                               T.C. Memo. 2020-4



                        UNITED STATES TAX COURT



                   JASON HOMMEL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23155-14.                         Filed January 8, 2020.



      Jason Hommel, pro se.

      Monica Cendejas and Erin Kathleen Salel, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      HOLMES, Judge: Jason Hommel began running a coin business from his

garage in 2009. He was good at the business, and the business was good. It soon

outgrew his garage, and Hommel both bought an old coin shop in early 2009 and

opened a new mint-and-coin shop later that fall. But fortune varies, and by the
                                       -2-

[*2] end of 2010 he had been charged with false imprisonment by his workers and

had lost both businesses.

      The Commissioner sent Mr. Hommel a notice of deficiency that said he

owed more than a million dollars in tax for 2009 alone. Mr. Hommel says he

shouldn’t owe this much for 2009 because, in retrospect, he was far along the path

to the ruin he suffered in 2010.

                               FINDINGS OF FACT

      Mr. Hommel is a California native. After graduating from the University of

Colorado in Boulder, he managed a restaurant for just over a year before moving

home to work with his father on precious-metals sales and analysis.1 Mr.

Hommel’s father was a successful businessman, and the two “had a good four or

five years” working and learning together before his death in 2004. That left Mr.

Hommel a good inheritance, which he invested in silver- and gold-mining stocks.

Sometime in the early 2000s Mr. Hommel established an online presence with a

website called SilverStockReport.com. He and a partner figured out how to offer

some features for paid subscribers, and the website became profitable.




      1
       Mr. Hommel and his father were investors in silver and gold, and silver-
and gold-mining stocks. When they started sometime in 1998 or 1999, neither had
much experience in this market, but they quickly became adept.
                                        -3-

[*3] Mr. Hommel’s fortune was at its zenith when 2009 began. He received a

distribution of about $100,000 after terminating the subscription services to his

website, and decided to enter the business of silver-bullion trading. He started to

make online sales out of his home through an auction site called seekbullion.com.

He and a friend would prepare and ship the silver from Mr. Hommel’s garage.

Business was good, and Mr. Hommel was soon making around 30 sales a day.

I.    Coin Shops and Minting

      Success led Mr. Hommel to expand. He convinced himself that he could

both make and sell silver coins himself and that he could do it better than his

competitors. By the fall of 2009 he had opened two coin shops and a mint. The

businesses’ products were good--and apparently in high demand--but unexpected

troubles were about to strike.

      A.     The Rocklin Coin Shop

      Troubles began shortly after Mr. Hommel moved the business out of his

garage and into the Rocklin Coin Shop. Rocklin was an existing business, and

Mr. Hommel bought it on March 20, 2009 from Roger Firstenberger for $50,000.2


      2
        According to Mr. Hommel, however, he paid more “outside of the bill of
sale” including a tip of five “palladium bars” that were worth roughly $2,500 each.
He said the total (including other unspecified consideration) was closer to
$150,000.
                                        -4-

[*4] He’d been one of Rocklin’s “largest customers” before purchasing it, and Mr.

Firstenberger thought Mr. Hommel “underst[oo]d the business very well.” The

shop came complete with a safe, a security system, show cases, and trade tools

such as display counters and desks, but the sale did not include Rocklin’s existing

inventory. No problem--Mr. Hommel had his own inventory of about $1 million

in gold and silver. With this he could stock Rocklin, which he chose to run as a

sole proprietorship.

      To prepare for Rocklin’s opening, Mr. Hommel advertised on his website,

brought his bullion in to fill the safe, and opened a separate bank account. He also

hired MV and JR to be the comanagers of the shop.3 MV was a banker and had

reached out to Mr. Hommel in response to his newspaper advertisement for the

job. JR was a family acquaintance whom Mr. Hommel really didn’t know much

about. Mr. Hommel, MV, and JR were all trained by Mr. Firstenberger in how to

run the shop and how to buy and sell gold and silver from the public.

      On April 1, 2009, Rocklin opened its doors to the public under its new

management. Customers could buy bullion or coins either by cash or wire

transfer, and half of all of Rocklin’s sales were made in cash. Rocklin would buy

      3
         We identify these men by their initials because Mr. Hommel’s allegations
of their misconduct could seriously harm their reputations if believed, and the
truth of his allegations turns out not to be important in computing his tax bill.
                                         -5-

[*5] its inventory from walk-in customers, as well as precious-metal refiners or

other dealers. Mr. Hommel was at first a hands-on manager at Rocklin and was

there about every day through June 2009.

      But Mr. Hommel never intended to work at the shop on a regular basis. His

personal life had become busier, and he wanted to open up a mint and write a

book. This meant he needed to hire more help, so he brought on a friend of MV’s

and JR’s, a man we’ll call GN. Mr. Hommel added both MV and JR to Rocklin’s

bank account in June so that they “would be able to do [their] job[s]” without his

being there. But he thought he needed to have someone at Rocklin’s helm, and he

made MV what he called “fiduciary manager” of the shop.

      Mr. Hommel, however, seems to have wanted a paper trail that would lead

any nosy people away from him. This led to an agreement on paper--where Mr.

Hommel sold Rocklin to MV--as well as an oral agreement between the two.

From Mr. Hommel’s perspective, the oral agreement was as follows: “[MV] was

the day-to-day manager of the shop, and by putting the shop in his name, [MV]

would be the one responsible for filing all the taxes, and of the profits of the store

* * * and [MV and Mr. Hommel] * * * had an oral a[greement] that [Mr. Hommel]

would be paid the profits and [MV] could simply deduct that as advertising costs.”

