                        T.C. Memo. 2005-213



                      UNITED STATES TAX COURT



            RAMIRO AND MARIA MARTINEZ, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5130-04.              Filed September 12, 2005.


     Ramiro and Maria Martinez, pro sese.

     Irene Carroll, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   Respondent determined a deficiency of $2,305

in petitioners’ Federal income tax for 2001.1   The issue for




     1
      All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
                                - 2 -

decision is whether petitioners received unreported income for

2001.2

                          FINDINGS OF FACT

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

The stipulation of facts is incorporated herein by this

reference.   Petitioners resided in Los Angeles, California, when

their petition in this case was filed.   Petitioners have limited

facility in English, and their testimony was given through an

interpreter.

A.   Petitioners’ 2001 Tax Return

     Petitioners timely filed a joint Federal income tax return

for 2001.    Petitioners reported $14,840 of business income on the

return and listed their respective occupations as self–employed.

Each petitioner also filed a separate Schedule C-EZ, Net Profit

From Business (Sole Proprietorship), with the return.   Petitioner

Ramiro Martinez (Mr. Martinez) reported on his Schedule C-EZ that

his principal business or profession was construction and that he

received gross receipts and a net profit of $11,050.    Petitioner

Maria Martinez (Mrs. Martinez) reported on her Schedule C-EZ that




     2
      Respondent increased petitioners’ income by the amount of
unreported income he alleges they received, and as a result he
also adjusted petitioners’ self-employment tax, self-employment
tax deduction, and earned income credit. The parties agree that
the resulting adjustments are computational, and they do not
dispute that the adjustments turn on our resolution of the
unreported income issue.
                                 - 3 -

her principal business or profession was housekeeping and that

she received gross receipts and a net profit of $3,790.

B.   The Notice of Deficiency

     On January 26, 2004, respondent issued a Notice of

Deficiency in which he adjusted petitioners’ business income from

$14,840 to $20,710.    Respondent adjusted petitioners’ business

income based on Forms 1099 submitted to the Internal Revenue

Service by third-party payers.    The Forms 1099 provided as

follows:

           Payer of income       Payee of income    Amount paid

     Life Bank                  Ramiro   Martinez    $2,000
     Dr. Yury Geylikman         Ramiro   Martinez     3,000
     Alpa Construction, Inc.    Ramiro   Martinez     5,020
     Svetella Design, Inc.      Ramiro   Martinez     3,750
     Fresh Paint Art
       Advisor, Inc.            Maria Martinez        3,790
     County of Los Angeles
       Auditor Controller       Maria Martinez         3,150
         Total Amount
           Reported                                   20,710

As a result of his adjustment to petitioners’ business income,

respondent also adjusted petitioners’ self-employment tax, self-

employment tax deduction, and earned income credit.    Petitioners

acknowledge that they received the amounts reported on the Forms

1099.

C.   Mr. Martinez’s Self-Employment Income

     Mr. Martinez was paid for his construction work in

installments by check.    Mr. Martinez testified that he would cash

the checks he received and divide the proceeds with other workers
                                  - 4 -

who were unable to cash checks.3     Mr. Martinez testified that his

payment to each person depended on the type of work the

individual did and the length of time that the individual worked.

Mr. Martinez kept no records, however, of how much time the other

workers worked or of his transferring income to any third

parties.    Mr. Martinez also kept no records of how much income he

earned or retained for himself.

     1.     Life Bank

     Mr. Martinez testified he split the $2,000 he received from

Life Bank with two other workers, Gustav Ortiz (Mr. Ortiz) and a

man Mr. Martinez could only identify as “another guy who is not

here.     He went to Mexico.”   Mr. Martinez did not know how much of

the $2,000 was for his own work or how much he kept.     Mr. Ortiz,

who has a Social Security number, testified that he worked only

for Mr. Martinez and that Mr. Martinez gave him approximately

$1,000 cash for the job, but Mr. Ortiz did not report the money

on a tax return or deposit the money in a bank.

     2.      Dr. Yury Geylikman

     Mr. Martinez testified he split the $3,000 he received from

Dr. Yury Geylikman (Geylikman) with at least two or three other




     3
      The record does not make clear the relationship between Mr.
Martinez and the other workers. Mr. Martinez gave conflicting
testimony as to whether the other workers worked for him or
merely with him.
                                - 5 -

workers, but he could identify only one worker, Mr. Luis Garcia.

