                               T.C. Memo. 2014-244



                         UNITED STATES TAX COURT



               CHRISTOPHER SALMONSON, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 28399-08.                          Filed December 9, 2014.



      Christopher Salmonson, pro se.

      John T. Lortie, Kimberly A. Daigle, and Kenneth Allan Hochman, for

respondent.



                           MEMORANDUM OPINION


      BUCH, Judge: Respondent issued a notice of deficiency determining the

following deficiencies, additions to tax, and penalties with respect to Christopher
                                        -2-

[*2] Salmonson’s Federal income tax for years 1998 through 2003:1

                                              Addition to tax         Penalty
          Year            Deficiency          sec. 6651(a)(1)       sec. 6662(a)
          1998             $91,603               $22,900              $18,321
          1999             354,400                88,600               70,835
          2000             171,547                42,211               34,309
          2001               83,123               18,220               16,625
          2002               90,832               18,259               18,166
          2003               16,214                4,054                 3,243

      The issues remaining for consideration are whether Mr. Salmonson has

unreported income and whether he is liable for additions to tax and penalties. We

sustain respondent’s adjustments as to the omitted income. Further, respondent

met his burden of production as to the additions to tax and penalties, and Mr.

Salmonson did not establish any grounds on which the additions to tax and

penalties should not apply in this case, so we also sustain the additions and

penalties.




      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. All monetary amounts are rounded to
the nearest dollar.
                                        -3-

[*3]                                Background

       This case was submitted without trial under Rule 122.

       During the years in issue Mr. Salmonson was the chief executive officer of

Fuel Nation, Inc. On November 15, 2004, Mr. Salmonson filed joint Federal

income tax returns for 1998 through 2003. The Internal Revenue Service later

examined Mr. Salmonson’s returns and after analyzing his bank deposits and

unrelated cash expenditures determined that he had underreported his income. On

August 22, 2008, respondent mailed Mr. Salmonson a notice of deficiency

increasing his taxable income, allowing deductions, and making various

computational adjustments. Respondent also determined a section 6651(a)(1)

failure to timely file addition to tax and a section 6662(a) accuracy-related penalty

for each year in issue. Mr. Salmonson, while residing in Florida, timely

petitioned.

       In May 2014 the parties filed a joint motion to submit this case fully

stipulated pursuant to Rule 122. The Court granted the motion, and the parties

filed a stipulation of facts. Mr. Salmonson stipulated that he had bank deposits

and unrelated cash expenditures in amounts equal to the amounts determined in

the notice of deficiency for 1998 through 2003; however, he disputed that the

amounts were taxable. The parties also attached copies of Mr. Salmonson’s
                                         -4-

[*4] unfiled 1998 through 2003 Forms 1040X, Amended U.S. Individual Income

Tax Return, to the stipulation. Attached to each Form 1040X was an affidavit by

Mr. Salmonson stating: “In * * * [the tax year] no payments or deposits were

received by the party identified as ‘the recipient’ from the party identified as ‘the

payor’ which were connected with the performance of the functions of a public

office, or otherwise constituted gains, profits or income within the meaning of the

relevant law.”

                                     Discussion

I. Burden of Proof

      The Commissioner’s determinations in the notice of deficiency are generally

presumed correct, and taxpayers bear the burden of proving otherwise.2 However,

in order for the presumption of correctness to arise in cases involving unreported

income, the Commissioner must make a minimal evidentiary showing.3 We find

that respondent has made such a showing and is entitled to the presumption.

      The burden may shift to the Commissioner under section 7491(a) if the

taxpayer has complied with the necessary substantiation requirements and has



      2
          Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
      3
     Blohm v. Commissioner, 994 F.2d 1542, 1549 (11th Cir. 1993), aff’g T.C.
Memo. 1991-636.
                                         -5-

[*5] maintained all records and cooperated with reasonable requests by respondent

for witnesses, information, documents, meetings, and interviews. While Mr.

Salmonson argues that respondent bears the burden, he has not met these

requirements. As a result, the burden remains on Mr. Salmonson.

