                         T.C. Memo. 2003-315



                       UNITED STATES TAX COURT



                       PETER WOOD, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14398-02.              Filed November 12, 2003.




     Peter Wood, pro se.

     David L. Zoss, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined the following

deficiencies in, and additions to, petitioner’s Federal income

tax (tax):
                                     - 2 -

                                            Additions to Tax
 Year       Deficiency   Sec. 6651(a)(1)1     Sec. 6651(a)(2)     Sec. 6654(a)
 1995         $78,117       $16,573.25               $0             $3,412.62
 1996           9,857           642.83              714.25             301.28
 1997          41,120         8,802.00            9,780.00           2,091.52

        In an amendment to answer (respondent’s amendment to an-

swer), respondent alleged increases of $71.42 and $1,478 in the

additions to tax under section 6651(a)(1) for 1996 and 1997,

respectively.2

        The issues remaining for decision are:3

        (1) Did petitioner operate during each of the years at issue

a sole proprietorship engaged in the business of selling jewelry

and certain other items?        We hold that he did.

        (2) Does petitioner have unreported Schedule C net profit

for each of the years at issue in the amount that respondent

determined in the notice?        We hold that he does.

        (3) Is petitioner’s filing status for each of the years at

issue married filing separately?            We hold that it is.



        1
      All section references are to the Internal Revenue Code
(Code) in effect for the years at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
        2
      In respondent’s amendment to answer, respondent conceded
the determinations under sec. 6651(a)(2) for 1996 and 1997 that
respondent determined in the notice of deficiency (notice) issued
to petitioner.
        3
      In addition to the issues remaining for decision listed
below, there are other questions relating to certain determina-
tions in the notice that are computational in that their resolu-
tion flows automatically from our resolution of the remaining
issues that we address herein.
                               - 3 -

      (4) Is petitioner liable for an addition to tax under

section 6651(a)(1) for each of the years at issue?   We hold that

he is.

      (5) Is petitioner liable for an addition to tax under

section 6654(a) for each of the years at issue?   We hold that he

is.

                         FINDINGS OF FACT

      Most of the facts have been deemed established pursuant to

Rule 90(c) and pursuant to the Court’s Order under Rule 91(f)

dated May 8, 2003.

      At the time he filed the petition in this case, petitioner’s

mailing address was in Excelsior, Minnesota.

      Beginning in 1990 and continuing throughout each of the

years at issue, petitioner operated a sole proprietorship under

the name Native Skies.   (We shall refer to petitioner’s sole

proprietorship Native Skies as petitioner’s sole proprietorship.)

At all relevant times, including during each of the years at

issue, petitioner’s sole proprietorship was engaged in the

business of selling jewelry and certain other items, such as

rugs.

      On April 6, 1994, the Secretary of State of Minnesota

(Secretary of State) issued a certificate of incorporation to a

corporation identified in that certificate as “Native Skies Inc.”

During the years at issue, Native Skies, Inc., was inactive.
                               - 4 -

During those years, no corporate bylaws for Native Skies, Inc.,

and no minutes of any meetings of Native Skies, Inc., existed.

During 1996 and 1997, Native Skies, Inc., did not file an annual

registration form with the Secretary of State and was not in good

standing in the State of Minnesota.4   Native Skies, Inc., did not

file any Federal income tax return, any Federal employment tax

return, or any information return with the Internal Revenue

Service for any of the years at issue.   Nor did Native Skies,

Inc., issue any Form W-2 or any Form 1099 for any of those years.

     During each of the years at issue, petitioner maintained a

business bank account in the name of Native Skies, Inc., at First

National Bank of the Lakes (petitioner’s corporate business bank

account).   During each such year, petitioner deposited into

petitioner’s corporate business bank account business receipts

from petitioner’s sole proprietorship and withdrew from that

account funds to pay expenses associated with petitioner’s sole

proprietorship.

     During each of the years at issue, petitioner and his spouse

maintained two personal joint bank accounts at First National

Bank of the Lakes (petitioner’s personal bank accounts).   During

each month of each of the years at issue, between $3,000 and


     4
      The deemed admissions and matters deemed stipulated indi-
cate that during 1995 Native Skies, Inc., did not file an annual
registration form with the Secretary of State and was not in good
standing in the State of Minn. Respondent acknowledges that that
deemed admission and deemed stipulation is not accurate.
                                - 5 -

$3,600 was automatically transferred from petitioner’s corporate

business bank account into one of petitioner’s personal bank

accounts.    During each such year, petitioner and his spouse used

petitioner’s personal bank accounts primarily for the payment of

their personal expenses.

