                        T.C. Memo. 2011-291



                      UNITED STATES TAX COURT



                ERIK MCBRIDE THOMPSON, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 2718-09, 2720-09.      Filed December 19, 2011.



     Erik McBride Thompson, pro se.

     Blaine C. Holiday, for respondent.



                         MEMORANDUM OPINION


     HOLMES, Judge:   Erik Thompson didn’t file returns for tax

years 2004 and 2006 because he disapproved of the wars in Iraq

and Afghanistan and didn’t want to fuel “the government’s killing

machine.”   The Commissioner sent him a notice of deficiency, and

Thompson filed a petition.   He didn’t approach pretrial

preparation in the spirit of cooperation that our Rules hope to
                                - 2 -

inspire, because he saw “little distinction between the

activities of the IRS and Tax Court and the activities of those

good law-abiding Germans who drove the trains to the death

camps.”

     He began to back off from such sentiments at trial and

brought with him numerous documents that he’d never shared with

the Commissioner.   We reserved decision on the Commissioner’s

motion to exclude this evidence, and Thompson eventually

collaborated with the Commissioner to settle many issues.    Two

remain for both years in issue:    (1) investment-interest expense

and (2) rental-real-estate loss.    The Commissioner says Thompson

didn’t substantiate the former and didn’t participate actively

enough in the rental real-estate activity to get the latter.

                              Background

     As a young man, Thompson left rural Milan, Minnesota, to go

to Stanford, where he earned three degrees.   He also served in

the Peace Corps in Truk (or, as it is now known, Chuuk),

Micronesia. And after his father died, he decided to return home

to try to revitalize Milan.

     He put his Stanford MBA to use by running the local bank,

Prairie Sun Bank--where he eventually became chairman--and became

part owner of Milan Agency, Inc., Prairie Sun Bank’s holding

company.   He also founded Prairie Land & Lumber (Prairie), a
                                 - 3 -

real-estate company, where he is still president and director.1

This helped Thompson bring a slice of Micronesia home--Prairie

owned ten rental properties that housed 100 Micronesians, a

substantial portion of Milan’s 300 or so residents.

     The immigrants found work in nearby meat-processing

facilities, and business soon ticked up at the local gas station

and grocery store.   Thompson himself also did fairly well but

decided to protest his disagreement with the federal government

by not filing his tax returns.

     This did not, of course, stop third parties from sending

information to the IRS.   The Commissioner used that information

to prepare “substitutes for returns” (SFRs)2 that determined

Thompson had $460,000 in income for 2004 and over $300,000 for

2006.    Not knowing anything about Thompson’s personal affairs,

the Commissioner assumed Thompson was single and was entitled to

only the standard deduction.     The result was deficiencies that




     1
       Prairie is an S corporation. If a business meets the
requirements of section 1361, it may elect to become an “S
corporation” and pay no corporate tax. An S corporation’s income
and losses, like a partnership’s, flow through to its
shareholders, who then pay income tax.

     Unless otherwise noted, all section references are to the
Internal Revenue Code for the years at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
     2
       Section 6020(b) authorizes the Commissioner to prepare a
return when a taxpayer doesn’t.
                               - 4 -

were quite large,3 and the Commissioner also determined additions

to tax for Thompson’s failure to timely file, failure to timely

pay, and failure to make sufficient estimated tax payments.

     The Commissioner sent Thompson notices of deficiency with

the SFRs attached.   Thompson filed petitions with this Court.

We issued our standing pretrial orders in January 2010 setting

the case for trial at our June 2010 trial session in St. Paul.

(Thompson was and remains a resident of South Dakota.)   In April

the Commissioner sent out a Branerton letter.4   Within a few

weeks, Thompson provided some information--just not the type that

the Commissioner was hoping for:   “You may be curious about my

decision not to file * * * my actions are designed to call us

back to the rule of law and stop the slaughter of innocents.”

The letter goes on at some length but leaves no doubt that

Thompson intended to resist paying taxes because he disapproved




     3
       Thompson didn’t bother to file in 2005. But he did make
estimated tax payments in 2006 that were credited toward his 2005
tax liability.
     4
       Branerton letters are the most common way for informal
discovery to begin. In Branerton Corp. v. Commissioner, 61 T.C.
691, 692 (1974), we explained:

     The discovery procedures should be used only after the
     parties have made reasonable informal efforts to obtain
     needed information voluntarily. * * * Essential to * * *
     [the stipulation] process is the voluntary exchange of
     necessary facts, documents, and other data between the
     parties as an aid to the more expeditious trial of cases as
     well as for settlement purposes. * * *
                               - 5 -

of the wars in Iraq and Afghanistan.    He claimed to believe that

paying his taxes would violate the Nuremberg Principles.5

     In keeping with our customary practice, we ordered the

parties to exchange unstipulated documents no later than 14 days

before trial.   Thompson still wouldn’t budge.6   The pretrial

order made clear that noncompliance, at least without good cause

or both parties’ consent, could lead to the exclusion of

evidence.