Lawyers might at this point be concerned that the transaction might look like a
                                        -6-

[*6] sham, but Mr. Hommel claimed to justify this recharacterization of profit as

advertising costs in his own mind as being recompense for the publicity he

brought Rocklin through his website.

      Lawyers might also be concerned that such an oral agreement would leave

Mr. Hommel vulnerable to assertions of the parol evidence rule and statute of

frauds, because it was not at all what was put on paper. On paper Mr. Hommel

simply sold Rocklin to MV. We have in the record a bill of sale dated September

1, 2009, and it looks like a markup of the one between Mr. Hommel and Mr.

Firstenberger: Rocklin’s lease was transferred into MV’s name and MV received

the “safe, security & alarm, office furniture, show cases, and the trade tools and

investments,” but no inventory. That doesn’t mean Rocklin was transferred

without any metal to sell. The same metal was in the store after the sale that was

in it before; to the world it might look like Rocklin’s inventory was the same, but

by not mentioning it in the bill of sale, Mr. Hommel thought MV wouldn’t

“exactly own the inventory.” One might think that this would cause problems as

new metal and coins came in and old metal and coins were sold--the paperwork

had nothing in it to govern the inevitable commingling of old and new inventory.

But Mr. Hommel didn’t think this would be a problem, because he believed that

all the cash flowing into the store was also part of the inventory and thus belonged
                                         -7-

[*7] to him. Inventory (even if one limits it to the traditional definition of stock

held for sale) is not a small item in a coin shop--at the time of the “sale” to MV,

Rocklin’s inventory was worth approximately $1 million.

      As Mr. Hommel explained the deal, his simultaneous oral agreement with

MV would undermine the written transaction: According to the oral agreement,

Mr. Hommel would continue to be the real owner of Rocklin and have the right to

all its profits, while MV would get only a salary. This oral agreement was meant

to “set[] aside the bill of sale, and * * * [MV] was going to assume [a] fiduciary

duty and [Mr. Hommel] would be the beneficiary of that duty * * * .” The only

money that changed hands, under either the written contract or the oral agreement,

was about $55,000--which Mr. Hommel took from Rocklin and placed in an

escrow account. Mr. Hommel sincerely believed that he “retained full ownership

of everything at all time[s] because [MV] never gave [him] any consideration to

buy the store from [him].”

      Mr. Hommel also explained that his plan was to have the three comanagers4

run Rocklin and MV--as “fiduciary manager”--manage the books and records.


      4
        According to Mr. Hommel, Rocklin did not have an employee payroll
system because MV, JR, and GN were all “independent managers” or
“independent contractors” who “ha[d] to make independent decisions and [have]
negotiating abilit[ies] with the customer[s].”
                                         -8-

[*8] MV was to update Mr. Hommel with a weekly report of inventory and sales.

It will come as no surprise to those with a darker view of human nature that

shortly after this transaction MV opened up a separate bank account for Rocklin in

his name alone. September 2009 was also the last time a deposit was made into

Mr. Hommel’s original Rocklin account.

      We are careful to note, at this point in our factfinding, that we also believe

Mr. Hommel when he says that he did not consult with a lawyer, broker, or anyone

else when he crafted this transaction.

      B.     J.H. Mint

      Mr. Hommel then turned his attention to opening a mint.5 To forge this

dream, he had leased a warehouse in Grass Valley, California “around January or

February of 2009.” He then “called around to determine how to build a mint” and

was referred to International Rolling Mills (Rolling Mills), which makes minting

machinery. He struck a deal with Rolling Mills to buy some silver-minting

machines at about $300,000 each. Those machines arrived at the warehouse in

June or July 2009. He then hired Tim Hronis, a building contractor, to be his


      5
        Precious-metal ore must first be refined to remove impurities and produce
a concentrate. The concentrate is then typically sent through a foundry, in which it
is heated until molten and then cast. A mint transforms the shape and size of metal
that has been refined, concentrated, and cast.
                                        -9-

[*9] “building manager” and “manager of the minting machines,” and to help him

build J.H. Mint. Mr. Hommel again papered the transaction in an unusual way by

perhaps putting the warehouse lease in Mr. Hronis’ name.6

       As the machines settled into the back of the warehouse, Mr. Hommel set up

another coin shop in the front. His plan was to add to the usual coin-shop

inventory newly minted silver “rounds”--noncurrency coins--stamped with his

monogram, “J.H.” Mr. Hommel intended for J.H. Mint’s tradable coins to become

as well-recognized in the trade as those he had ordered from other mints and sold

at Rocklin. He thought that this bit of vertical integration would let him turn over

his inventory more quickly and end the hassle of dealing with mints in which he

had lost trust.

       Mr. Hommel, however, needed someone to run the coin-shop side7 of the

business, so he hired DB--his shipping manager for seekbullion.com--to “be the

public face” of J.H. Mint, and he put into place an arrangement with him that



       6
        Mr. Hommel said that Mr. Hronis was the tenant, but then said he wasn’t
exactly sure whether Mr. Hronis held the J.H. Mint lease, or some other lease in
his name.
       7
        The coin shop was stocked with “$50,000 to $100,000” of cash either from
Mr. Hommel’s bank accounts or potentially from the first day of bullion sales
since “you sell bullion to the public” and “boom, you’ve got $100,000”--at least
on a good day.
                                         - 10 -

[*10] mirrored his arrangement with MV at Rocklin. It would appear to the world

that DB was doing business as J.H. Mint, but Mr. Hommel would be the true

owner with the right to all of each month’s inventory and profits. There was never

a bill of sale, so J.H. Mint was never transferred into DB’s name on paper, and no

part of this arrangement was recorded.