     In order to calculate the gross receipts that petitioner

derived from petitioner’s sole proprietorship during each of the

years at issue, respondent used the bank deposits method with

respect to petitioner’s corporate business bank account and

petitioner’s personal bank accounts.    According to the bank

deposits method, petitioner had the following gross deposits,

nontaxable deposits, and gross receipts derived from petitioner’s

sole proprietorship for each of the years at issue:

  Year      Gross Deposits   Nontaxable Deposits   Gross Receipts
  1995        $481,365.17         $47,058.58         $434,306.59
  1996         341,029.75          31,000.00          310,029.75
  1997         490,908.45         151,000.00          339,908.45

     In addition to using the bank deposits method in order to

calculate the gross receipts that petitioner derived from peti-

tioner’s sole proprietorship during each of the years at issue,

respondent used billing invoices and/or purchase orders generated

by that business (petitioner’s billing invoices and/or purchase

orders) in order to calculate such gross receipts.    According to

petitioner’s billing invoices and/or purchase orders, petitioner

had the following gross receipts derived from petitioner’s sole
                                - 6 -

proprietorship for each of the years at issue:

           Year              Gross Receipts
           1995                $449,283.08
           1996                 330,646.69
           1997                 339,646.51

     On January 9, 1996, respondent sent petitioner a letter

(respondent’s first notice of inadequate records) notifying him

that he was not keeping adequate records with respect to peti-

tioner’s sole proprietorship, as required by the Code, which

would enable him to report accurately, and respondent to verify

accurately, petitioner’s tax liability.5   Respondent’s first

notice of inadequate records directed petitioner to send respon-

dent within six months an explanation (required explanation) of

how petitioner had corrected his recordkeeping in order to meet

the requirements of the Code.

     On July 22, 1996, respondent sent petitioner a letter

(respondent’s second notice of inadequate records) informing

petitioner that respondent had not received from him the required

explanation.6   Respondent’s second notice of inadequate records

directed petitioner to notify respondent within 15 days about the

steps that he had taken to correct the recordkeeping problems

described in respondent’s first notice of inadequate records.

     5
      Respondent’s first notice of inadequate records did not
indicate the year or years to which that notice pertained.
     6
      Respondent’s second notice of inadequate records indicated
that it pertained to petitioner’s taxable years 1991, 1992, and
1993.
                                - 7 -

     Petitioner did not file a tax return for any of his taxable

years 1995, 1996, or 1997.7    Petitioner made estimated tax pay-

ments in the amounts of $11,824, $3,500, and $2,000 for those

respective years.

     On June 4, 2002, respondent issued a notice to petitioner

with respect to his taxable years 1995, 1996, and 1997.    In that

notice, respondent determined, inter alia, that petitioner had

the following unreported Schedule C net profit8 for the years at

issue:




     7
      In February 1998, petitioner and his spouse filed an appli-
cation for a mortgage (petitioner’s mortgage application) on
their secondary residence in Deerwood, Minn. As noted above,
petitioner did not file a tax return for any of the years at
issue. However, attached to petitioner’s mortgage application
were copies of unfiled returns (petitioner’s unfiled returns) for
those respective years. Schedule C, Profit or Loss From Business
(Schedule C), of each of petitioner’s unfiled returns for the
years at issue reflected that petitioner operated a sole propri-
etorship which was engaged in the business of selling jewelry and
gift items. Those respective Schedules C claimed net profit of
$142,056.13, $132,793.19, and $102,107.20, respectively.
     8
      In determining in the notice petitioner’s Schedule C net
profit for each of the taxable years 1995, 1996, and 1997,
respondent accepted as substantiated by petitioner the following
amounts of cost of sales incurred by petitioner’s sole propri-
etorship:

              Year            Cost of Sales
              1995             $244,521.55
              1996              274,883.38
              1997              223,597.37
                               - 8 -

                   Year            Schedule C Net Profit1
                   1995                 $204,761.53
                   1996                   35,146.37
                   1997                  116,049.14
     1
       The Schedule C net profit that respondent determined in the
notice for each of the years 1995 and 1997 is equal to peti-
tioner’s gross receipts calculated in accordance with peti-
tioner’s billing invoices and/or purchase orders minus the cost
of sales that respondent accepted in the notice as substantiated
by petitioner. With respect to 1995, petitioner’s gross receipts
calculated in accordance with petitioner’s billing invoices
and/or purchase orders (i.e., $449,283.08) was larger than
petitioner’s gross receipts calculated under the bank deposits
method (i.e., $434,306.59). With respect to 1997, petitioner’s
gross receipts calculated in accordance with petitioner’s billing
invoices and/or purchase orders (i.e., $339,646.51) was smaller
than petitioner’s gross receipts calculated under the bank
deposits method (i.e., $339,908.45). The Schedule C net profit
that respondent determined in the notice for 1996 is equal to
petitioner’s gross receipts calculated under the bank deposits
method minus the cost of sales that respondent accepted in the
notice as substantiated by petitioner. With respect to 1996,
petitioner’s gross receipts calculated under the bank deposits
method (i.e., $310,029.75) was smaller than petitioner’s gross
receipts calculated in accordance with petitioner’s billing
invoices and/or purchase orders (i.e., $330,646.69). The record
does not disclose the reasons for the foregoing actions of
respondent.

Respondent further determined in the notice that petitioner was

liable for each of the years at issue for additions to tax under

sections 6651(a)(1) and 6654(a).