     The looming trial deadline finally spurred Thompson to get

some information to the Commissioner.   The week before trial

Thompson faxed his unfiled 2004 tax return, a copy of his filed

2003 tax return, and public-record data of a condo he owned in

Hawaii.   These became stipulated exhibits.   But when we called

the case for trial, Thompson still banked on a continuance.      As


     5
       Thompson refers here to the principles established at the
Nuremberg trials, which the United Nations affirmed and codified
after World War II. See Affirmation of the Principles of
International Law Recognized by the Charter of the Nürnberg
Tribunal, G.A. Res. 95(I), U.N. Doc. A/236 (Dec. 11, 1946);
Principles of International Law Recognized in the Charter of the
Nürnberg Tribunal and in the Judgment of the Tribunal, U.N. Doc.
A/CN.4/SER.A/1950/Add. 1 (1950) (Nuremberg Principles). The
Nuremberg Principles provided that compliance with the law would
be no excuse for those tried if the conduct would be complicit
in, for example, a crime against humanity. United States v.
Malinowski, 472 F.2d 850, 856 n.7 (3d Cir. 1973).
     6
       Thompson claimed that he sometimes suffered from long
delays in receiving mail; but even if we take at face value his
claim that he didn’t get our order until April 20, that still
gave him time to get at least some documents to the Commissioner
before June.
                                 - 6 -

the Commissioner reminded us, however, Thompson had spent almost

a year with the Appeals officer doing nothing.    We therefore

denied his request.

     This finally jolted Thompson into action.    He introduced

twelve exhibits into evidence, and he testified about investment-

interest expense and Prairie’s losses.7    Not only did he claim he

had paid investment interest in 2004 and 2006, he also claimed he

had investment interest that he had carried over from previous

years.   The carryover would be a boon for 2006--an interest

deduction as large as Thompson claimed would fully offset his

$113,226 dividend from Milan Agency, Inc.

     The Commissioner moved to exclude Thompson’s exhibits, and

rather than grant the motion, we reserved decision in one last

attempt to get Thompson to give documents verifying his expenses

to the Commissioner.     The Commissioner was to file an opening

brief by September 9, 2010--Thompson had until then.     If he

refused, we made clear, his window of opportunity to produce

documents would close.




     7
       When a taxpayer borrows money to buy into a partnership
that actively conducts a trade or business, but in which the
taxpayer himself doesn’t materially participate, interest he pays
on the loan is “investment interest.” The term also includes the
interest someone pays on a loan whose proceeds he uses to buy an
asset that yields “portfolio income.” See sec. 163(d)(3)(A),
(5)(A). “Portfolio income” includes most types of passive
income, such as interest and dividends.
                                - 7 -

     On August 4, 2010, the Commissioner reported that Thompson’s

communication was minimal.    To his credit, Thompson then did turn

over some documents that enabled the Commissioner to verify

gambling losses, mortgage interest, taxes paid, charitable gifts,

and a capital-loss carryover.     We are left with only Thompson’s

investment-interest expense and his share of Prairie’s losses to

discuss.

                              Discussion

     We do not accept Thompson’s claims that the Nuremberg

Principles allow him to not file his returns.    See, e.g., Muste

v. Commissioner, 35 T.C. 913, 920 (1961); Harper v. Commissioner,

T.C. Memo. 1973-214, affd. without published opinion 505 F.2d 730

(3d Cir. 1974).   We might sustain his claimed expenses, though if

the Commissioner has his way we will have virtually nothing in

the record to support them.

I.   Admissibility of Documents

     The Commissioner moved to exclude the exhibits that Thompson

presented for the first time at trial, and he renews his motion

on brief.   He is surely correct that Thompson was dilatory in

producing documents.   We may exclude, and often do exclude,

evidence that a party tries to get admitted contrary to our

pretrial order.   See Schaefer v. Commissioner, T.C. Memo. 1998-

163, affd. without published opinion 188 F.3d 514 (9th Cir.

