                  T.C. Memo. 1999-246



                UNITED STATES TAX COURT



          GAIL CARLETTE DIXON, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 8767-98.                       Filed July 28, 1999.



     Held: R's determination that P had unreported income
from her sole proprietorship as an income tax preparer in
the amounts of $87,000, $128,000, and $153,000 for the 1990,
1991, and 1992 taxable years, respectively, is sustained.

     Held, further, R's determination that P is liable for
the additions to tax under secs. 6651(a)(1), I.R.C., and
6654(a), I.R.C., for the 1990, 1991, and 1992 taxable years
is sustained.



Gail Carlette Dixon, pro se.

Daniel J. Parent, for respondent.
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               MEMORANDUM FINDINGS OF FACT AND OPINION

       NIMS, Judge: Respondent determined deficiencies and

additions to tax for 1990, 1991, and 1992 with respect to

petitioner's Federal income taxes as follows:

                                  Additions to Tax
Year        Deficiency     Sec. 6651(a)(1)     Sec. 6654(a)
1990         $17,238           $4,310              $1,129
1991          33,970            8,493               1,941
1992          40,711           10,178               1,776

       Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years in

issue.    All Rule references are to the Tax Court Rules of

Practice and Procedure.    All dollar amounts are rounded to the

nearest dollar.

       After concessions made by petitioner, the issues for

decision are: (1) Whether petitioner had unreported gross

receipts from her sole proprietorship, as determined by

respondent, for her 1990, 1991, and 1992 taxable years; (2)

whether petitioner is liable for the addition to tax under

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

the years in issue; and (3) whether petitioner is liable for the

addition to tax under section 6654(a) for the failure to pay

estimated income taxes for the years in issue.
                               - 3 -


                          FINDINGS OF FACT

     At the time the petition was filed, petitioner resided in

Sacramento, California.   Petitioner did not file income tax

returns for her 1990, 1991, and 1992 taxable years and failed to

make estimated tax payments during these years.

     Respondent mailed the notice of deficiency on February 18,

1998, for petitioner's 1990, 1991, and 1992 taxable years.     Among

other things, respondent made adjustments to petitioner's income

by increases of $87,000 in 1990, $128,000 in 1991, and $153,000

in 1992.   This was done by reconstructing petitioner's income

from available records.

     During 1990, 1991, and 1992, petitioner operated a tax

preparation business known as Dixon Tax Returns as a sole

proprietorship.   Petitioner also provided notary and property

management services.

     Petitioner employed individuals to assist her in her

business--an office manager and tax return preparers.    In the

notice of deficiency, respondent allowed business expense

deductions for wages paid to petitioner's employees in the

amounts of $4,000, $10,000, and $16,000 for the 1990, 1991, and

1992 taxable years, respectively.

     On April 10, 1992, the United States executed a search

warrant of petitioner's business premises; approximately 60 boxes

of records were seized.   The boxes included copies of
                                - 4 -


petitioner's business income receipt books (Rediform books),

notary journal, and copies of client tax returns prepared by

petitioner.    The client tax returns prepared by Dixon Tax Returns

included petitioner's name and identification number as the paid

preparer.   After the criminal proceedings and after being

reviewed by respondent's revenue agent, John Donovan (Agent

Donovan), the boxes were returned to petitioner.

     In January 1996, petitioner was convicted of 14 counts of

violating section 7206(2) for aiding and abetting the filing of

false income tax returns.   Petitioner was incarcerated at a

Federal correctional institution in Dublin, California, for 18

months.   As a condition of her supervised release from

imprisonment, petitioner was ordered to file her 1990, 1991, and

1992 Federal income tax returns immediately.

     Respondent's service center prepared a "Preparer Inventory

Listing" (PIL) of returns which listed all tax returns prepared

by petitioner in 1990 and 1991; a PIL was not available for 1992

because petitioner's records were unavailable.   The PIL included

sufficient information to determine whether a particular return

prepared by petitioner was a Form 1040EZ, a Form 1040A (Short

Form), or a Form 1040 (which included a Schedule A or Schedule C)

(Long Form).   The PIL also included the name and Social Security
                                - 5 -


number of the taxpayer, the type of form prepared, and the amount

of tax owed.   The PIL matched the actual copies of client tax

returns which were seized from petitioner's business.

