                         T.C. Memo. 2003-139



                       UNITED STATES TAX COURT



              ALBERT DUDLEY THROWER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14625-92.              Filed May 15, 2003.


     Albert Dudley Thrower, pro se.

     John M. Tkacik, Jr., for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:    Respondent determined the following

deficiency and additions to tax with respect to petitioner’s 1988

Federal income tax:1



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

                                Additions to Tax
                        Sec.           Sec.           Sec.
     Deficiency       6651(a)(1)    6653(a)(1)       6654(a)

     $1,020,626      $255,156.50       $51,031       $65,550


     The issues for decision are:   (1) The amount, if any, of

petitioner’s 1988 unreported rental income; (2) whether

petitioner had $3,400,351 of unreported income from illegal

activities in 1988, as respondent determined; and (3) whether

petitioner is liable for additions to tax.2

                         FINDINGS OF FACT

     When he petitioned this Court, petitioner was incarcerated

at Allen Correctional Institute in Lima, Ohio.

     During 1988, petitioner owned at least 141 rental properties

in Akron, Ohio.   Conducting business under the name of “College

Rentals”, 545 Grant Street, Akron, Ohio, he rented these

properties mainly to college students.

     In August 1988, the Akron, Ohio, Police Department arrested

petitioner on charges of trafficking in marijuana.    The arrest

occurred in the apartment of one of petitioner’s associates at

80 S. Portage Path, Akron, Ohio.




     2
       On brief, petitioner has advanced various meritless
arguments. For example, petitioner contends that the limitations
period for assessing his 1988 tax liability has expired.
Petitioner, however, failed to file a 1988 tax return; therefore,
“the tax may be assessed * * * at any time.” Sec. 6501(c)(3).
                                 - 3 -

     In February 1989, petitioner pleaded guilty to trafficking

in marijuana and other related offenses.   He received a prison

term of 7 to 25 years and was ordered to forfeit 141 of his

rental properties.   See Thrower v. Anderson, No. 98AP-1152 (Ohio

Ct. App. May 18, 1999); State v. Thrower, No. 14967 (Ohio Ct.

App. July 31, 1991); State v. Thrower, 575 N.E.2d 863, 876-877,

879 (Ohio Ct. App. 1989).

     For 1988, petitioner filed no Federal income tax return and

paid no estimated taxes.

                                OPINION

1.   Unreported Rental Income

     In the notice of deficiency, respondent determined that in

1988 petitioner had $217,460 of unreported net rental income,

representing $543,851 of gross rental income reduced by $98,501

of depreciation expense and $227,890 of other rental expenses.

     In his petition, petitioner affirmatively acceded to these

determinations.3   At trial, petitioner offered into evidence a

photocopy of a 1988 Form 1040, U.S. Individual Income Tax Return

(the purported return), which he contended was “my 1988 tax

     3
       The petition states: “I do not contest the rental income
and expenses.” Moreover, petitioner failed to respond to
respondent’s requests for admissions, which set forth the same
amounts of gross receipts, expenses, and depreciation
attributable to his rental properties as contained in the notice
of deficiency. Pursuant to Rule 90(c), petitioner is deemed to
have admitted these matters. See Freedson v. Commissioner, 65
T.C. 333, 335-336 (1975), affd. 565 F.2d 954 (5th Cir. 1978).
                               - 4 -

return * * * signed under oath.”   The purported return is dated

September 8, 2002–-2 days before trial.   On line 18 (“Rents,

royalties, partnerships, estates, trusts, etc.”) of the purported

return, petitioner listed $445,354 of net rental income--a

significantly greater amount than respondent had determined in

the notice of deficiency--representing $1,212,140 of rents

received, reduced by $98,499 of depreciation expense and $668,287

of other rental expenses.   On line 15 (“Other gains or (losses)”)

of the purported return, petitioner listed $2,283,273 of alleged

losses which he contends resulted from “involuntary conversion”

of his forfeited rental properties.

