                        T.C. Memo. 2010-62



                      UNITED STATES TAX COURT



                  C. GARY EVANS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 26655-06.             Filed March 30, 2010.



     C. Gary Evans, pro se.

     Jennifer K. Martwick, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:   Respondent determined a deficiency of

$1,211,748 in petitioner’s 2002 Federal income tax, a failure to

file addition to tax pursuant to section 6651(a)(1) of $272,643,

a failure to pay addition to tax pursuant to section 6651(a)(2)

in an amount to be computed at a later date, and a failure to pay

estimated tax addition to tax pursuant to section 6654(a) of
                               - 2 -

$40,493.1   The following issues remain for decision:2   (1)

Whether respondent may raise the issue of whether petitioner’s

gross income should be increased by bank deposit income of

$178,110, an increase not determined in the notice of deficiency;

(2) whether petitioner’s gross income should be increased by

certain ordinary income of $4,479; (3) whether petitioner’s gross

income should be increased by interest income of $86; (4) whether

petitioner is subject to the failure to file addition to tax

pursuant to section 6651(a)(1); (5) whether petitioner is liable

for the failure to pay addition to tax pursuant to section

6651(a)(2); and (6) whether petitioner is liable for the failure

to pay estimated tax addition to tax pursuant to section 6654.

                          FINDINGS OF FACT

     Petitioner refused to stipulate any of the facts.    On

October 14, 2008, respondent filed a motion pursuant to Rule

91(f) requesting the Court to order petitioner to show cause why

the facts and evidence set forth in respondent’s proposed

stipulation of facts should not be deemed established.    On


     1
      Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code, as amended, for the
year in issue. Amounts are rounded to the nearest dollar.
     2
      On the basis of a settlement by the parties, respondent has
conceded the determination in the notice of deficiency that
petitioner’s gross income should be increased by income from the
sale of stocks and bonds. Respondent also has conceded that
petitioner is entitled to a capital loss of $3,000 pursuant to
sec. 1211(b).
                                - 3 -

October 17, 2008, the Court ordered petitioner to show cause why

respondent’s proposed stipulation of facts and evidence should

not be deemed established.    Petitioner failed to file a timely

response.    On November 20, 2008, we granted respondent’s motion

and deemed established respondent’s proposed stipulation of facts

and evidence.3   The facts deemed established by the Court’s order

are incorporated in this opinion by reference and are found

accordingly.

     At the time the petition was filed, petitioner resided in

Georgia.    Petitioner is a certified public accountant and worked

for Coopers & Lybrand for 4 years.

     Petitioner did not file any Federal income tax returns after

1994 and did not file a Federal income tax return for his 2002

tax year.

     Petitioner did not make any estimated tax payments, and no

Federal income taxes were withheld from his wages for his 2002

tax year.

     During 2002, petitioner received from Hickory Valley

Retirement, Inc., ordinary flowthrough income of $4,533 and

interest income of $86.



     3
      Petitioner attempted to file a response   to respondent’s
Rule 91(f) motion after the time specified in   the Court’s Oct.
17, 2008, order. Petitioner’s motion was not    filed because he
did not seek leave to file his response late.    Even if he had
filed a timely response, petitioner failed to   show why
respondent’s facts and evidence should not be   deemed established.
                                 - 4 -

     For his 2002 tax year petitioner is entitled to an ordinary

flowthrough loss of $54 from Decubitus, Inc.

     During 2002, petitioner deposited $210,304 into his SunTrust

Bank account.    Of that $210,304, at least $178,110 is includable

in petitioner’s gross income.4    Included within that $178,110 is

rental income from two properties.       The first property, at 6420

Roswell Rd. N.E., Atlanta, Georgia, was owned by petitioner

during 2002 and rented for annual rent of $106,726 to “Flashers”,

an establishment that operates as a strip club.      Petitioner

deposited the rent from Flashers into his SunTrust Bank account.

The other property, at 4075 Buford Highway, Atlanta, Georgia, was

owned by petitioner during 2002 and rented for annual rent of

$29,872 to “Follies”, an establishment that operates as a strip

club.    Petitioner deposited the rent from Follies into his

SunTrust Bank account.

     On September 26, 2006, respondent sent petitioner a notice

of deficiency.    In the notice of deficiency respondent determined

a deficiency in petitioner’s Federal income tax on the basis of

his receipt of proceeds of $3,176,465 from the sale of certain

stocks and bonds (stocks and bonds sale issue).      Petitioner

timely filed a petition in this Court for redetermination of the


     4
      While we make the recitations above in conformity with the
deemed stipulations of fact, we consider infra petitioner’s
argument that the amounts deposited in his SunTrust Bank account
may not be included in gross income for his 2002 tax year because
they were not included in the notice of deficiency.
                                 - 5 -

deficiency.    As noted above, the stocks and bonds sale issue was

settled by the parties.   However, respondent now asserts a

deficiency in petitioner’s Federal income tax on the basis of

bank deposits of $178,110 made to petitioner’s SunTrust Bank

account (bank deposit issue).    The bank deposit issue was first

set forth in respondent’s pretrial memorandum submitted 2 weeks

before January 14, 2008 (first pretrial memorandum), when the

instant case was first set for trial but continued on the

parties’ joint motion and was set forth again in respondent’s

pretrial memorandum submitted for trial on the Court’s December

2, 2008, Atlanta, Georgia, trial session (second pretrial

memorandum).   Respondent has not amended his answer.