     During 1990, petitioner prepared at least 1,640 Short Forms

and at least 341 Long Forms.    During 1991, petitioner prepared at

least 2,191 Short Forms and at least 574 Long Forms, a 40-percent

increase in returns prepared.   During 1992, petitioner prepared

more than 3,000 tax returns.

     During 1990 and 1991, petitioner generally charged $35 for

the preparation of a Short Form and $75 for a Long Form.   During

1992, petitioner generally charged $37 for the preparation of a

Short Form and $78 for a Long Form.

     Petitioner's notary journal, which covers the period from

December 22, 1989 to August 9, 1990,1 includes the amount of the

fees paid for petitioner's notary services.   The notary fees from

January 1 through June 30, 1990, totaled $2,119.

     Petitioner's Rediform books were incomplete; they did not

include records for all of the months of 1990, 1991, and 1992.

Petitioner's Rediform books for 1990 include:




     1
      It should be noted that the Stipulation of Facts states
petitioner's notary journal covers the period from Dec. 22, 1989
to July 20, 1990; however, the actual notary journal covers the
period from Dec. 22, 1989 to Aug. 9, 1990.
                                      - 6 -


                  Date                        Amount
             1/2/90 to 2/2/90                 $12,567
             2/2/90 to 2/17/90                 15,858
             2/24/90 to 3/14/90                15,687
             3/14/90 to 4/7/90                 16,733
             4/7/90 to 5/4/90                  16,782
               Total                           77,627

Petitioner's Rediform books for 1991 include:

                   Date                       Amount
             1/30/91 to 2/9/91                $16,225
             2/9/91 to 2/22/91                 17,197
             2/23/91 to 3/1/91                  9,082
             3/2/91 to 3/8/91                   9,480
             3/8/91 to 3/22/91                 18,004
             3/22/91 to 4/11/91                17,239
             4/11/91 to 5/20/91                17,987
             5/2/91 to 12/31/91                13,262
               Total                          118,476

Petitioner's Rediform books for 1992 include:

                  Date                        Amount
             1/1/92 to 1/6/92                   $102
             2/3/92 to 2/7/92                  8,282
               Total                           8,384

     Deposits into petitioner's bank accounts during January,

February, March, April, and May of 1990, 1991, and 1992 are

similar to the income and business activity shown in petitioner's

Rediform books.

     The receipts as shown in the Rediform books for 3 days in

early February compare in each year as follows:

   Date                      1990              1991         1992
February   4th                N/A             $1,410       $2,205
February   5th              $1,450             2,915        2,420
February   6th                 788             1,742        3,319
February   7th               1,530              N/A          N/A
  Total                      3,768             6,067        7,944

Percentage increase             N/A           61 percent   31 percent
                               - 7 -


     Petitioner earned nearly all of her tax preparation income

between January 1 and April 15 of each year.

     During petitioner's criminal proceedings, petitioner and her

attorneys were informed that they could examine her seized

records or take them back at anytime.   Petitioner retrieved her

records sometime in 1998 and placed them in storage in

Sacramento, California.   Petitioner did not get the records out

of storage until December 1998 when petitioner satisfied storage

fees in arrears.

     In 1989, petitioner lent Penisimani Lomu and Hakeai Faanunu

$13,300 bearing 9 percent interest.    Petitioner was paid $1,097

and $399 in interest during 1990 and 1991, respectively.

     During 1990, 1991, and 1992, petitioner paid to John

Giovanzana $950, $10,497, and $7,588, respectively, in rent for

business premises at 1923 University Avenue, East Palo Alto,

California.   During 1990, petitioner paid Siri Brothers $26,096

in rent for business premises at 645 Donohoe Street, East Palo

Alto, California; petitioner was evicted on April 15, 1990.

Respondent has allowed a deduction for rent expense in the

amounts of $27,046, $10,497, and $7,588, respectively, for

petitioner's 1990, 1991, and 1992 taxable years.
                               - 8 -


                              OPINION

I.   Unreported Income

     The first issue is whether petitioner had unreported gross

receipts from her sole proprietorship, as determined by

respondent, for her 1990, 1991, and 1992 taxable years.