     After trial, with leave of the Court, respondent filed an

amendment to his answer, asserting an increased deficiency and

additions to tax in conformity with the evidence that

petitioner’s 1988 net rental income is $445,352.4

     Petitioner has not sought to retract or disavow his

admissions on the purported return as to the amounts of his gross

rental income, rental depreciation expense, and other rental

expenses.   He argues, however, that his net rental income is more

than offset by the $2,283,273 of losses that he claimed on the

purported return.



     4
       Respondent attributes to rounding the $2 difference
between the amounts of net rental income indicated on the
purported return and as calculated in the amended answer.
                                - 5 -

     In his petition, petitioner did not raise the issue of

losses allegedly resulting from the forfeiture of his rental

properties.   He did not seek to amend his petition to raise this

issue, nor did he otherwise give proper notice before trial that

he intended to raise it.    Accordingly, the issue is not before

the Court, and we will not consider it.    See Frentz v.

Commissioner, 44 T.C. 485, 490-491 (1965), affd. per order 375

F.2d 662 (6th Cir. 1967).

     Even if the issue were properly before us, however,

petitioner would not be entitled to the claimed losses.

Petitioner failed to introduce any credible evidence to establish

the amounts of the alleged losses or the year in which they might

have been realized.   Indeed, because the forfeitures occurred

after petitioner’s guilty plea in February 1989, they would not

have given rise to any loss in 1988.    See sec. 461(a); sec.

1.446-1(c)(1), Income Tax Regs.    In any event, losses resulting

from drug traffickers’ asset forfeitures are disallowed as

contravening clearly defined public policy.5   See, e.g., Holt v.

     5
       On brief, petitioner suggests that the above-cited
principle of public policy is nongermane here because his claimed
losses did not result from a forfeiture related to drug
trafficking but rather from a “breach of contract” as a result of
a “reneged plea agreement.” Contrary to petitioner’s
contentions, the Ohio Court of Appeals has repeatedly and
consistently characterized the disposition of petitioner’s 141
rental properties as a forfeiture related to his drug trafficking
charges. See, e.g., State v. Thrower, No. 20615 (Ohio Ct. App.
Mar. 13, 2002); Thrower v. Anderson, No. 98AP-1152 (Ohio Ct. App.
                                                    (continued...)
                               - 6 -

Commissioner, 69 T.C. 75, 79-81 (1977), affd. 611 F.2d 1160 (5th

Cir. 1980); Bailey v. Commissioner, T.C. Memo. 1989-674, affd.

without published opinion 929 F.2d 700 (6th Cir. 1991).

      In conclusion, we hold that for 1988 petitioner had

unreported net rental income of $445,352.

2.   Unreported Income From Illegal Activities

      In the notice of deficiency, respondent determined that

during the first 8 months of 1988, petitioner received $3,823,364

of “unreported funds by illegal means”.   To arrive at this

figure, respondent first determined that petitioner’s alleged

illegal receipts for the month of August 1988 totaled

$477,920.50; respondent then projected petitioner’s alleged




      5
      (...continued)
May 18, 1999); State v. Thrower, 621 N.E.2d 456, 457 (Ohio Ct.
App. 1993); State v. Thrower, No. 14967 (Ohio Ct. App. July 31,
1991); State v. Thrower, 610 N.E.2d 433, 434 (Ohio Ct. App.
1991); State v. Thrower, 575 N.E.2d 863, 876-877, 879 (Ohio Ct.
App. 1989).

     Petitioner also seeks to assert in this action a breach of
contract “counterclaim” against respondent for “$250
million/specific performance as to property”. We lack authority
to address such a claim. The Tax Court is a court of limited
jurisdiction and may exercise only the power conferred by
statute. See sec. 7442; Neilson v. Commissioner, 94 T.C. 1, 9
(1990). Petitioner’s “counterclaim” falls outside that
jurisdiction.
                                 - 7 -

illegal receipts for the first 8 months of 1988 as being 8 times

this amount.6

     If a taxpayer keeps inadequate records, the Commissioner may

compute the taxpayer’s income by any indirect method that is

reasonable in light of all the facts and circumstances.    See United

States v. Walton, 909 F.2d 915, 918 (6th Cir. 1990); see also United

States v. Fior D’Italia, Inc., 536 U.S. 238, 243 (2002) (stating

that IRS assessment authority under section 6201(a) is not exceeded

“when the IRS estimates an individual’s tax liability–-as long as

the method used to make the estimate is a ‘reasonable’ one”).      If

necessary, the Commissioner may reconstruct a taxpayer’s income,

provided the result is reasonable and substantially correct.