1999).   Thompson relies on one of the exceptions to our general
                               - 8 -

rule of exclusion, the exception for “good cause”--though the

good cause that he claims is that he was out of town and didn’t

check his mail until seven weeks before trial.   This is a poor

excuse, especially considering his earlier uncooperative behavior

and bellicose letters.   But we acknowledge his attempts to

provide some documentation after trial.   The pretrial order does

not mandate exclusion, and we will admit the documents.   See

Major v. Commissioner, T.C. Memo. 2005-141, affd. 224 Fed. Appx.

686 (9th Cir. 2007).8




     8
       The pretrial order says, “The Court may refuse to receive
in evidence any document or material not so stipulated or
exchanged [that is, within the prescribed period], unless
otherwise agreed by the parties or allowed by the Court for good
cause shown.” (Emphasis added.)

     The Commissioner fears we are rewarding bad behavior. That
is not our intent. We take into account that the documents’
purpose was to substantiate the disputed expenses, which we find
does not prejudice the Commissioner. Cf. Cagle v. Commissioner,
T.C. Memo. 1993-217. We also recognize that Thompson is going at
this pro se and for the first time. He would be unlikely to get
such indulgence in the future, and we have other ways of
discouraging delay. See sec. 6673.

     The Commissioner also renews his objections based on lack of
foundation and hearsay. All the documents presented dealt with
Thompson’s condominium in Hawaii, his claimed capital-loss
carryover, a loan he had taken out, or deductions relating to
Prairie that Thompson claimed. Thompson provided ample testimony
of these topics and so the documents don’t lack foundational
evidence. We do, however, sustain the Commissioner’s hearsay
objection as to the handwritten notes on the face of Exhibits 12,
18, 21, 22, and 23 as well as the computations printed on the
last page of Exhibit 22.
                                      - 9 -

II.   Deductions and Losses

      A.     Investment-Interest Expense

                         Claimed by      Allowed by the      Amount in
          Year            Thompson        Commissioner        Dispute
          2004            $11,374             $8,868           $2,506
          2006            116,384             36,094           80,290

      Thompson has the burden of proving losses and other

deductions.       See Rule 142(a); Jordan v. Commissioner, T.C. Memo.

2009-223.        He called only himself as a witness during trial and

testified generally that he incurred the investment-interest

expense in dispute.        Of course, unsubstantiated testimony usually

does not get a taxpayer very far.         See Tokarski v. Commissioner,

87 T.C. 74, 77 (1986).       What Thompson really needs are records

sufficient to verify his claims.         See sec. 6001; sec. 1.6001-

1(a), Income Tax Regs.

      Thompson argues that his 2003 tax return shows $170,494 of

investment-interest expense which he could carry forward to

future years.9       He contends that the Commissioner’s admission

that he paid some investment-interest expense in 2004 and 2006

means that we should accept his own assertion about the specific

amount of that interest, including the amount that he reported on

his 2003 return, to allow the rest.           Tax returns, however, don’t


      9
       Each year Thompson was limited in how much of the expense
he could claim. That’s because the expense can offset only net
investment income. Sec. 163(d)(1).
                              - 10 -

substantiate deductions or losses; they are nothing more than a

statement of a taxpayer’s claims.   Wilkinson v. Commissioner, 71

T.C. 633, 639 (1979).   Thompson therefore can’t rely solely on

his old return or his current say-so to prove the disputed

amount.   See McWilliams v. Commissioner, T.C. Memo. 1995-454

(“[t]axpayers cannot merely rely on prior years’ tax returns in

which credits were claimed”); see also Se. Mail Transp., Inc. v.

Commissioner, T.C. Memo. 1992-252.10   Thompson alludes in his

brief to additional documentation, but it’s not in the record.

See Kanofsky v. Commissioner, T.C. Memo. 2006-79, affd. 271 Fed.

Appx. 146 (3d Cir. 2008).

     Although we thus have no information about interest paid

before 2003, Thompson did provide some records of two United

Bankers’ notes for the years at issue.   He borrowed over $500,000

on December 31, 2002, agreeing to pay a variable interest rate on

a quarterly schedule.   He then took out another loan in 2006, and

used most of those proceeds to pay off the original 2002 loan.

Thompson also gave us what appear to be 2006 quarterly statements

and a renewal notice.   Two of the quarterly statements related to

the 2002 loan.   They say he owed $4,391.22 in interest on March

31, 2006 (the renewal notice suggests he had to actually pay

$4,399.13) and $7,500 in interest on June 30, 2006.   Another

     10
       Even if he had substantiated investment-interest expense
from years before 2004, he’d have to show they were not absorbed
in intervening years. McWilliams, T.C. Memo. 1995-454.
                                - 11 -

statement lists interest of $4,326.40 on the 2006 loan due at the

end of 2006.     Finally, he gave us a bank slip noting an interest

payment of $4,422.41 on the date he took out the 2006 loan.