                                OPINION

     We first address the issue of whether respondent may raise

the bank deposit issue, a new issue not raised in the notice of

deficiency.    Petitioner objected at trial to respondent’s raising

of the bank deposit issue because it was not included in the

notice of deficiency.   Respondent contends that the bank deposit

issue is properly before the Court and that petitioner was not

prejudiced because he had notice of the bank deposit issue when

the case was originally set for trial on January 14, 2008.

     Generally, the Commissioner’s determination of a deficiency

is presumed correct, and the taxpayer has the burden of proving
                                    - 6 -

it incorrect.    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).5

     An exception to the general rule exists when the

Commissioner raises a new matter.       Rule 142(a); Shea v.

Commissioner, 112 T.C. 183 (1999); Tabrezi v. Commissioner, T.C.

Memo. 2006-61.        Generally, the Commissioner has raised a new

matter when the Commissioner “attempts to rely on a basis that is

beyond the scope of the original determination”.        Shea v.

Commissioner, supra at 191.        In particular, a new matter is

raised when the Commissioner’s new theory “‘either alters the

original deficiency or requires the presentation of different

evidence.’”     Id.     (quoting Wayne Bolt & Nut Co. v. Commissioner,

93 T.C. 500, 507 (1989)).       The Commissioner generally must bear

the burden of proof on a new matter.        Rule 142(a); Shea v.

Commissioner, supra at 191.

     Respondent’s assertion of the bank deposit issue is a new

matter.    Respondent argues that petitioner remains liable for a

portion of the deficiency determined in the notice of deficiency

but that there is a new source for that portion; i.e., the income

from the SunTrust bank deposits of $178,110 rather than the

$3,176,465 of income from petitioner’s sale of stocks and bonds.

The bank deposit issue will require the presentation of different


     5
      Petitioner does not contend that sec. 7491(a) should apply
in the instant case to shift the burden of proof to respondent,
nor did he establish that it should apply to the instant case.
                                 - 7 -

evidence than that which would have been required for the stocks

and bonds sale issue.     Accordingly, we conclude that the bank

deposit issue is a new matter on which respondent bears the

burden of proof.     See Rule 142(a).

        We next turn to the issue of whether respondent may raise

the bank deposit issue in this proceeding.     Rule 41(b)(2) allows

this Court to accept evidence that is not within the issues

raised by the pleadings and conform the pleadings to that

evidence “freely when justice so requires”, provided that the

objecting party is not prejudiced by its admission.     Church of

Scientology v. Commissioner, 83 T.C. 381, 469 (1984), affd. 823

F.2d 1310 (9th Cir. 1987).     The facts necessary to decide the

remaining issues were before the Court as of the time petitioner

failed to file a timely response to respondent’s Rule 91(f)

motion as required by the Court’s order.     Therefore, the relevant

facts necessary to decide the case were deemed established at

that time.     While we did provide petitioner a trial during which

he could have provided further evidence, he did not do so.     He

objected merely to the trial of the bank deposit issue at that

time.     We believe that justice requires that petitioner not be

allowed to sit on his objection to the bank deposit issue until

after the facts regarding that issue have been established.

Petitioner had ample opportunity to object to the bank deposit

issue in response to the Court’s order requiring him to respond
                                - 8 -

to respondent’s Rule 91(f) motion.      Furthermore, petitioner had

other occasions to present relevant evidence and to object to the

raising of the bank deposit issue.      Petitioner had notice of the

bank deposit issue nearly a year before trial, as the bank

deposit issue was included in respondent’s first pretrial

memorandum.   Respondent’s second pretrial memorandum, filed 2

weeks before trial, also included the bank deposit issue.      It was

not until trial that petitioner raised his objection to the bank

deposit issue.    Accordingly, we conclude that petitioner is not

prejudiced by respondent’s raising of the bank deposit issue.      We

deem the pleadings amended to conform to the evidence and

conclude that the bank deposit issue is properly before the

Court.   Consequently, on the basis of the record, including the

facts deemed established, we hold that petitioner’s gross income

includes the SunTrust bank deposits of $178,110.

     We next decide whether petitioner’s gross income for the tax

year in issue includes ordinary income of $4,479 and interest

income of $86.6   Respondent contends that petitioner earned

ordinary income of $4,533 from Hickory Valley Retirement Inn,

Ltd., that he is entitled to a flowthrough loss of $54 from

Decubitus, Inc., and that he received interest income of $86 from

Hickory Valley Retirement Inn, Ltd.     As to the foregoing issues,


     6
      The burden of proof on these issues remains on petitioner.
                                  - 9 -

the facts deemed established support respondent’s determinations.