                              OPINION

     Respondent concedes that section 7491 is applicable in the

instant case.   With respect to section 7491(a), respondent

maintains that petitioner has not introduced credible evidence

under section 7491(a)(1) or complied with section 7491(a)(2) and

that therefore the burden of proof with respect to respondent’s
                                - 9 -

deficiency determinations for the years at issue does not shift

to respondent.    On the instant record, we agree with respondent.

We conclude that petitioner has the burden of proving that

respondent’s deficiency determinations are wrong.      Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    Respondent,

however, has the burden of proof with respect to the increase in

the addition to tax under section 6651(a)(1) for each of the

years 1996 and 1997 that respondent alleged in respondent’s

amendment to answer.    Rule 142(a)(1).

     At trial, the only issue about which petitioner testified

related to whether during each of the years at issue petitioner’s

sole proprietorship or Native Skies, Inc., operated a business

engaged in selling jewelry and certain other items.9     Petitioner

testified that Native Skies, Inc., and not petitioner’s sole

proprietorship, operated that business.    Petitioner’s testimony

is contrary to the matters deemed established in the instant

case.    We are unwilling to rely on that testimony.   The matters

deemed established show that during each of the years at issue

petitioner’s sole proprietorship, and not Native Skies, Inc.,

operated a business engaged in selling jewelry and certain other

items, such as rugs.    On the record before us, we find that

petitioner has failed to carry his burden of showing that during

each of the years at issue petitioner’s sole proprietorship did

     9
      Although the Court provided petitioner an opportunity to
file a brief in this case, petitioner declined to do so.
                              - 10 -

not operate a business engaged in selling jewelry and certain

other items.

     We turn now to the determinations in the notice.   With

respect to the determinations regarding petitioner’s Schedule C

net profit, petitioner proffered certain documentary evidence at

trial, presumably in support of his position that he does not

have the Schedule C net profit for each of the years at issue

that respondent determined in the notice.   The Court allowed that

documentary evidence into the record as nothing more than peti-

tioner’s self-serving, uncorroborated, and unsubstantiated

summaries of the gross receipts and the expenses that he claims

he has for each of the years at issue.   We are unwilling to rely

on those summaries.   On the record before us, we find that

petitioner has failed to carry his burden of showing that respon-

dent was wrong in determining that petitioner has Schedule C net

profit for each of the years at issue in the amount that respon-

dent determined in the notice.

     With respect to the determinations regarding petitioner’s

filing status, petitioner has failed to carry his burden of

showing that respondent was wrong in determining that peti-

tioner’s filing status for each of the years at issue is married

filing separately.

     With respect to the determinations under section 6651(a)(1),

the matters deemed established show that petitioner did not file
                               - 11 -

a tax return for any of the years at issue.    On the record before

us, we find that respondent has carried respondent’s burden of

production under section 7491(c) with respect to the addition to

tax under section 6651(a)(1) for each of the years at issue that

respondent determined in the notice.    On that record, we further

find that petitioner has failed to carry his burden of showing

that respondent was wrong in determining that petitioner is

liable for each such year for such addition to tax.

     With respect to the increase in the addition to tax under

section 6651(a)(1) for each of the years 1996 and 1997 which

respondent alleged in respondent’s amendment to answer and on

which respondent has the burden of proof, respondent claims that

such an increase for each such year is appropriate for the

following reasons.   As discussed above, in respondent’s amendment

to answer respondent conceded the respective determinations in

the notice under section 6651(a)(2) for the years 1996 and 1997.

According to respondent, respondent’s concession requires that

the amount of the addition to tax under section 6651(a)(1) be

calculated under that section without regard to section

6651(c)(1).   We agree.   On the record before us, we find that

respondent has carried respondent’s burden of showing that the

amount of the addition to tax under section 6651(a)(1) that

respondent determined in the notice for each of the years 1996
                               - 12 -

and 1997 should be increased.10

       With respect to the determinations under section 6654(a),

the matters deemed established show that petitioner did not file

a tax return for any of the years at issue.    Those matters also

show that petitioner made an estimated tax payment for each of

the years at issue in an amount significantly less than the

amount of the deficiency in tax that respondent determined, and

that we have sustained, for each such year.    On the record before

us, we find that respondent has satisfied respondent’s burden of

production with respect to the addition to tax under section

6654(a) for each of the years at issue.    On that record, we

further find that petitioner has failed to establish that any of

the exceptions in section 6654(e) apply in the instant case.    On

the record before us, we find that petitioner has failed to carry

his burden of showing that respondent was wrong in determining

that petitioner is liable for each such year for such addition to

tax.




       10
      It appears that respondent may have made an error in
respondent’s amendment to answer in computing the increase in the
addition to tax under sec. 6651(a)(1) for 1997. It appears that
in that computation respondent failed to credit petitioner with
petitioner’s $2,000 estimated tax payment with respect to 1997.
See sec. 6651(b). Any such computational error shall be taken
into account by the parties in the computations under Rule 155.
                             - 13 -

     To reflect the foregoing and the concessions of respondent

under section 6651(a)(2),

                                   Decision will be entered

                              under Rule 155.