Respondent determined that petitioner had unreported gross income

from her tax preparation and notary business of $87,000,

$128,000, and $153,000 in 1990, 1991, and 1992, respectively.

Petitioner did not file a trial memorandum or brief in this case.

However, based on her testimony at trial, petitioner seems to

assert that respondent's determination is arbitrary.

     Respondent may use an indirect method to reconstruct a

taxpayer's income where the taxpayer has failed to provide

adequate records substantiating her income.   See, e.g., Holland

v. United States, 348 U.S. 121, 133 (1954).   Respondent's method

of income reconstruction is presumptively correct and will be

affirmed as long as it is rational in light of all surrounding

facts and circumstances.   See Palmer v. IRS, 116 F.3d 1309, 1312

(9th Cir. 1997); Cracchiola v. Commissioner, 643 F.2d 1383, 1385

(9th Cir. 1981), affg. per curiam T.C. Memo. 1979-3.   Petitioner

bears the burden of proving that respondent's method of income

reconstruction is unreasonable.   See Palmer v. IRS, supra at

1312.
                                - 9 -


     Courts have approved methods of reconstruction which project

or extrapolate the taxpayer's income from a limited amount of

information.   See, e.g., Bradford v. Commissioner, 796 F.2d 303,

306-307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Adamson v.

Commissioner, 745 F.2d 541, 548 (9th Cir. 1984), affg. T.C. Memo.

1982-371.   In this case, the only records available to

reconstruct petitioner's tax preparation and notary income were

petitioner's Rediform books, notary journal, and copies of client

tax returns prepared by petitioner.

     Agent Donovan determined that petitioner had $83,000 and

$122,000 in unreported income from her tax preparation business

for her 1990 and 1991 taxable years, respectively.    This amount

was derived by first multiplying the number of Short and Long

Forms disclosed by the 1990 PIL by the appropriate charge

disclosed by the Rediform books, which totaled $82,975 and

$119,735 (PIL Totals) for petitioner's 1990 and 1991 taxable

years, respectively.   Agent Donovan then totaled the gross

receipts shown in the Rediform books (Rediform Totals) in the

amount of $77,627.   For the 1990 taxable year, Agent Donovan

compared the PIL total of $82,975 to the Rediform total of

$77,627 and determined that tax return preparation income was

$83,000.    For the 1991 taxable year, Agent Donovan compared the

PIL total of $119,735 to the Rediform total of $118,476 and

determined that tax return preparation income was $122,000.
                              - 10 -


     For petitioner's 1992 taxable year, respondent determined

that petitioner had $146,000 of unreported tax preparation

income.   A PIL for petitioner's 1992 taxable year was

unavailable.   However, the record indicates that petitioner

prepared at least 3,000 returns in 1992.   Agent Donovan testified

that $146,000 was a result of increasing his figure of $122,000

of unreported tax preparation income from 1991 by 20 percent,

yielding $146,600, rounded down to $146,000.   Agent Donovan

derived the factor of 20 percent by using the 31 percent increase

in the comparative 3 days of receipts for the month of February

in 1990, 1991, and 1992 and reducing the percentage to 20 percent

to account for the fact that petitioner's tax preparation

business ceased on April 10, 1992.

     Under these circumstances, we conclude that respondent's

method of reconstructing petitioner's 1990, 1991, and 1992 tax

return preparation income is reasonable.   Therefore, respondent's

determination that petitioner had unreported tax preparation

income of $83,000, $122,000, and $146,000 for 1990, 1991, and

1992, respectively, is sustained.

     Respondent also determined that petitioner had unreported

notary income of $4,000, $6,000, and $7,000 in 1990, 1991, and

1992, respectively.   Petitioner's notary journal, which covers

the period from December 22, 1989 to August 9, 1990, includes the
                               - 11 -


amount of the fees paid for petitioner's notary services.   The

notary fees from January 1 through June 30, 1990, totaled $2,119.