Mr. Martinez estimated that he kept $1,400 of the $3,000.

      3.    Alpa Construction and Svetella Design, Inc.

      Mr. Martinez testified he split both the $5,020 he received

from Alpa Construction (Alpa) and the $3,750 he received from

Svetella Design, Inc. (Svetella), with three or four workers whom

he could not identify.    Petitioner did not know how much of the

Alpa income he kept, but he estimated that he kept $1,600 of the

Svetella income.

      4.    Tax Return Preparation

      Petitioners’ 2001 joint return was prepared by Gonzales

Services.   Mr. Martinez informed Gonzales Services that he

divided the income he received with other workers.      The amount of

income Mr. Martinez reported on his Schedule C-EZ was based on

his own estimates of how much he had earned from his business and

how much he had paid to others.      Mr. Martinez’s estimates were

not based on any records.

D.    Mrs. Martinez’s Self-Employment Income

      In 2001, Fresh Paint Art Advisor, Inc., paid Mrs. Martinez

$3,790, and that was the only income reported on her Schedule C-

EZ.   Also during 2001, Los Angeles County (County) paid Mrs.

Martinez $3,150 for providing care to her grandchildren.      Mrs.

Martinez used the money from the County for her grandchildren,

but she kept no records of her expenditures.
                                - 6 -

E.   The Present Litigation

     On March 22, 2004, petitioners timely filed a petition with

this Court seeking review of the notice of deficiency and

alleging that they had expense documentation that would reduce

the amount of the deficiency.   On April 27, 2004, respondent’s

answer was filed.   The trial in this case was set for the Court’s

January 24, 2005, Los Angeles, California, trial session, and

both parties appeared and were heard.

                              OPINION

     Section 61(a) defines gross income for purposes of

calculating taxable income as “all income from whatever source

derived”.   Respondent has determined that petitioners received

unreported income from Life Bank, Alpa, Geylikman, Svetella, and

the Los Angeles County Auditor Controller.

     The Commissioner’s deficiency determination is normally

entitled to a presumption of correctness, Rapp v. Commissioner,

774 F.2d 932, 935 (9th Cir. 1985), and the burden of proving the

determination incorrect generally rests with the taxpayer, Rule

142(a).   However, when a case involves unreported income and that

case is appealable to the Court of Appeals for the Ninth Circuit,

barring a stipulation to the contrary, the Commissioner’s

determination of unreported income is entitled to the presumption

of correctness only if the determination is supported by some

evidence linking the taxpayer to an income-producing activity.
                               - 7 -

Palmer v. United States, 116 F.3d 1309, 1313 (9th Cir. 1997).

Once the Commissioner produces evidence linking the taxpayer to

an income-producing activity, the burden shifts to the taxpayer

to rebut the presumption by establishing that the Commissioner’s

determination is arbitrary or erroneous.   Rapp v. Commissioner,

supra at 935; Adamson v. Commissioner, 745 F.2d 541, 547 (9th

Cir. 1984), affg. T.C. Memo. 1982-371; see also United States v.

Janis, 428 U.S. 433, 441-442 (1976).

     This case is appealable, barring a stipulation to the

contrary, to the Court of Appeals for the Ninth Circuit.

Consequently, we are bound to apply the law of the circuit as

summarized above.   Golsen v. Commissioner, 54 T.C. 742 (1970),

affd. 445 F.2d 985 (10th Cir. 1971).

     The evidence on which respondent relies to satisfy his

initial burden of production regarding his determination that

petitioners received unreported income is drawn from Forms 1099

that respondent received from third-party payers.   Because

petitioners have stipulated that they received the income

reported on the Forms 1099, respondent has met his burden of

production.   See Parker v. Commissioner, 117 F.3d 785, 787 (5th

Cir. 1997) (when the taxpayer does not dispute the receipt of

unreported income, the Commissioner “has no duty to investigate a
                                - 8 -

third-party payment report”).   Petitioners, therefore, have the

burden of showing that respondent’s determination is erroneous.4

     Petitioners contend that although they received the funds

reported on the Forms 1099, “some or all of these funds were

given to them to pay to third parties and * * * therefore * * *

[they do] not believe the amounts * * * [are] their income.”     We

reject petitioners’ contention.