      The coin-shop side of J.H. Mint was a success--sometimes accruing extra

cash which was deposited into Mr. Hommel’s personal bank accounts. But he

soon realized that the mint side was “a money pit disaster.” In addition to DB and

Mr. Hronis, there were four other individuals working for J.H. Mint. J.H. Mint

was initially stocked with approximately 200,000 ounces of Mr. Hommel’s silver,

but 100,000 were used to cover repair expenses for the minting machines. With

half of his inventory spent, he didn’t have “enough inventory to fill the machines,”

and “[w]ithin a year [he] realized [he] should just shut down the machine part of it

* * * .” J.H. Mint was unable to make more than 5,000 silver rounds during the

time it was open.

      Mr. Hommel did not register J.H. Mint as a business under California law

and did not incorporate until November 2011, after he sought advice from an

attorney. Neither did he open a separate bank account for J.H. Mint right away,

and instead ran the trades through his personal bank account. He made this choice
                                        - 11 -

[*11] because he was starting to get “a little skeptical” of DB and “was just scared

of theft.” Maybe he was right--DB at some point between J.H. Mint’s opening and

July 2010 opened a bank account for J.H. Mint in his own name.

      C.     The 2010 Fallings Out

      Mr. Hommel’s Rocklin and J.H. Mint arrangements seemed to be running

smoothly through 2009 and into early 2010. He continued to receive a monthly

wire transfer into his personal account from Rocklin--payments which had started

with Rocklin’s opening in April and remained steady until the end of 2009. And

while Mr. Hommel knew that the mint side of J.H. Mint was tanking, at least the

coin-shop side had proved successful.

      But in the summer of 2010 Rocklin and J.H. Mint “kind of went south

together” when Mr. Hommel began to suspect that MV and DB were stealing. Mr.

Hommel noticed in July that DB’s weekly inventory reports were “regularly

inaccurate,” and “were showing significant declines, greater than you could

possibly explain away with regular business activity,” while DB’s own bank

account (d.b.a J.H. Mint) grew. In August 2010 Mr. Hommel decided to fire DB,

but only after convincing him to transfer most of the money in DB’s account over

to a new “fiduciary manager.” When all was said and done, Mr. Hommel believed
                                       - 12 -

[*12] that DB had stolen $76,000 worth of inventory from J.H. Mint and

converted it into cash.8

      Things were even worse at Rocklin. Mr. Hommel was tipped off that

something was awry when Mr. Firstenberger called him with word that MV and

the other comanagers were “telling everybody that [Mr. Hommel’s] not affiliated

with the shop at all.” After hearing this, Mr. Hommel conducted a “spot inventory

check” at Rocklin--comparing his latest inventory report to a physical count--in

September 2010 and found that the inventory was $288,000 short. According to

Mr. Hommel, MV admitted that he had moved $350,000 worth of silver and gold

offsite “in case [they] got robbed by the public.” Mr. Hommel told MV that he

was to bring it all back to the shop. He then decided to take matters into his own

hands. The next day he drove to the shop and, after a heated exchange with JR

and GN, removed all of the inventory from the vault--which by Mr. Hommel’s

count had a value of $160,000 less than it had had the day before.




      8
         Mr. Hommel sued DB for “embezzlement, breach of fiduciary duty [and]
* * * theft.” DB cross-claimed against Mr. Hommel for “[d]efamation of character
for calling him a thief.” It’s unclear whether this case settled, though Mr.
Hommel’s settlement with the Rocklin crew stated that “we will similarly seek to
work towards * * * dropping * * * all claims against [DB].”
                                        - 13 -

[*13] Mr. Hommel became quite upset, and decided to make what he called a

“citizen’s arrest” after he saw a post on Rocklin’s website which read “we will be

open with full inventory on Monday.” He first went to the local police station,

where he dropped off a document he called an “indictment.” He then went to

Rocklin carrying a gun, a chain, and a padlock and subsequently locked JR inside

the store. But this attempt at a citizen’s arrest and reclaiming any missing

inventory was not received well by local law-enforcement officials. The police

arrested him for false imprisonment. A grand jury indicted him, and two years

later he was found guilty. A state court also issued a restraining order that barred

him from going near the shop ever again.

      Mr. Hommel hired an attorney after his arrest and sued all three Rocklin

comanagers in Nevada County Superior Court for theft and embezzlement. MV,

GN, and JR unsurprisingly took the position that the written deal was the real deal

and cross-complained against Mr. Hommel for defamation of character, unlawful

business practices (false advertising and unfair competition), breach of contract,

and trespass, among other things. These cases settled in April 2012, with all

claims dropped and neither party receiving any money. At no point during 2010

did Mr. Hommel file his 2009 tax return.
                                          - 14 -

[*14] II.    Morgan Distribution

       A completely unrelated issue is an unreported distribution of $336,000 from

Morgan Stanley. Mr. Hommel received this distribution from Morgan Stanley into

his personal WestAmerica Bank account during 2009. At trial he admitted that he

failed to report this distribution on his return.