     To determine petitioner's notary income for her 1990 taxable

year, Agent Donovan multiplied the $2,119 of notary income, as

disclosed in the notary journal, by two, resulting in $4,238, and

then rounded down to $4,000.   To determine notary income for

petitioner's 1991 taxable year, Agent Donovan increased $4,238

($2,119 multiplied by two) by 40 percent (based upon the 40-

percent increase in the number of returns prepared from 1990 and

1991, and the imputed 61-percent tax return preparation revenue

growth from 1990 to 1991), resulting in $5,933, and rounded up to

$6,000.   Agent Donovan determined that petitioner's notary income

increased by 20 percent in 1992, resulting in $7,120, rounded

down to $7,000.   Agent Donovan derived the multiplication factor

of 20 percent by using the 31-percent increase in the comparative

3 days of receipts for the month of February in 1990, 1991, and

1992 and reducing the percentage to 20 percent to account for the

fact that petitioner's tax preparation business ceased on April

10, 1992.

     We uphold respondent's method of reconstructing petitioner's

notary income because it is rational in light of all surrounding

facts and circumstances.   See Palmer v. IRS, 116 F.3d at 1312.
                              - 12 -


Therefore, respondent's determination that petitioner had

unreported notary income of $4,000, $6,000, and $7,000 for 1990,

1991, and 1992, respectively, is sustained.

      Based on the foregoing, we sustain respondent's

determination that petitioner had unreported income from her sole

proprietorship in the amounts of $87,000, $128,000, and $153,000

for the 1990, 1991, and 1992 taxable years, respectively.

II.   Addition to Tax Under Sec. 6651(a)(1)

      Respondent determined additions to tax for failure to file

timely tax returns under section 6651(a)(1) in the amounts of

$4,310, $8,493, and $10,178 for 1990, 1991, and 1992,

respectively.   Section 6651(a)(1) provides for an addition to tax

of 5 percent per month for each month or part of a month for

which a return is late, the aggregate not to exceed 25 percent.

A taxpayer has a nondelegable duty to file a timely return but

can avoid the addition to tax for failing to do so by

affirmatively showing that the delinquency was due to reasonable

cause and not due to willful neglect.   See sec. 6651(a).   The

taxpayer bears the burden of proving both (1) that the failure

did not result from willful neglect, and (2) that the failure was

due to reasonable cause.   See United States v. Boyle, 469 U.S.

241, 245 (1985).   If the taxpayer does not meet this twin burden,
                               - 13 -


the imposition of the addition to tax is mandatory.    See Heman v.

Commissioner, 32 T.C. 479 (1959), affd. 283 F.2d 227 (8th Cir.

1960).

     Petitioner has failed to file her 1990, 1991, and 1992

income tax returns.    Petitioner testified that she was too

distraught over her husband's death on October 15, 1990, to file

her 1990 tax return.    She further testified that she was under a

lot of stress, was under a physician's medical care, and was

taking a lot of medication.    In light of the fact that petitioner

prepared 2,765 client returns in 1991, we conclude that

petitioner's failure to file her 1990 income tax return was not

due to reasonable cause, and therefore the addition to tax is

properly imposed.

      Petitioner's 1991 and 1992 income tax returns were due on

April 15, 1992 and 1993, respectively.    By her testimony,

petitioner seeks to imply that she was unable to file her 1991

and 1992 income returns on time because the IRS had her business

records.   The record shows that the United States executed a

search warrant of petitioner's business premises on April 10,

1992, where approximately 60 boxes of records were seized.

However, during petitioner's criminal proceedings, petitioner and

her attorneys were informed that they could examine her seized

records or take them back at anytime.    Thus, petitioner had ample

opportunity to access her business records.    Moreover, even after
                              - 14 -


petitioner retrieved her records in 1998, she failed to file her

income tax returns.   The fact that petitioner has not filed her

returns even with full access to her records indicates a lack of

causal relationship between petitioner's failure to file and the

IRS's seizure of her business records.

     Under these circumstances, we conclude that petitioner's

failure to file her 1991 and 1992 income tax returns was not due

to reasonable cause, and therefore the addition to tax is

properly imposed.

III. Addition to Tax Under Sec. 6654(a)

     Respondent determined additions to tax for 1990 under

section 6654(a) for underpayment of estimated Federal income tax.

This addition to tax is mandatory absent a showing by petitioner

that one of the several statutorily provided exceptions applies.

See Grosshandler v. Commissioner, 75 T.C. 1, 20-21 (1980).

Petitioner has made no such showing.   Respondent's determination

is therefore sustained.

     To reflect the foregoing,

                                              Decision will be

                                          entered for respondent.