     It is well established that a taxpayer need not treat as

income payments that he did not receive under a claim of right,

that were not his to keep, and that he was required to transmit

to someone else as a mere conduit.      Diamond v. Commissioner, 56

T.C. 530, 541 (1971), affd. 492 F.2d 286 (7th Cir. 1974); see

also Ancira v. Commissioner, 119 T.C. 135, 138 (2002); Vetrano v.

Commissioner, T.C. Memo. 2000-128.      However, if a taxpayer does

receive a payment under a claim of right and without restriction

or limitation as to the disposition of the payment, then the

taxpayer has received taxable income even if it still may be

claimed that he is not entitled to retain the payment and even

though he may be liable to restore its equivalent.     See N. Am.

Oil Consol. v. Burnet, 286 U.S. 417, 424 (1932); Vetrano v.

Commissioner, supra.   The record does not reflect that


     4
      In this case, petitioners do not contend that sec. 7491(a),
which shifts the burden of proof to the Commissioner if its
requirements are met, applies, and petitioners have not produced
evidence to show they meet the requirements of sec. 7491(a). The
burden of proof, therefore, remains on petitioners.
                                - 9 -

petitioners received the unreported income as mere conduits

without a claim of right.

A.   Mr. Martinez

     Mr. Martinez testified that he split the money he received

from the third-party payers with other workers because the

workers “had no formal ID or any papers to cash their money, and

so * * * [I] took the check * * * [myself] and * * * [I] cashed

it for them.”   Mr. Martinez provided inconsistent testimony,

however, as to whether the workers worked for him or with him,

the number of workers he paid and the amounts he paid them, and

the amounts he kept for himself.   Mr. Martinez also presented no

documentation supporting his alleged division of the money he

received or the amount he reported on his Schedule C-EZ, and he

provided no documentary evidence that he was obligated to divide

the money with other workers.

     One of the men who worked with Mr. Martinez during 2001,

Gustav Ortiz (Mr. Ortiz), testified that Mr. Martinez gave him

“about a thousand for the Life job”.    Although Mr. Ortiz did not

report the income on a Federal income tax return and did not have

any documentation to support his testimony, we shall accept his

testimony made under oath, and we shall allow Mr. Martinez a

deduction of $1,000 for wages paid to Mr. Ortiz.

     Because of Mr. Martinez’s vague and inconsistent testimony

and the lack of credible evidence in the record, we conclude that
                             - 10 -

petitioners failed to carry their burden of proof, that Mr.

Martinez received the amounts reported on the Forms 1099 by Life

Bank, Geylikman, Alpa, and Svetella under a claim of right, and

that Mr. Martinez must include those amounts in his income.   See

Liddy v. Commissioner, T.C. Memo. 1985-107 (taxpayer did not meet

his burden of proof where he inadequately explained what he did

with the funds he received), affd. 808 F.2d 312 (4th Cir. 1986).

However, we shall allow Mr. Martinez a deduction of $1,000 for

the amount that Mr. Ortiz testified under oath he received from

Mr. Martinez.

B.   Mrs. Martinez

     Mrs. Martinez testified that she spent the $3,150 she

received from the County on her grandchildren because she

believed the money belonged to them and that the County only paid

it to her “because she was taking care of the kids.”   Mrs.

Martinez failed to provide any credible evidence, however, to

support her claim that the money belonged to her grandchildren.

For example, Mrs. Martinez presented no evidence that her use of

the County funds was restricted, that she spent the money on her

grandchildren other than by choice, or that the funds were

excludable from her income by operation of law.5   Consequently,


     5
      For example, sec. 131(a) provides that gross income shall
not include amounts received by a foster care provider as
qualified foster care payments. See Cato v. Commissioner, 99
T.C. 633 (1992). Petitioners do not contend that Mrs. Martinez
                                                   (continued...)
                             - 11 -

we conclude that petitioners have failed to carry their burden of

proving that the County payments of $3,150 were not income to

Mrs. Martinez.

C.   Conclusion

     We have carefully considered all remaining arguments made by

the parties for results contrary to those expressed herein and,

to the extent not discussed above, conclude that those arguments

are without merit.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.




     5
      (...continued)
was a foster care provider or that the payments in question were
qualified foster care payments. The record establishes only that
Mrs. Martinez received the payments for taking care of her
grandchildren.