Mendelson v. Commissioner, 305 F.2d 519, 521-522 (7th Cir. 1962),

affg. T.C. Memo. 1961-319; Cebollero v. Commissioner, T.C. Memo.

1990-618, affd. 967 F.2d 986 (4th Cir. 1992).    The Commissioner’s

income reconstruction need not be exact, but it must be “reasonable

in light of all surrounding facts and circumstances.”     Schroeder v.

Commissioner, 40 T.C. 30, 33 (1963).

         Respondent reconstructed petitioner’s alleged illegal income

using the projection method, which “has received widespread judicial

approval.”     Jackson v. Commissioner, 73 T.C. 394, 403 (1979).   In

general, the projection method entails extrapolating income for a

     6
       In the notice of deficiency, respondent also allowed
petitioner a $423,013 deduction for cost of goods sold relative
to the alleged illegal income.
                                - 8 -

taxable period from records of income produced by the activity in

question over some shorter period.   See, e.g., United States v.

Janis, 428 U.S. 433, 437 (1976) (upholding projection of 77 days’

income based upon 5 days’ gross proceeds as indicated in wagering

records); United States v. Besase, 623 F.2d 463, 468 (6th Cir. 1980)

(upholding reconstruction of income based on 4 days’ gross gambling

receipts as indicated on adding machine tapes).   Obviously, the

reliability of the results obtained under this method depends upon

the reliability of the starting point; i.e., the adequacy of the

data used to extrapolate the projected income.    Cf. Thomas v.

Commissioner, 223 F.2d 83, 89 (6th Cir. 1955) (“‘To be dependable,

however, the [net worth] method requires a starting point,

reasonably well established as accurate.’” (quoting Gariepy v.

United States, 189 F.2d 459, 461 (6th Cir. 1951))).

     In employing the projection method here, respondent used as his

starting point petitioner’s alleged illegal receipts for the month

of August 1988.   To arrive at this starting point, respondent relied

upon information derived from a notebook that the Akron Police

Department allegedly seized from petitioner’s briefcase upon his

arrest at 80 S. Portage Path, in Akron, Ohio.

      At trial, respondent sought to introduce into evidence certain

photocopied pages (the photocopied pages) that respondent claimed to

be a true copy of the notebook in question.   Respondent was unable
                                - 9 -

to account for the original notebook or for apparently missing pages

of the exhibit.7

     The photocopied pages show columns of numbers added and

subtracted, accompanied by various marginal notations, at least some

of which were made by law enforcement personnel or by respondent’s

examining agent.   Throughout the photocopied pages are faint,

illegible markings as might result from erasures.   The notebook

pages reproduced in the photocopied pages contain no identifiable

direct or indirect references to petitioner.

     Petitioner denies that any of the handwriting in the

photocopied pages is his.   At a pretrial hearing, in response to

petitioner’s inquiry on this point, respondent’s counsel conceded

that the handwriting in the photocopied pages is not petitioner’s.8

Although respondent’s counsel belatedly attempted to retract this

concession at trial, no competent evidence was offered to establish



     7
       The photocopied pages are numbered C-4 through C-31.
Respondent did not attempt to account for the apparently missing
pages C-1 through C-3. Respondent’s counsel explained only that
the page numbers were “marked by Respondent * * * during
examination”.
     8
       At trial the next day, respondent’s counsel represented
that he “misspoke” in making this concession and stated “I think
I clarified that later on the record.” The record reflects no
such clarification intelligibly made. To the contrary, it
reflects that respondent’s counsel took no exception when on at
least nine separate occasions during the remainder of the
pretrial hearing, petitioner referred to what he–-and the Court–-
understood to be respondent’s concession and stated that in light
of it, he (petitioner) would forgo calling his own handwriting
witness.
                                 - 10 -

that any of the handwriting in the photocopied pages is

petitioner’s.

