                          T.C. Memo. 1997-363



                        UNITED STATES TAX COURT



       ALBERT R. CUJAS, JR., & SUSAN W. CUJAS, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 10476-96.                     Filed August 6, 1997.



       Albert R. Cujas, Jr., pro se.

       J. Craig Young, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


       FOLEY, Judge:   Respondent determined the following

deficiencies in and additions to petitioners' Federal income

taxes:

                         Albert R. Cujas, Jr.

                                            Additions To Tax
Year             Deficiency            Sec. 6651(a)(1) Sec. 6654(a)
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1992               $13,005                    $3,251           $457
1993                 5,172                     1,293            217


                               Susan W. Cujas

                                                Additions To Tax
Year              Deficiency               Sec. 6651(a)(1) Sec. 6654(a)

1992                $4,528                    $1,132           $127
1993                 5,172                     1,293            217

       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.         The issues for

decision are as follows:

       1.   Whether petitioners failed to report income.      We hold

that they did to the extent provided below.

       2.   Whether petitioners, pursuant to section 72(t), are

liable for a 10-percent additional tax on early distributions

they received in 1992 from their individual retirement accounts

(IRA's).     We hold that they are liable.

       3.   Whether petitioners, pursuant to section 1401, are

liable for self-employment tax.       We hold that they are liable to

the extent provided below.

       4.   Whether petitioners, pursuant to section 6651(a)(1), are

liable for additions to tax for failure to file timely Federal

income tax returns.     We hold that they are liable to the extent

provided below.
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     5.   Whether petitioners, pursuant to section 6654(a), are

liable for additions to tax for failure to make estimated tax

payments.    We hold that they are liable to the extent provided

below.

     6.   Whether petitioners have asserted frivolous and

groundless arguments that warrant the imposition of a penalty

pursuant to section 6673.    We hold that a penalty is not

warranted.

                          FINDINGS OF FACT

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

the time their joint petition was filed, petitioners' mailing

address was in Kernersville, North Carolina.

     During the years in issue, Albert Cujas was married to Susan

Cujas and was self-employed as a physical therapist.    Petitioners

filed a joint Federal income tax return for 1991, but did not

file returns for 1992 or 1993.    The Internal Revenue Service

audited petitioners' 1991 return, and Agent Jerry Gardner was

assigned to the case.    He notified petitioners in writing that

their 1991 return was being audited.     In this correspondence, he

asked petitioners to meet with him and to provide records

relating to their 1991 income and expenses.    Petitioners did not

comply with Agent Gardner's requests.

     After Agent Gardner had completed his audit of petitioners'

1991 return, he began an audit relating to petitioners' 1992 and
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1993 tax years.     He did not, however, notify petitioners that

they were being audited for 1992 and 1993 and did not request

records from them relating to these years.           During the audit, he

obtained information returns (i.e., Forms 1099) indicating that

petitioners had received income in 1992 as follows:



                            Albert R. Cujas, Jr.

Payor                                            Type of Payment       Amount

Maultsby Orthopedic Clinic PA                     Compensation         $1,867
St. John Neuromuscular Therapy Seminars           Compensation         13,214
Matol Botanical International Ltd.                Compensation            630
State of N.C. Health Plan                         Compensation          2,302
Hartford Life Insurance Co.                       Compensation            677
State Employees Credit Union                     IRA distribution      25,623
State Employees Credit Union                        Interest              493

                               Susan W. Cujas

Payor                                            Type of Payment       Amount

Northwest Child Development Council, Inc.         Compensation         $4,702
The Investment Company of America                  Dividends               95
State Employees Credit Union                        Interest              114
State Employees Credit Union                     IRA distribution      10,973
Capital Guardian Trust Co.                       IRA distribution       4,902

After receiving this information, Agent Gardner contacted some of

the payors and obtained written verification of the items.

        Agent Gardner did not obtain any evidence that petitioners

received income relating to 1993.           He proceeded to reconstruct

petitioners' income for that year using data published by the

Bureau of Labor Statistics (BLS) and determined that each

petitioner incurred personal living expenses and received self-

employment income of $21,339.        He also determined that:       (1) For

1992, petitioners were each liable for a 10-percent additional
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tax on early distributions they received from their IRA's; and

(2) for 1992 and 1993, petitioners were each liable for self-

employment tax, additions to tax for failure to file timely

Federal income tax returns, and additions to tax for failure to

make estimated tax payments.

      Based on the results of Agent Gardner's audit, respondent on

February 29, 1996, issued a separate notice of deficiency to each

petitioner.

                               OPINION

I.   Unreported Income

      Generally, the Commissioner's determination is presumed to

be correct, and the taxpayer bears the burden of proving that it

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

(1933).   Some courts, however, have declined to accord a

presumption of correctness to the Commissioner's determination of

unreported income where the Commissioner simply relies on the

presumption without introducing sufficient evidence linking the

taxpayer to an income generating activity.    Williams v.

Commissioner, 999 F.2d 760, 763 (4th Cir. 1993), affg. T.C. Memo.

1992-153; Anastasato v. Commissioner, 794 F.2d 884, 886-887 (3d

Cir. 1986), vacating and remanding T.C. Memo. 1985-101; Jackson

v. Commissioner, 73 T.C. 394, 401 (1979).    The Commissioner need

only provide a minimal amount of evidence.    Williams v.