     The 2006 documentation convinces us that the 2002 note was

still outstanding in 2004.     We have, however, little proof of the

timing or amount of interest actually paid in 2002.      Thompson did

document $20,64811 in interest for 2006, and would like to

estimate what he couldn’t provide.       But without information about

how he actually used the loan proceeds, we cannot say such

payments were investment interest.       See Kudo v. Commissioner,

T.C. Memo. 1998-404, affd. 11 Fed. Appx. 864 (9th Cir. 2001).12

Thompson checked “Business Purposes” when he applied for the new

loan.     He now claims that Prairie Sun Bank used the loan to

invest in ECONAR Energy Systems Corp.13      These claims, however,

are unsupported.    Even if he paid all of the interest he claimed,

Thompson didn’t demonstrate the amount of his investment in


     11
       $4,399.13 + $7,500 + $4,326.40 + $4,422.41. Several
documents not only showed the amount due, but also indicated
Thompson was not behind on his payments, satisfying us that he
paid these amounts.
     12
       The purpose is crucial because it determines whether the
interest paid is deductible. When we know a taxpayer paid a
deductible expense, we sometimes can estimate the amount. See
Cohan v. Commissioner, 39 F.2d 540, 543-44 (2d Cir. 1930). The
converse does not hold true--knowing the amount (without more)
does not let us estimate that an item is deductible.
     13
       At trial he mentioned a heat pump manufacturer.       Maybe
this is ECONAR, maybe not: Thompson didn’t say.
                                   - 12 -

ECONAR nor why such investment triggered deductions under section

163(d).     We thus sustain the Commissioner’s limitation on

Thompson’s deduction of investment interest.

     B.      Nonpassive Losses

                      Claimed by       Allowed by the       Amount in
          Year         Thompson         Commissioner         Dispute
          2004          $36,247             -0-              $36,247
          2006           34,607             -0-               34,607

     The Commissioner argues that “petitioner was not able to

establish that the rental activity was non-passive or that the

activity was engaged in for a profit.”14      Showing unusual

chutzpah, Thompson blames the Commissioner for waiting too long

to raise the issue of character of the losses.          (At trial

Thompson focused on the amount of the loss.)

     It’s true that if an issue is untimely raised--unfairly

surprising the opposing party by not giving him a chance to

adequately address it at trial–-we’ll refuse to consider it.


     14
       A passive activity is a trade or business in which the
taxpayer doesn’t materially participate. Sec. 469(c). Why the
distinction? Congress is concerned that a taxpayer with income,
such as wages, will look for an investment to generate noncash
losses that will shelter that income. See Mowafi v.
Commissioner, T.C. Memo. 2001-111.

     Thompson described Prairie as having “10 rental homes,” and
the parties refer to Prairie’s losses as “rental losses.” Rental
activities are passive unless a taxpayer meets certain
requirements (such as spending more than 750 hours on the
activity during the tax year). Sec. 469(c)(2), (7). Thompson
has not shown that he met any of these requirements.
                              - 13 -

Rolfs v. Commissioner, 135 T.C. 471, 484 (2010) (citing prior

caselaw).   But we disagree with Thompson’s premise.   The

Commissioner didn’t raise this issue for the first time on brief;

he raised it at trial.   (And considering Thompson hadn’t bothered

giving the Commissioner anything relating to his deductions and

losses until one week before trial, this was no small feat.)    The

Commissioner pointed out to the Court that something wasn’t quite

right with the Prairie losses on Thompson’s 2004 return:

Thompson somehow had both passive and nonpassive losses from

Prairie and the Commissioner wanted to know how.   The Court tried

to have Thompson clarify matters, but he was clearly confused:

“How is one passive, one nonpassive?”   Unable to answer the

Commissioner’s argument, Thompson turned from testifying about

the character of the losses to testifying about their amounts.