     Respondent’s sole witness was a former Akron Police Department

officer who had been in charge of petitioner’s criminal

investigation and who, since leaving the Akron Police Department in

1991, has owned and operated his own consulting business.

Respondent’s witness acknowledged that some of the handwriting and

markings in the photocopied pages were his own, apparently made in

the course of his analyzing the notebook at some unspecified time

and in unspecified circumstances.   Respondent’s witness (who was not

present when petitioner was arrested and the notebook was allegedly

seized) was unable to authenticate the photocopied pages or even to

identify them satisfactorily.9   Respondent established no chain of

custody of the notebook or notebooks–-a concern that gains in

significance given that the photocopied pages appear to be an

incomplete and corrupted version of the original document or

documents.

     Because of these various evidentiary infirmities, the Court

sustained petitioner’s objection to the admission of the photocopied

pages into evidence.   On brief, respondent has not sought to revisit

this evidentiary ruling and appears to have abandoned any reliance


     9
       Respondent’s witness identified the photocopied pages as a
true copy of a notebook seized from petitioner’s briefcase at his
arrest. Internal handwritten notations in the photocopied pages,
however, identify approximately the last half of the photocopied
pages as having been found at an address other than the place of
petitioner’s arrest.
                                 - 11 -

on the photocopied pages.   Instead, respondent argues on brief that

the reasonableness of his determination of the amount of

petitioner’s 1988 alleged illegal income is established by the

testimony of respondent’s witness.   At trial, the testimony on this

point was as follows:

          [RESPONDENT’S COUNSEL:] * * * based on your
     experience as a police officer investigating narcotics
     activity, and your knowledge of Mr. Thrower’s involvement
     in the marijuana trafficking, is it reasonable to
     determine that Mr. Thrower had receipts of $477,920 during
     the month of August ‘88?

          [RESPONDENT’S WITNESS:] That’s correct.

      In asking this leading question, respondent’s counsel

ostensibly sought to elicit expert opinion testimony on the basis of

the witness’s specialized knowledge as a former police officer,

notwithstanding that respondent’s witness was never formally offered

as an expert witness.10   Cf. Chagra v. Commissioner, T.C. Memo. 1991-

366 (“It is well settled that the testimony of a drug enforcement

officer with respect to the valuation of illegal narcotics is expert


     10
       Upon commencing direct examination of respondent’s
witness, respondent’s counsel stated that he was calling the
witness as both a fact witness and an expert witness. At the
Court’s direction, respondent’s counsel commenced direct
examination with questions relating to the witness’s role as a
fact witness. Respondent’s counsel gave no overt indication of
ever moving to the expert witness phase of the testimony.

     Before trial, pursuant to Rule 143(f) respondent submitted
to the Court a copy of a putative expert report prepared by
respondent’s witness. Respondent never offered the expert report
into evidence. The expert report made a fleeting appearance in
the courtroom, however, when respondent’s counsel produced the
version of the photocopied pages he offered into evidence by
physically detaching them from the expert report.
                                  - 12 -

testimony.”), affd. without published opinion 990 F.2d 1250 (2d Cir.

1993).    Considering the testimony as expert opinion testimony, we do

not believe it is properly based upon “sufficient facts or data” or

upon “reliable principles and methods” applied “reliably to the

facts” of this case, as required by rule 702 of the Federal Rules of

Evidence.11    Earlier in the trial, respondent’s witness had testified

that he had relied on the photocopied pages as the basis for his

conclusion that petitioner’s drug-related income for the first 8

months of 1988 should be computed as eight times approximately

$477,000.     At trial, it was apparent that in giving an affirmative

response to the above-quoted leading question, respondent’s witness

was merely reaffirming his prior opinion, which was based on the

photocopied pages.    Having concluded that the photocopied pages are

unreliable evidence which respondent has failed to adequately

connect with petitioner, we conclude that the expert opinion




     11
          Fed. R. Evid. 702 provides as follows:

          If scientific, technical, or other specialized
     knowledge will assist the trier of fact to understand
     the evidence or to determine a fact in issue, a witness
     qualified as an expert by knowledge, skill, experience,
     training, or education, may testify thereto in the form
     of an opinion or otherwise, if (1) the testimony is
     based upon sufficient facts or data, (2) the testimony
     is the product of reliable principles and methods, and
     (3) the witness has applied the principles and methods
     reliably to the facts of the case.
                               - 13 -

