refund of the

overpayment.

Issue 4.   Additions to Tax Under Section 6651(a)(1)

     Respondent determined that petitioner is liable for the

section 6651(a)(1) addition to tax for each of the years at issue

but subsequently conceded the addition for 1989.   Section

6651(a)(1) provides for an addition to tax for failure to file a

Federal income tax return by its due date, determined with regard

to any extension of time for filing, unless it is shown that such

failure is due to reasonable cause and not due to willful

neglect.   The addition to tax equals 5 percent of the amount

required to be shown as tax on the return for each month or

fraction thereof during which the failure to file continues, up

to a maximum of 25 percent.   Sec. 6651(a)(1).




     8
       For taxable years ending after Aug. 5, 1997, the 2-year
look-back period is increased to 3 years where a notice of
deficiency is issued during the third year after the due date for
filing the tax return and no return was filed before the date of
the notice. See sec. 6512(b)(3), as amended by the Taxpayer
Relief Act of 1997, Pub. L. 105-34, sec. 1282(a), 111 Stat. 1037.
                             - 11 -

     Petitioner did not file Federal income tax returns for any

of the years at issue before issuance of the notice of deficiency

in this case on April 22, 1996.     The notice of deficiency was

issued more than a year after April 17, 1995, the latest due date

for petitioner to file any of her Federal income tax returns for

the years at issue in this case.9    Petitioner did not offer any

evidence of reasonable cause for her failure to file.10    Based on

the foregoing, we find that petitioner is liable for the section

6651(a)(1) additions to tax as determined by respondent for each

of the years at issue except 1989.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.




     9
       Absent an extension, petitioner’s 1994 Form 1040 was due
on Apr. 17, 1995. In the petition, petitioner avers that she
sought extensions to file her Federal income tax returns for
1992, 1993, and 1994. Respondent admits that petitioner filed
extensions for filing with respect to her 1988, 1989, and 1992
tax years but denies that she filed extensions for her 1993 and
1994 tax years. Petitioner did not present any evidence to
support the claim that she filed or received extensions for any
of the years in question, nor did she present any evidence to
support a finding that any of her returns for the years at issue
in this case were due later than Apr. 17, 1995.
     10
       As the notice of deficiency in this case was issued on
Apr. 22, 1996, sec. 7491(c) is inapplicable.