His confusion--likely avoidable if he had complied with Court

deadlines--is no excuse for failure to meet his burden.15


     15
       Thompson also makes “fairness” arguments concerning the
Prairie losses. First he argues that because he believes Milan
Agency, Inc., and Prairie are grouped together under banking law,
they should be grouped together for tax law (and thus, we
suppose, gains and losses of the two should be netted). But
grouping for tax law--at least for the purpose of applying the
passive-activity loss rules--is defined under section 1.469-4,
Income Tax Regs., which doesn’t cross-reference banking law.
Based on the little evidence Thompson did give us, we find he
didn’t meet that section’s facts-and-circumstances test. Sec.
1.469-4(c)(2) and (d)(1)(ii), Example (2), Income Tax Regs. (Nor
did he show he’s not otherwise limited under paragraph (d) of
that regulation.)
                                                    (continued...)
                                - 14 -

III. Additions to Tax

     The final issues are additions to tax under section 6651 and

6654.     Since Thompson conceded the additions to tax for 2004 on

brief, we need only discuss 2006.

        The Commissioner has the burden of production on additions

and penalties, see sec. 7491(c), but the burden of persuasion

remains on Thompson, see, e.g., Higbee v. Commissioner, 116 T.C.

438, 446-47 (2001).     The first of the three additions to tax here

is the addition for failure to timely file a tax return.    See

sec. 6651(a)(1).     The Commissioner met his burden of production

on this one because Thompson stipulated that he did not file his

2006 return.

     The Commissioner has also met his burden for the second

addition to tax--the one imposed on those who fail to timely pay

taxes shown on a return.    See sec. 6651(a)(2).   Thompson didn’t

file a return, but section 6020(b) allows the Commissioner to

prepare a substitute for return.    An SFR that meets certain

requirements is treated as “the return filed by the taxpayer for

purposes of determining the amount of the addition.”     Wheeler v.


     15
      (...continued)
     He also suggests that because he believes, citing Vainisi v.
Commissioner, 599 F.3d 567 (7th Cir. 2010), revg. 132 T.C. 1
(2009), that the law concerning S corporations is uncertain, the
Commissioner can’t simply state his income is passive. Not so.
The burden is on Thompson to show his activities were not
passive, and this requirement applies even to shareholders of an
S corporation. See Harnett v. Commissioner, T.C. Memo. 2011-191.
                               - 15 -

Commissioner, 127 T.C. 200, 208-09 (2006) (citing section

6651(g)(2)), affd. 521 F.3d 1289 (10th Cir. 2008).   A valid SFR

must provide more than background information about the taxpayer.

See id. at 209.   By incorporating tax information from third

parties to make appropriate adjustments to tax, the Commissioner

did just that.

     Finally section 6654 imposes an addition to tax when a

taxpayer fails to make estimated tax payments during the year.

Sec. 6654(a) and (b).   Thompson didn’t file his 2005 return, so

the required annual payment is 90 percent of the 2006 tax due.

See sec. 6654(d)(1)(B).   To meet his burden of production, the

Commissioner must prove Thompson owed tax for 2006 and that

Thompson paid insufficient estimated tax.   We’ve determined that

Thompson owes tax for 2006, and Thompson admits that he hasn’t

paid any tax besides the relatively small amount that was

withheld.   (Nor has Thompson shown that one of the section

6654(e) exceptions applies.)

     Thompson instead asks us to give him a pass on account of

his good faith--his willingness to show up for trial, the

presentation of his 2003 return, and the Commissioner’s

recognition that some of the investment-interest expenses were

legitimate.

     There is, however, no reasonable-cause exception to the

section 6654 addition that applies to Thompson.   See Dodge v.
                                - 16 -

Commissioner, 96 T.C. 172, 183 (1991), affd. on this issue 981

F.2d 350 (8th Cir. 1992).   There is such an exception to the

other additions, see sec. 6651(a)(1) and (2), but Thompson failed

to adequately explain either at trial or afterward why he didn’t

file his 2006 return or pay the amount that would have been shown

on the return had he filed it.    His Nuremberg Principles defense

is not reasonable.

     A final word of caution.    Thompson seems to welcome future

opportunities to come to the Tax Court.16   We can help pro se

litigants with legitimate claims, but not those who make

frivolous arguments.   Perhaps Thompson believes conflating the

two is worth the risk; he is now cautioned that section 6673

allows the Court to impose sanctions of up to $25,000 on

taxpayers making frivolous arguments.


                                          Decisions will be entered

                                     under Rule 155.




     16
       “Petitioner is on a fact-finding journey through the Tax
Court and any encouragement of delay, hindrance, or cost-
increasing would be directed at future proceedings. Petitioner
does not ‘disregard * * * the rules of this court,’ but rather
hopes to learn them and possibly use them in the future.”
Answering Brief for Petitioner at 9-10.