III.   Return, Audit, Notice, and Trial

       A.    Audit and Bank Deposits Analysis

       Mr. Hommel did not file his 2009 tax return until October 5, 2011, and the

total tax shown on his 1040 was zero. Here’s a breakdown of what he reported on

the Schedule C, Profit or Loss From Business (“Coin/Silver Dealer”), of his 2009

return:

                    Gross receipts/other income       $1,122,216
                    Cost of goods sold                  1,641,659
                    Total expenses                        268,725
                      Net loss                          (788,168)

The Commissioner began an audit. During that audit Mr. Hommel did not provide

any records of his gold and silver dealings. He had not made or kept copies, and

he claims that it was legally impossible to access any of his businesses’ records for
                                      - 15 -

[*15] 2009 because they “were the legal domain and purview of [MV] or [DB]”

and because of the restraining order that barred him from Rocklin.

      Because Mr. Hommel had not kept adequate records, the Commissioner

conducted a bank-deposits analysis to reconstruct his income. The revenue agent

analyzed five accounts that Mr. Hommel owned, and he concluded that there was

just under $9.2 million in Schedule C gross receipts--which led the Commissioner

to conclude that Mr. Hommel had failed to report nearly $8.1 million in income.

Here’s a summary:9




      9
        We note that the summary is slightly different from the summary provided
by the Commissioner. However, after we added up the deposits identified in the
bank statements, we believe these are the correct totals.
                                       - 16 -

[*16]                               Date of last
                   Persons with
                                      deposit       Total deposits    Ownership
    Account         signatory
                                    included in        in 2009        disputed?
                    authority
                                       BDA
 WestAmerica
  Bank 964-1
                     Hommel           12/31/2009 $7,615,239.55            No
  (“Personal
  Account”)
 WestAmerica
                     Hommel             4/7/2009     1,076,002.43         No
  Bank 926-6
 Premierwest
                     Hommel
  Bank 0237                                                            Yes, after
                      MV                9/3/2009     1,248,743.38
  (“Rocklin                                                            9/3/2009
                       JR
  Account”)
 WestAmerica         Hommel
                                      12/16/2009       327,000.00         No
  Bank 970-4         Hronis
 Bank of
  America            Hommel            8/31/2009       177,411.43         No
  0180


The agent also reviewed all outgoing wire transfers, and he determined that Mr.

Hommel had understated his cost of goods sold (COGS) by nearly $4.4 million.

This was an adjustment much in Mr. Hommel’s favor, and it meant that Mr.

Hommel was entitled to COGS of more than $6 million.

        B.    Notice and Trial

        The Commissioner issued Mr. Hommel a notice of deficiency in June 2014.

It showed a $1.2 million deficiency and also pressed on a late-filing addition to
                                         - 17 -

[*17] tax and a section 6662(a)10 penalty. Mr. Hommel timely petitioned our

Court. In preparing for trial, the Commissioner assigned a different revenue agent,

Yong Shin, to the case, and Agent Shin again reduced the amount of unreported

taxable deposits that the IRS said that Mr. Hommel had made. He reached this

conclusion after excavating more nontaxable deposits that turned out to be wire

transfers between Mr. Hommel’s bank accounts. Here’s Agent Shin’s summary:

                          Total 2009                                 Non-taxable
 Account                                      Taxable deposits
                           deposits                                   deposits
 WestAmerica
  Bank 964-1
                        $7,615,239.18             $6,958,329.14     $656,910.04
  (“Personal
  Account”)
 WestAmerica
                          1,076,321.52                 -0-          1,076,321.52
  Bank 926-6
 Premierwest Bank
  0237 (“Rocklin          1,248,743.38            1,020,031.88        228,711.50
  Account”)
 WestAmerica
                            327,000.00               30,000.00         297,000.00
  Bank 970-4
 Bank of America
  0180                      177,411.43                 -0-             177,411.43

  Total                 10,444,716.00             8,008,361.00       2,436,354.00


      10
          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, unless we say otherwise.
                                         - 18 -

[*18] This reduced the Commissioner’s estimate of the total unreported deposits to

$6,810,339.11

        We tried this case in San Diego, California,12 where we learned that Peter

Ottinger, a CPA, prepared Mr. Hommel’s 2009 tax return. Mr. Hommel didn’t

specify which documents he gave to Mr. Ottinger for this purpose and guessed that

he may have used the (likely inaccurate) inventory reports that he had received

from MV. Mr. Hommel testified that he and his CPA decided not to report any

trades from Rocklin on his individual 2009 tax return, since MV now owned the

shop.

        Mr. Hommel “strongly disagree[d]” with the Commissioner’s COGS

determination, because it was derived only from bank records and did not include

any of the businesses’ cash transactions. Mr. Hommel did not, however, introduce

any evidence to support this argument.

        Although the Commissioner determined a section 6662(a) penalty for the

year at issue, he failed to introduce at trial any evidence that he’d complied with


        11
          We note here that this final computation of unreported deposits doesn’t
square perfectly with the information supporting the second bank-deposits analysis
that is in the record. We find that the total amount of unreported deposits is what
the Commissioner states in his brief: $6,810,339.
        12
         Mr. Hommel lived in California at all relevant times, which means this
case is appealable to the Ninth Circuit. See sec. 7482(b)(1)(A).
                                         - 19 -

[*19] section 6751(b). See Graev v. Commissioner, 149 T.C. 485, 493 n.14

(2017) (citing Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in

part, rev’g in part T.C. Memo. 2015-42), supplementing and overruling in part 147

T.C. 460 (2016).