testimony based thereon is also unreliable and entitled to little or

no weight.12

     In the final analysis, it is apparent, on the basis of all the

evidence in the record, that respondent’s deficiency figures for

petitioner’s alleged illegal income are predicated on the unreliable

and inadmissible evidence of the photocopied pages.   In Rosano v.

Commissioner, 46 T.C. 681, 687 (1966), we observed that “the

Commissioner’s determination may often rest upon hearsay or other

inadmissible evidence, and we know of no rule of law calling for a

review of the materials that were before the Commissioner in order

to ascertain whether he relied upon improper evidence”.   By the same

token, however, if the Commissioner undertakes to demonstrate the

basis of his determination with unreliable evidence and in the

process convinces the Court that his determination is arbitrary,



     12
       In light of our conclusion that the testimony in question
was proffered as expert testimony, based on “specialized
knowledge” of respondent’s witness as a former police officer, it
follows that the testimony is not admissible as opinion testimony
by a lay witness under Fed. R. Evid. 701 (providing that opinion
testimony by lay witnesses is limited to opinions that are not
based on, among other things, “scientific, technical, or other
specialized knowledge within the scope of Rule 702.”). Even if
we had concluded, however, that the opinion testimony in question
was not based on specialized knowledge within the scope of Fed.
R. Evid. 702, we would nevertheless disregard the testimony as
improper opinion testimony by a lay witness, in that respondent’s
witness failed to establish a reliable factual predicate for his
opinion testimony. See Chagra v. Commissioner, T.C. Memo. 1991-
366, affd. without published opinion 990 F.2d 1250 (2d Cir.
1993); see also United States v. Williams, 212 F.3d 1305, 1310
(D.C. Cir. 2000) (“to admit lay opinion evidence rationally based
on the witness’s perception, a sufficient factual foundation must
exist”).
                                 - 14 -

then the Government may be “elevated on its own powder charge”.

Jackson v. Commissioner, 73 T.C. at 403.     In that event, “the burden

is no longer on petitioner to show that he owes nothing, or the

correct amount, if any, that he does owe.”     Id. (citing Helvering v.

Taylor, 293 U.S. 507 (1935)); see Harp v. Commissioner, 263 F.2d

139, 141 (6th Cir. 1959) (“the Commissioner’s determination is

presumed correct, but if error is shown, the presumption disappears

and the Commissioner then has the burden of proving the correctness

of his determination, or at least the correct amount actually

due.”), affg. in part, revg. in part and remanding T.C. Memo. 1957-

105.

       Having admitted that he derived his deficiency figures for

petitioner’s alleged illegal income from the photocopied pages and

having undertaken at trial to establish the reasonableness of his

determination on that basis, respondent has in the process

inadvertently convinced us that his deficiency figures were

unreliably derived.    In particular, respondent’s belatedly retracted

admission that the photocopied pages (which respondent has not

otherwise adequately connected with petitioner) are not in

petitioner’s handwriting seems plainly inconsistent with the basis

of respondent’s reconstruction of petitioner’s income.

       Taxpayers may not avoid the imposition of legally due taxes by

concealing facts, but neither may the Commissioner base his

determination on a “‘strong underlying element of guess work.’”
                                 - 15 -

Jacobs v. Commissioner, T.C. Memo. 1974-73 (quoting Polizzi v.

Commissioner, 265 F.2d 498, 502 (6th Cir. 1959), affg. in part and

revg. in part T.C. Memo. 1957-159).    In the instant case, as in

Thomas v. Commissioner, 223 F.2d at 90, respondent’s reconstruction

of petitioner’s alleged illegal income may have the “inviting

quality of apparent exactitude” but ultimately proves conjectural.