II. Omitted Income

      Where a taxpayer fails to keep sufficient records under section 6001, the

Commissioner may compute taxable income through a method that clearly reflects

income.4 One such method involves combining a taxpayer’s accretions to wealth

by examining his bank deposits and cash expenditures.5

      The Commissioner’s use of the bank deposits analysis method has long been

approved.6 This method “assumes that all money deposited in a taxpayer’s bank

account during a given period constitutes taxable income, but the Government

must take into account any nontaxable source or deductible expense of which it




      4
     Sec. 446(b); Parks v. Commissioner, 94 T.C. 654, 658 (1990); Petzoldt v.
Commissioner, 92 T.C. 661, 686-687 (1989).
      5
          United States v. Abodeely, 801 F.2d 1020, 1023-1024 (8th Cir. 1986).
      6
          Nicholas v. Commissioner, 70 T.C. 1057, 1064 (1978).
                                         -6-

[*6] has knowledge.”7 Nontaxable sources include funds attributable to “‘loans,

gifts, inheritances, or assets on hand at the beginning of the taxable period.’”8

      A bank deposit provides prima facie evidence of income, and the

Commissioner is not required to prove the likely source of the income.9 The

taxpayer carries the burden of establishing that items should be excluded from

income or allowed as deductions.10 One such way of proving that an item should

have been excluded would be to show that the deposit is derived from a

nontaxable source.11

      Likewise, the cash expenditures method is another well-established method

of determining a taxpayer’s unreported income.12 The foundation of the cash

expenditures method is “the assumption that the amount by which a taxpayer’s

expenditures during a taxable year exceed his reported income has taxable origins



      7
     Clayton v. Commissioner, 102 T.C. 632, 645-646 (1994) (citing DiLeo v.
Commissioner, 96 T.C. 858, 868 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992)).
      8
      Burgo v. Commissioner, 69 T.C. 729, 743 n.14 (1978) (quoting Troncelliti
v. Commissioner, T.C. Memo. 1971-72).
      9
          Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
      10
           Gemma v. Commissioner, 46 T.C. 821, 833 (1966).
      11
           See Nicholas v. Commissioner, 70 T.C. at 1064.
      12
           Parks v. Commissioner, 94 T.C. at 658.
                                         -7-

[*7] absent some explanation by the taxpayer.”13 The relevant inquiry is whether

any expenditures exceeding reported income can be attributed to assets available

at the beginning of the relevant period or to nontaxable receipts.14

      Mr. Salmonson stipulated that he had bank deposits and unrelated cash

expenditures in the amounts that respondent alleged. However, Mr. Salmonson

argues in his brief that respondent erred in conducting his own analysis and argues

instead that respondent should focus on Mr. Salmonson’s Forms 1040X.

      First, we note that the Internal Revenue Code does not explicitly provide for

either the filing or the acceptance of an amended return; “instead, an amended

return is a creature of administrative origin and grace.”15 It is solely within the

Commissioner’s discretion whether to accept or reject an amended return.16 Even

if we were to look to the amended returns in evaluating Mr. Salmonson’s tax

liabilities, he maintains the same argument in the affidavit attached to his Form

1040X as he does in the stipulation: that the income is not taxable to him under

section 7701(a)(26) because he did not hold a public office. Section 7701


      13
           Petzoldt v. Commissioner, 92 T.C. at 694.
      14
           Petzoldt v. Commissioner, 92 T.C. at 695.
      15
           Badaracco v. Commissioner, 464 U.S. 386, 393 (1984).
      16
           Goldring v. Commissioner, 20 T.C. 79, 81 (1953).
                                        -8-

[*8] provides various definitions, and section 7701(a)(26), specifically, provides

that “[t]he term ‘trade or business’ includes the performance of the functions of a

public office.” However, section 7701(c) provides that the term “includes” is not

to be interpreted to “exclude other things otherwise within the meaning of the term

defined.” We have previously held arguments seeking to convert “includes” to

“includes only” to be frivolous.17 Consequently, we decline to address Mr.

Salmonson’s argument further.18 Mr. Salmonson has not provided any other

arguments or evidence to show that the amounts should not be included in his

income.

      Accordingly, we sustain respondent’s adjustments to Mr. Salmonson’s

taxable income.