                                      OPINION

      Mr. Hommel claims that we should not attribute to him any of this

unreported income discovered by the Commissioner because the ownership of

Rocklin was in dispute after September 3, 2009, and because the coin shop’s

managers stole inventory during the year. But the Commissioner says the store’s

ownership and any thefts after September 3, 2009, are irrelevant because he

considered only deposits into Rocklin’s bank account up until that date--the date

when Rocklin was sold (at least on paper) to MV.

      We address whether these deposits were income to Mr. Hommel for 2009.

We’ll also address the other adjustments that the Commissioner made, whether

Mr. Hommel is liable for an addition to tax and a penalty, and whether we can

grant any of his requests for affirmative relief.

I.    Underreported Income

      The law usually requires us to presume the Commissioner’s notices of

deficiency are correct and places the burden on the taxpayer to prove otherwise.
                                      - 20 -

[*20] See Welch v. Helvering, 290 U.S. 111, 115 (1933). But this case is

appealable to the Ninth Circuit, which requires that the Commissioner first show

“some evidence * * * which would support an inference” of the taxpayer’s

involvement in the activity during the year at issue. Weimerskirch v.

Commissioner, 596 F.2d 358, 361 (9th Cir. 1979) (quoting Gerado v.

Commissioner, 552 F.2d 549, 554 (3d Cir. 1977)), rev’g 67 T.C. 672 (1977). The

Commissioner easily carries this burden, as Mr. Hommel has stipulated that he

bought and sold gold and silver coins in 2009. The Commissioner, therefore, has

correctly attributed Mr. Hommel’s unreported income to his businesses.13

      A.    Bank Deposits Analysis

      When a taxpayer does not keep adequate records of his income, the

Commissioner may reconstruct it, see secs. 6001, 446(b), and may use a taxpayer’s

bank deposits to do so. See Palmer v. IRS, 116 F.3d 1309, 1312 (9th Cir. 1997)

(holding that the IRS may rationally reconstruct income where taxpayers fail to

offer accurate records); Parks v. Commissioner, 94 T.C. 654, 658 (1990). A bank-

deposits analysis assumes that all money deposited in a taxpayer’s bank accounts

during a given period is taxable income, and unexplained deposits are considered

      13
         Mr. Hommel also admitted that he failed to report the $336,000 Morgan
Stanley distribution he received during 2009. We therefore find that this amount
is taxable income to Mr. Hommel.
                                        - 21 -

[*21] prima facie evidence of income. See United States v. Helina, 549 F.2d 713,

715 n.2 (9th Cir. 1977); Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). The

taxpayer then has the burden to show that such deposits were inheritances, loan

proceeds, transfers from another personal account, or otherwise nontaxable. See

Palmer, 116 F.3d at 1312. The Commissioner has to subtract reported income and

income from nontaxable sources that he knows about. Helina, 549 F.2d at 715

n.2. If a taxpayer believes the Commissioner’s computation is unfair or

inaccurate, however, he has the burden to show how it’s wrong. Palmer, 116 F.3d

at 1312.

      We find that the Commissioner is allowed to use the bank-deposits analysis,

because Mr. Hommel failed to provide books and records for his silver and gold

businesses during the audit. We also find that the Commissioner looked at all five

of Mr. Hommel’s available accounts and even had a second agent, Agent Shin,

review the analysis. Agent Shin’s review was thorough--he looked at every

deposit (e.g., wire transfers, cash deposits, cashier’s checks) and found that Mr.

Hommel’s unreported gross receipts on his Schedule C were more than $1 million

less than originally determined. What’s more, even though Mr. Hommel shared

signatory authority on two accounts included in the analysis, most of the
                                        - 22 -

[*22] unreported income was found in his personal checking account and came

mostly from precious metal sales that he himself had made.

      Mr. Hommel argues the analysis is flawed. He describes in some detail the

wrongs he suffered from his former Rocklin and J.H. Mint workers and what he

calls the bad faith of the IRS. We do think Mr. Hommel’s description of his

grievances is sincere, but it just doesn’t affect the merits of the Commissioner’s

analysis, because that analysis looked only at deposits made to Rocklin’s account

before the September 2009 change in ownership. It doesn’t include anything MV

did as Rocklin’s purported owner.

      And any theft from J.H. Mint is likewise irrelevant to the analysis. DB

didn’t have signatory authority for any of the accounts included in the analysis,

and Mr. Hommel admitted that the only other mint worker who had such

authority--Mr. Hronis--never stole from him. The Commissioner also agrees that

most of the deposits made into the account that bore both Mr. Hommel’s and Mr.

Hronis’s names were nontaxable wire transfers.

      And that leads to the real problem here: Mr. Hommel argues that he can’t

owe a deficiency because he has no money to pay it. We understand that a

taxpayer’s financial circumstances when it comes time to pay can look much
                                        - 23 -

[*23] different from the way they did in the tax year at issue. But a taxpayer’s

inability to pay does not mean he doesn’t have a tax deficiency.14

      Nor do we see bad faith in the way the Commissioner conducted his bank-

deposits analysis; and if it turns out not to have been as accurate as it possibly

could have been, the fault lies with Mr. Hommel’s failures at recordkeeping.

Restraining orders aside, Mr. Hommel should have been able to at least try to

obtain records from Rocklin and J.H. Mint, if there were any. And he surely could

have at least produced records for seekbullion.com--one of his businesses without

any ownership dispute or restraining order in place. Had Mr. Hommel kept copies

of records, he could have avoided the bank-deposits analysis altogether. But he

didn’t, and so we find that he underreported his 2009 Schedule C gross receipts by

$6,810,339--as the Commissioner determined.