Cf. Jackson v. Commissioner, supra at 403 (“the elaborate construct

set out in the deficiency notice, based solely as it was on a

secondhand report of peripheral statements made by an unreliable

informant, turns out to be sheer gossamer”).    We conclude that

respondent’s deficiency figures were so arbitrarily derived as to

negate any presumption of correctness.    The record provides no

reliable basis for estimating petitioner’s alleged illegal income.

Accordingly, respondent’s determination with respect to this issue

is not sustained.

3.   Additions to Tax

      a.   Addition to Tax for Failure To Timely File a Return

      Respondent determined that petitioner is liable for the section

6651(a)(1) addition to tax for failure to timely file his 1988

Federal income tax return.    Section 6651(a)(1) imposes an addition

to tax for failure to timely file a return unless the taxpayer

establishes that the failure “is due to reasonable cause and not due

to willful neglect”.    A delay is due to reasonable cause if “the

taxpayer exercised ordinary business care and prudence and was
                                - 16 -

nevertheless unable to file the return within the prescribed time”.

Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

     It is undisputed that petitioner failed to timely file his 1988

tax return.   Petitioner alleges, however, that he was unable to

timely file his tax return because he was incarcerated and because

his business records were confiscated after his arrest.

     The mere fact that petitioner was incarcerated when his return

was due is not reasonable cause for his failure to timely file.

Llorente v. Commissioner, 74 T.C. 260, 268-269 (1980), affd. in

part, revd. in part on other grounds and remanded 649 F.2d 152 (2d

Cir. 1981); Labato v. Commissioner, T.C. Memo. 2001-243.    Nor is the

unavailability of records generally reasonable cause for failure to

file a timely return.   See Young v. Commissioner, T.C. Memo. 1989-

480, affd. without published opinion 937 F.2d 609 (6th Cir. 1991).

Nothing in the record suggests that petitioner applied for an

extension of time to file his 1988 return; petitioner has not shown

that he could not have prepared a timely 1988 return with a

reasonable degree of accuracy on the basis of the information
available to him as of the due date of that return.   See Cook v.

Commissioner, T.C. Memo. 1999-50.   Petitioner has not established

that his failure to timely file his return was due to reasonable

cause.   Therefore, we hold that petitioner is liable for the section

6651(a)(1) addition to tax with respect to the deficiency

attributable to his unreported net rental income.
                                - 17 -

     b.   Addition to Tax for Negligence

     Respondent determined that petitioner is liable for the section

6653(a)(1) addition to tax for an underpayment attributable to

negligence or disregard of rules or regulations.    In this context,

negligence is “‘lack of due care or failure to do what a reasonable

and ordinarily prudent person would do under the circumstances.’”

Midwest Indus. Supply, Inc. v. Commissioner, T.C. Memo. 1996-130

(quoting Neely v. Commissioner, 85 T.C. 934, 947 (1985)), affd.

without published opinion 125 F.3d 855 (6th Cir. 1997).

     Petitioner does not contend that he paid his 1988 tax

liability.   He has failed to show that his underpayment was not

attributable to negligence or disregard of rules or regulations.

Therefore, we hold that petitioner is liable for the section

6653(a)(1) addition to tax with respect to the deficiency

attributable to his unreported net rental income.

     c.   Addition to Tax for Underpayment of Estimated Tax
     Respondent determined that petitioner is liable for the section

6654(a) addition to tax for underpayment of estimated tax.
     During the year at issue, petitioner filed no tax return and

paid no estimated taxes.   Petitioner has not shown that any of the

exceptions contained in section 6654(e) applies.    Accordingly, we

hold that petitioner is liable for the section 6654(a) addition to

tax with respect to the deficiency attributable to his unreported

net rental income.
                                 - 18 -

     In reaching our holding, we have considered all arguments

the parties have raised.   Arguments not addressed herein we have

concluded are irrelevant or without merit.

     To reflect the foregoing,


                                          Decision will be

                                    entered under Rule 155.