      17
     Wnuck v. Commissioner, 136 T.C. 498, 506 (2011); Waltner v.
Commissioner, T.C. Memo. 2014-35, at *50.
      18
        See Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984) (“We
perceive no need to refute these [frivolous] arguments with somber reasoning and
copious citation of precedent; to do so might suggest that these arguments have
some colorable merit.”); Wnuck v. Commissioner, 136 T.C. at 504 (“[I]t is
doubtful whether tax jurisprudence will be much advanced by issuing yet another
opinion affirming the obvious truisms about tax law[.]”); Sanders v.
Commissioner, T.C. Memo. 1997-452, 1997 WL 602841, at *4 (“[W]e are not
obligated to exhaustively review and rebut petitioner’s misguided contentions.”).
                                        -9-

[*9] III. Section 6651(a)(1) Addition to Tax

      Section 6651(a)(1) imposes an addition to tax for failing to timely file a

Federal income tax return unless it is shown that the failure was due to reasonable

cause and not due to willful neglect. The Commissioner bears the burden of

production with respect to an individual’s liability for any penalty or addition to

tax.19 The taxpayer then bears the burden of proving any defenses.20

      Respondent determined an addition to tax under section 6651(a)(1) for each

year in issue. Mr. Salmonson stipulated that he filed joint Federal income tax

returns for 1998 through 2003 on November 15, 2004.21 He did not provide

evidence of any defenses.

      Accordingly, we find that respondent has met his burden of production and

Mr. Salmonson did not prove any defenses. As a result, the additions to tax under

section 6651(a)(1) for the years in issue are sustained.

IV. Section 6662(a) Accuracy-Related Penalty

      Section 6662 imposes a 20% accuracy-related penalty on “any portion of an

underpayment of tax required to be shown on a return” if the underpayment is due


      19
           See sec. 7491(c).
      20
           See Higbee v. Commissioner, 116 T.C. 438, 447 (2001).
      21
           See sec. 6072(a).
                                          - 10 -

[*10] to, among other reasons, negligence or disregard of rules or regulations.22

As with section 6651(a), the Commissioner bears the burden of production as to

the penalty.23 The penalty will not apply to any portion of the underpayment for

which a taxpayer establishes that he or she had reasonable cause and acted in good

faith.24

       As defined in the Code, “‘negligence’ includes any failure to make a

reasonable attempt to comply with the provisions of this title, and the term

‘disregard’ includes any careless, reckless, or intentional disregard.”25 Negligence

has been further defined as a “‘lack of due care or failure to do what a reasonable

and ordinarily prudent person would do under the circumstances.’”26 Additionally,

a taxpayer is negligent if he fails to maintain sufficient records to substantiate the

items in question.27


       22
            Sec. 6662(a) and (b)(1).
       23
            Sec. 7491(c).
       24
            Sec. 6664(c)(1).
       25
            Sec. 6662(c).
       26
        See Neely v. Commissioner, 85 T.C. 934, 947 (1985) (quoting Marcello v.
Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), aff’g in part, remanding in part
43 T.C. 168 (1964), and T.C. Memo. 1964-299).
       27
            See Higbee v. Commissioner, 116 T.C. at 449; sec. 1.6662-3(b)(1), Income
                                                                       (continued...)
                                            - 11 -

[*11] Mr. Salmonson was negligent. In the stipulations and in his briefs, Mr.

Salmonson maintained that the omitted income was not taxable to him because of

section 7701(a)(26). As stated above, we have previously rejected any attempt to

read “includes” as “includes only” as frivolous. Further, subsection (c) of section

7701 rejects this interpretation as well.

      Accordingly, we find that respondent met his burden of production and Mr.

Salmonson failed to prove any defenses. Therefore, the penalties under section

6662(a) for the years in issue are sustained.

      Relatedly, section 6673 allows the Court to impose sanctions when a

taxpayer continues to advance frivolous positions. Respondent did not assert, nor

will we require Mr. Salmonson to pay, a penalty under section 6673 at this time.

However, we warn Mr. Salmonson that such a penalty could be imposed in the

future should he continue to assert arguments similar to those asserted here.

V. Conclusion

      On the basis of the evidence before us, we sustain respondent’s adjustments

to Mr. Salmonson’s taxable income. Further, we sustain the additions to tax and




      27
      (...continued)
Tax Regs.
                                       - 12 -

[*12] penalties because respondent met his burden of production and Mr.

Salmonson failed to meet his burden to show that the penalties should not apply.

      We have considered the parties’ arguments and, to the extent not addressed

herein, we find them to be irrelevant, moot, or without merit.

      To reflect the foregoing,


                                                Decision will be entered for

                                       respondent.