      B.     COGS and More

      Gross receipts aren’t the same as taxable income. Everyone recognizes that

Mr. Hommel had inventory costs and other expenses. The Commissioner didn’t

challenge the nearly $270,000 in business expenses that Mr. Hommel claimed on




      14
         We urge the Commissioner to tell Mr. Hommel about collection
alternatives at the end of this case.
                                       - 24 -

[*24] his Schedule C. The Commissioner, however, does disagree with Mr.

Hommel’s reported adjustment for COGS and the theft loss that he claimed.

             1.      COGS

      COGS is computed under section 471.15 During the audit, the

Commissioner measured Mr. Hommel’s Schedule C, COGS adjustment. And in

preparing for trial, the Commissioner increased it by more than $4 million after he

reviewed all of Mr. Hommel’s outgoing wire transfers. Yet Mr. Hommel still

disagrees with this number because he believes that the Commissioner failed to

take cash outlays to the public into account.

      The problem here, as throughout much of the case, is that Mr. Hommel kept

no records of any such cash transactions for Rocklin, J.H. Mint, or

seekbullion.com.16




      15
         COGS is the cost of acquiring inventory, through either purchase or
production. See, e.g., Reading v. Commissioner, 70 T.C. 730, 733 (1978), aff’d,
614 F.2d 159 (8th Cir. 1980). No matter the line of business, taxpayers use COGS
to offset their gross receipts when they calculate gross income. See, e.g., Olive v.
Commissioner, 139 T.C. 19, 20 n.2 (2012), aff’d, 792 F.3d 1146 (9th Cir. 2015).
      16
         It also seems likely that the Commissioner incorrectly included the cost
of J.H. Mint’s machinery in COGS, but neither party asks us to correct this error.
                                        - 25 -

[*25]         2.    Theft Loss

        Mr. Hommel also argues that we should consider the thefts he suffered as

we redetermine his 2009 tax bill. But the problem here is one of timing. The

alleged thefts occurred and Mr. Hommel discovered them only in 2010. That’s the

year they would be deductible. See sec. 165(a), (e).

        Mr. Hommel, however, argues less about the details of a theft-loss

deduction under the Code, and more about how he shouldn’t have to owe so much

tax when he lost so much and had so many reversals of fortune. He argues that he

shouldn’t owe any tax at all when by his estimation he suffered an $800,000 loss.

Had the Commissioner not determined that Mr. Hommel underreported his income

and accepted his return as filed, this argument might be valid. But the

Commissioner determined that Mr. Hommel had gross income in 2009 of millions

more than he reported, which means that he did not end 2009 with a loss.

II.     Penalties

        The Commissioner also wants a section 6651(a) addition to tax and a

section 6662(a) accuracy-related penalty against Mr. Hommel for 2009. Mr.

Hommel contests both of these by claiming, among other things, that the

Commissioner is “barred by res judicata and collateral estoppel,” because “the
                                        - 26 -

[*26] penalties pursuant to sections 6651 and 6662 were previously litigated and

conceded by Respondent.”17

      We will first address res judicata and collateral estoppel.

      A.     Res Judicata and Collateral Estoppel

      The problem for Mr. Hommel here is that he wants us to use a stipulated

decision from a different tax year to bar the Commissioner from determining an

addition to tax and a penalty for his 2009 tax year. This means his argument is

really only about collateral estoppel, because res judicata is a different legal

doctrine that doesn’t apply unless there is a final judgment involving “the same

claim and the same tax year.” Commissioner v. Sunnen, 333 U.S. 591, 598 (1948)

(emphasis added); see also Baker v. IRS (In re Baker), 74 F.3d 906, 910 (9th Cir.

1996).

      And collateral estoppel doesn’t work here either, because it requires the

parties to have litigated issues through to a final judgment. The record for the

      17
         Mr. Hommel has made a handful of other requests for affirmative relief
including: $8 million in compensation from the IRS for his pain and suffering and
for destroying his businesses, homes, and financial life, either in the form of, or in
addition to, a full refund of all taxes he’s ever paid; an order to abolish the IRS,
disband it, and send home its employees, or alternatively, a restraining order to
keep the IRS from ever auditing a return or assessing tax from him again; and a
penalty of 10% to 100% of the IRS’ budget to be assessed against it (and
presumably paid to him). We do not have jurisdiction to grant these claims for
relief. See sec. 7442; Wagstaff v. Commissioner, T.C. Memo. 2019-114, at *5-*6.
                                        - 27 -

[*27] 2008 case contains nothing more than a petition, an answer, and a stipulated

decision. Settlements generally don’t collaterally estop parties from litigating the

same issue again. See United States v. Intl. Bldg. Co., 345 U.S. 502, 506 (1953)

(holding that there is no collateral estoppel from a stipulated decision); Warren

Jones Co. v. Commissioner, 68 T.C. 837, 846 (1977) (holding that a stipulated

computation does not give rise to collateral estoppel), aff’d, 617 F.2d 536 (9th Cir.

1980); Massaglia v. Commissioner, 33 T.C. 379, 386 (1959), aff’d, 286 F.2d 258

(10th Cir. 1961).

      B.     Section 6651(a)

      With these defenses struck, we turn next to the addition to tax under section

6651(a)(1). This addition is 5% of the tax due if within the first month the return

is late and “an additional 5 percent for each additional month or fraction thereof

during which such failure continues, not exceeding 25 percent in the aggregate.”

Id. The Commissioner has met his burden here with Mr. Hommel’s 2009 tax

return, which bears a filing date of October 5, 2011--over a year past its due date.