At trial petitioner failed to present any evidence or argument on

those issues.    Accordingly, we hold that petitioner’s gross

income includes ordinary income of $4,4797 and interest income of

$86.

       We next consider the issue of the failure to file addition

to tax pursuant to section 6651(a)(1).      Section 6651(a)(1)

imposes an addition to tax for failure to file a return by the

date prescribed (determined with regard to any extension of time

for filing) unless the taxpayer can establish that such failure

is due to reasonable cause and not due to willful neglect.       The

addition to tax is 5 percent of the ultimately determined tax if

the failure to file does not exceed 1 month, with an additional 5

percent per month for each month the failure continues, up to a

maximum of 25 percent.   Id.    Respondent bears the burden of

production under section 7491(c), and petitioner bears the burden

of proof.    See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

       Petitioner is deemed to have admitted that he failed to file

a return for taxable year 2002.      Accordingly, respondent has met

his burden of production.      Petitioner has failed to meet his

burden of proof as he failed to present any evidence or argument



       7
      The ordinary income amount of $4,479 includes ordinary
income of $4,533 from Hickory Valley Retirement Inn, Ltd., less a
flowthrough loss of $54 from Decubitus, Inc.
                               - 10 -

on the failure to file addition to tax.      Consequently, we hold

that petitioner is liable for the failure to file addition to tax

pursuant to section 6651(a)(1) for taxable year 2002.

     We next consider the issue of the failure to pay addition to

tax pursuant to section 6651(a)(2).      Section 6651(a)(2) provides

for an addition to tax for failure to pay taxes shown on a return

on or before the payment due date.      The addition to tax is 0.5

percent per month, with an additional 0.5 percent per month for

each month the failure continues, up to 25 percent.      Id.   In

instances where the taxpayer fails to file a return, the return

prepared by the Commissioner pursuant to section 6020(b) shall be

treated as the return filed by the taxpayer for the purpose of

calculating the addition to tax pursuant to section 6651(a)(2).

Sec. 6651(g)(2).   For a return prepared by the Commissioner to

constitute a section 6020(b) return, it 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, T.C.

Memo. 2003-124.    Respondent bears the burden of production under

section 7491(c), and petitioner bears the burden of proof.      See

Higbee v. Commissioner, supra at 446.

     The record contains a substitute return for taxable year

2002.   The substitute return is subscribed and includes a section

6020(b) certification; Form 4549, Income Tax Examination Changes;
                                - 11 -

and Form 886-A, Explanation of Items.    Those forms are sufficient

for respondent to compute petitioner’s tax liability for tax year

2002, and respondent has certified that they will be treated as a

return.    The facts deemed admitted show that petitioner did not

pay any taxes or have any amounts withheld for tax year 2002.

Because petitioner has not paid the amount shown on the

substitute return, we uphold respondent’s determination of the

failure to pay addition to tax pursuant to section 6651(a)(2).

     We next consider the issue of the failure to pay estimated

tax addition to tax pursuant to section 6654(a).    Taxpayers are

liable for an addition to tax for failure to pay estimated taxes

where prepayments of tax, either through withholding or by making

estimated quarterly payments during the year, do not equal the

lesser of 90 percent of the tax shown for the current taxable

year or 100 percent of the tax shown for the previous taxable

year.   Sec. 6654.   An exception applies if the tax due for the

year in issue is less than $1,000, the individual had no tax

liability for the preceding year, or a waiver applies.       Sec.

6654(e).   The Commissioner bears the burden of production to show

that the taxpayer had an estimated tax payment obligation, which

includes whether a return was filed for the preceding year.         Sec.

7491(c); Wheeler v. Commissioner, 127 T.C. 200, 211-212 (2006),

affd. 521 F.3d 1289 (10th Cir. 2008).    Petitioner bears the

burden of proof.     Higbee v. Commissioner, supra at 446.
                               - 12 -

       The record shows that petitioner failed to file a return for

taxable year 2001, and he therefore was required to make

estimated payments equal to 90 percent of his tax for taxable

year 2002.    See sec. 6654(d)(1)(B).   Accordingly, respondent’s

burden of production is satisfied.      The facts deemed established

show that petitioner did not pay any taxes for taxable year 2002.

Moreover, petitioner has failed to present any evidence or

argument that an exception applies.     Consequently, petitioner has

failed to meet his burden of proof, and we uphold respondent’s

determination of the failure to pay estimated tax addition to

tax.

       The Court has considered all other arguments made by the

parties and, to the extent we have not addressed them herein, we

consider them moot, irrelevant, or without merit.

       To reflect the foregoing and respondent’s concession,


                                             Decision will be entered

                                        under Rule 155.