Commissioner, supra at 766; Weimerskirch v. Commissioner, 596
                                - 6 -


F.2d 358, 361 (9th Cir. 1979), revg. 67 T.C. 672 (1977).      If the

Commissioner fails to provide sufficient evidence, the deficiency

determination is arbitrary, and the Commissioner will bear the

burden of coming forward with evidence to establish the existence

and amount of any deficiency.     Jackson v. Commissioner, supra.

     Based on information reported on Forms 1099, respondent

determined that in 1992 petitioners received income from several

sources.    Based on BLS data, respondent determined that in 1993

petitioners received self-employment income.    We now address the

validity of each of these determinations.

     A.    1992 Tax Year

     Respondent determined that during 1992 each petitioner

received income from IRA distributions, self-employment, and

interest, and that Mrs. Cujas received dividend income.      These

determinations were based on information reported on Forms 1099

issued by the payors.

     Mrs. Cujas conceded that during 1992 she received funds from

the sources and in the amounts determined by respondent.      She has

failed to establish that these funds are excludable from her

gross income.    Accordingly, we hold that these funds are

includable in her gross income.    See secs. 61(a), 72, 408(d)(1).

     In his brief, Mr. Cujas conceded that during 1992 he

received:    (1) $25,623 from his IRA at the State Employees Credit

Union; (2) $2,302 from Blue Cross/Blue Shield of North Carolina;
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and (3) $1,867 from the Maultsby Clinic.       He has failed to

establish that these funds are excludable from his gross income.

Accordingly, we hold that these funds are includable in his gross

income.     See secs. 61(a), 72, 408(d)(1).

     The remainder of respondent's determinations relating to Mr.

Cujas for 1992 were supported by evidence.       Respondent obtained

Forms 1099 indicating that Mr. Cujas received:       (1) $13,214 from

St. John Neuromuscular Therapy Seminars; (2) $630 from Matol

Botanical International Ltd.; (3) $677 from Hartford Life

Insurance Co.; and (4) $493 from the State Employees Credit

Union.     Therefore, we conclude that respondent obtained

sufficient evidence to link Mr. Cujas to these funds.       As a

result, Mr. Cujas bears the burden of proving that respondent's

determinations relating to these funds are erroneous.       He has

failed to provide any credible evidence to carry his burden of

proof.     Accordingly, we hold that these funds are includable in

his gross income.     See sec. 61(a).

     B.     1993 Tax Year

     Respondent determined, using BLS data, that during 1993 each

petitioner had gross income of $21,339.       Every taxpayer is

required to maintain adequate records of taxable income.       Sec.

6001.     If the taxpayer fails to maintain such records, the

Commissioner may reconstruct income in accordance with a method

that clearly reflects income.     Sec. 446(b); Meneguzzo v.
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Commissioner, 43 T.C. 824, 831 (1965).    When the Commissioner has

evidence of taxable income but does not have information

available to ascertain the amount of such income, the

Commissioner may use BLS data to determine that the taxpayer had

income at least equal to the normal cost of living.     Giddio v.

Commissioner, 54 T.C. 1530, 1533 (1970).

     Prior to issuing notices of deficiency, respondent did not

contact petitioners and did not obtain any evidence linking

petitioners to an income generating activity relating to 1993.

Nevertheless, respondent proceeded to use BLS data to reconstruct

petitioners' 1993 income.   Therefore, respondent's determinations

relating to petitioners' 1993 tax years are arbitrary, and

respondent bears the burden of coming forward with evidence to

establish the existence and amount of any deficiency.    Jackson v.

Commissioner, supra at 401; cf. Giddio v. Commissioner, supra

(holding that it is not arbitrary for the Commissioner to use BLS

data to reconstruct a taxpayer's income when the Commissioner has

evidence of taxable income).

     Respondent has failed to present sufficient evidence to

establish the existence and amount of the deficiencies relating

to 1993.   Although Mr. Cujas testified that he was self-employed

as a physical therapist during 1993, respondent has failed to

establish the amount of funds that Mr. Cujas may have received

during 1993 for such services.    Therefore, respondent has failed
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to meet his burden of proof.    Accordingly, we hold that

petitioners are not liable for the deficiencies relating to 1993.

II.    Respondent's Other Determinations

       Respondent determined that:    (1) For 1992, petitioners were

each liable for a 10-percent additional tax on early

distributions they received from their IRA's; and (2) for 1992

and 1993, petitioners were each liable for self-employment tax,

additions to tax for failure to file timely Federal income tax

returns, and additions to tax for failure to make estimated tax

payments.    We have held for 1993 that petitioners are not liable

for deficiencies relating to respondent's determination that they

received income.    As a result, petitioners are not liable for the

self-employment tax and additions to tax relating to 1993.

Petitioners bear the burden of proving that the determinations

relating to 1992 are erroneous.      Rule 142(a).   Petitioners

introduced no evidence relating to these determinations.

Therefore, they are liable for the taxes and additions to tax

relating to 1992.

III.    Respondent's Motion for a Section 6673 Penalty

       Respondent submitted a motion for the imposition of a

penalty under section 6673.    Section 6673(a)(1) authorizes this

Court to impose a penalty in favor of the United States in an

amount not to exceed $25,000 whenever it appears that the

taxpayer's position in a proceeding is frivolous, groundless, or
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instituted primarily for delay.    We conclude that such a penalty

is inappropriate in the present case and deny respondent's

motion.

     All other arguments made by the parties are either

irrelevant or without merit.

     To reflect the foregoing,


                                      An order denying respondent's

                                 motion for a penalty will be

                                 issued, and decision will be

                                 entered under Rule 155.