To avoid this addition to tax, a taxpayer must prove that his failure to file was due

to reasonable cause and not due to willful neglect. Id.; United States v. Boyle, 469

U.S. 241, 245 (1985). Mr. Hommel argues that he had reasonable cause since

“this [penalty] was already waived because [he] went to rehab for alcohol in
                                        - 28 -

[*28] 2011,” and because his alcoholism worsened after he discovered what was

going on with his coin shops. We do not make light of Mr. Hommel’s personal

struggle, but we think the Commissioner correctly points out that Mr. Hommel did

not discover the thefts until three months after the return’s due date. We look at

his condition when the return was due, so that even if Mr. Hommel’s troubles

might have been a reasonable cause for not filing, he didn’t know he had them

until after his 2009 return was due. What’s more, Mr. Hommel himself said that

he did not “accurately timely file [his] Form 1040 for tax year 2009” because “i[t]

was late.” We find that his return was late just because he didn’t get it done in

time.

        Mr. Hommel, therefore, owes this addition to tax.

        C.    Section 6662(a) Penalty

              1.    The Basics

        That leaves the 20% accuracy-related penalty that the Commissioner wants

for substantial understatement of the tax due or for negligence or disregard of the

rules or regulations. See sec. 6662(a) and (b)(1) and (2). The Code tells us that an

understatement is substantial if it exceeds the greater of $5,000 or “10 percent of

the tax required to be shown on the return.” Sec. 6662(d)(1)(A). The

Commissioner easily meets this part of his burden because Mr. Hommel’s
                                        - 29 -

[*29] understatement exceeded both 10 percent of the tax he was required to show

and $5,000.

      The regulations tell us that a taxpayer is negligent if he “fail[s] to make a

reasonable attempt to comply with the provisions of the internal revenue laws or to

exercise ordinary and reasonable care in the preparation of [his] tax return.” Sec.

1.6662-3(b)(1), Income Tax Regs. Negligence also includes “any failure by the

taxpayer to keep adequate books and records or to substantiate items properly.”

Id. The Commissioner also meets this part of his burden, because Mr. Hommel

did not provide any records pertaining to his gold and silver dealings. Mr.

Hommel argues that he was unable to obtain these records, but as we’ve already

found, Mr. Hommel failed to provide any records of even those sales completed

before ownership of Rocklin or J.H. Mint was in dispute. Mr. Hommel also never

provided any records relating to his seekbullion.com internet sales. This allows us

to find that he’s failed to keep adequate books and records and signals loudly to us

that he failed to “exercise ordinary and reasonable care.”

      Section 6664(c) provides an out for a taxpayer who can show that he had

reasonable cause for the underpayment and acted in good faith. Good-faith

reliance on a competent professional falls under section 6664(c)’s umbrella. See

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98-99 (2000), aff’d,
                                        - 30 -

[*30] 299 F.3d 221 (3d Cir. 2002). Mr. Hommel mentions that he used a return

preparer, Mr. Ottinger, but to establish this defense he must prove:

      !      his return preparer was a competent professional who had sufficient
             expertise to justify reliance,

      !      he provided necessary and accurate information to his return preparer,
             and

      !      he actually relied in good faith on his preparer’s advice in completing
             his return.

See id. at 99. We are unable to move beyond the first bullet point because we lack

any information about Mr. Ottinger’s expertise. Mr. Hommel urges us to look at

Ottinger’s website, which is just a Google search away, but googling is not a

substitute for evidence at trial.

      What’s more, Mr. Hommel admitted that he didn’t make his CPA aware of

his distribution from Morgan Stanley because it “slipped [his] notice” and that he

failed to provide Mr. Ottinger with any 2009 bank statements. Mr. Hommel was

quite unsure what documentation he actually did provide to Mr. Ottinger. He

therefore has not established that he reasonably relied on his tax preparer.

             2.     Chaighoul

      But section 6751(b)(1) tells us that the Commissioner cannot assess a

section 6662(a) penalty unless it is “personally approved (in writing) by the
                                        - 31 -

[*31] immediate supervisor of the individual making such determination.” It’s

now well known that this provision means that the Commissioner cannot assert a

penalty in a notice of deficiency or an amended answer without that approval, see

Graev III, 149 T.C. at 493 (citing Chai v. Commissioner, 851 F.3d 190), unless the

determination falls within section 6751(b)(2)’s exceptions, see Walquist v.

Commissioner, 152 T.C. 61, 70 (2019). We also know that if there is no evidence

in the record of an essential condition for the imposition of a penalty--such as this

written supervisory approval--the party who has the burden of production loses.18

See Wheeler v. Commissioner, 127 T.C. 200, 210-12 (2006), aff’d, 521 F.3d 1289

(10th Cir. 2008); Ford v. Commissioner, T.C. Memo. 2018-8, 115 T.C.M. (CCH)

1027, 1028 (2018), aff’d, 751 F. App’x 843 (6th Cir. 2018).

      The Commissioner has the burden here, and at trial he didn’t introduce

evidence of supervisory approval. He did, however, move to reopen the record

earlier this year to show that he complied with section 6751(b)(1). In support of

his motion he lodged two declarations: one from John Yu to authenticate the

penalty-approval form and show how Mr. Yu came to approve a penalty

determination; and another from Revenue Agent David Strayer, who claims to

      18
       Mr. Hommel placed the section 6662 penalty at issue in his petition,
which means the Commissioner has the burden of production. See Swain v.
Commissioner, 118 T.C. 358, 364-65 (2002).
                                       - 32 -

[*32] have been the revenue agent who performed the examination of Mr.

Hommel’s 2009 return.

      Mr. Yu says in his declaration that he was Agent Strayer’s immediate

supervisor and that he approved the penalty determination in this capacity by

signing the penalty-approval form. The form itself has no creation date, but it

appears to have been signed by Mr. Yu on April 30, 2014--a date before the June

26, 2014 date of Mr. Hommel’s notice of deficiency.

      But there are some issues with the penalty-approval form: It lists a “Chase

Cunningham” as the examiner of Mr. Hommel’s return and bears no origination

date. This is a problem for the Commissioner because it is the “initial

determination” of a penalty that must be timely approved by the immediate

supervisor “of the individual making such determination.” Both Mr. Yu and

Agent Strayer say in their declarations that this was a simple autopopulation issue

that resulted from Cunningham’s initial and short-lived involvement with the case;

he was just the “agent who originally input this case into the Service’s Report

Generation Software” before the examination was reassigned to Agent Strayer.

      To confirm this autopopulation error, Mr. Yu attached to his declaration an

“Examining Officer’s Activity Record” that he created. And though there is no

origination date, the activity record bears handwritten notations, one dated
                                       - 33 -

[*33] “12/20/13” that reads “Case assigned to David Strayer,” and the other dated

“4/30/14” as the date when the penalty was approved. In his declaration Agent

Strayer confirms this reassignment and says he examined Mr. Hommel’s return

and completed the penalty-approval form. Mr. Hommel objects to the

Commissioner’s motion as untimely and says that allowing the record to be

reopened after the trial record was closed will prejudice him.

      We use our discretion to decide whether to reopen the record for additional

evidence, Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 331

(1971), but we won’t do so unless the evidence a party seeks to add to the record is

not merely cumulative or impeaching, is material to the issues involved, and

would change the outcome of the case, Butler v. Commissioner, 114 T.C. 276, 287

(2000), abrogated on other grounds by Porter v. Commissioner, 132 T.C. 203

(2009). Even if the evidence is material and would change the outcome of the

case, we still need to weigh the Commissioner’s diligence (or lack thereof) against

any possible prejudice to Mr. Hommel if we were to grant the motion to reopen the

record. See SEC v. Rogers, 790 F.2d 1450, 1460 (9th Cir. 1986) (citing Zenith

Radio Corp., 401 U.S. at 332), abrogated on other grounds by Pinter v. Dahl, 486

U.S. 622 (1988); Snuggery-Elvis P’ship v. Commissioner, T.C. Memo. 1992-622,
                                        - 34 -

[*34] 64 T.C.M. (CCH) 1128, 1132 (1992). The Commissioner argues that he has

met these criteria.

      The Commissioner didn’t introduce any evidence at trial that he’d complied

with section 6751(b)(1), so we can’t say that the penalty-approval form is merely

cumulative or impeaching. The penalty-approval form is material and if credible,

would likely change the outcome of the case. See Butler, 114 T.C. at 287;

Shuman v. Commissioner, T.C. Memo. 2018-135, at *25-*26. The penalty-

approval form itself is also nonhearsay, see Fed. R. Evid. 801(c) advisory

committee’s note (“If the significance of an offered statement lies solely in the fact

that it was made, no issue is raised as to the truth of anything asserted, and the

statement is not hearsay.”), and the Commissioner has also properly authenticated

it, see Fed. R. Evid. 901(b)(7)(B) (stating the authentication requirement met by

evidence that “a purported public record or statement is from the office where

items of this kind are kept”).

      The mystery name on the approval form, however, calls into question

whether Agent Strayer was in fact the individual who made the penalty

determination and whether his report was even the initial determination.

      In Palmolive v. Commissioner, 152 T.C. 75, 88 (2019), the taxpayer argued

that the Commissioner hadn’t proved exactly how or when the revenue agents
                                        - 35 -

[*35] made their initial determinations to assert penalties. We disposed of this

argument because “the subordinate employee[s] made [their] respective ‘initial

determination[s]’ at the time [they] solicited [their] supervisor’s approval.” Id.

We reasoned that to find otherwise would be “speculation” because “we kn[e]w of

no other inference about the timing of the ‘initial determination.’” Id. The dates

when the revenue agents solicited their supervisor’s approval were the dates on

which the supervisor signed the penalty-approval forms. Id. at 79-81.

      We also held in Palmolive that section 6751(b)(1) “does not require any

particular writing by the individual making the penalty determination, nor any

signature or written name of the individual.” Id. at 86 (emphasis added). The

penalty-approval form in Palmolive did not bear the name of the revenue agent

who made the initial determination, or any name at all. Id. Palmolive is

distinguishable, however, because the parties there stipulated the identity of the

IRS employees involved. They didn’t here.

      This is a problem for the Commissioner. The only thing linking Agent

Strayer to an immediate supervisor is his declaration swearing he indeed made the

initial determination and got the written approval from his supervisor, Mr. Yu.

This means that the Commissioner is trying to both introduce and undermine his

own penalty-approval form. The problem here is that the form doesn’t speak for
                                       - 36 -

[*36] itself, and the declarations that the Commissioner seeks to have admitted are

hearsay. We think Mr. Hommel is correct when he argues that this means he

would be prejudiced by their admission after trial and without any opportunity for

cross-examination.

      It is for this reason, and this reason alone, that Mr. Hommel is not liable for

this accuracy-related penalty.

      This is a split decision and concessions were made so,


                                                Decision will be entered under

                                       Rule 155.
