                        T.C. Memo. 2007-341



                      UNITED STATES TAX COURT



                 CREED J. PEARSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16460-06.               Filed November 19, 2007.




     Creed J. Pearson, pro se.

     Mary Ann Waters, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   Respondent determined deficiencies in, and

additions to, petitioner’s Federal income tax for taxable years

1999 through 2003 as follows:
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                                           Additions to Tax
                                 Sec.           Sec.          Sec.
         Year   Deficiency     6651(f)       6651(a)(2)       6654
         1999    $379,134    $274,850.40     $94,776.00   $18,346.93
         2000     281,581     204,144.05      70,394.50    15,040.43
         2001     452,670     328,185.75     113,167.50    18,090.37
         2002     109,345      79,275.13      20,775.55       3,653.96
         2003      70,143      50,853.68       9,118.59       1,835.66

All section references are to the Internal Revenue Code in effect

for the years in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure.          After concessions,1 the

issues remaining for decision are:

     (1)    Whether petitioner is entitled to any expense

deductions claimed on Schedule A, Itemized Deductions, or

Schedule C, Profit or Loss From Business, above those that

respondent concedes.        We hold that he is not;

     (2)    whether petitioner may audit an organization that is

not a party to this case and pay the taxes he owes from the

proceeds of that audit.        We hold that the Internal Revenue Code

(the Code) does not permit this offset against petitioner’s

income tax deficiency;




     1
       Petitioner concedes that he received income in the amounts
that respondent determined for the years in issue. Respondent
concedes that petitioner is entitled to some Schedule A itemized
deductions and Schedule C business expense deductions.
                                  -3-

     (3)    whether petitioner is liable for an addition to tax for

fraudulent failure to file a return under section 6651(f) or,

alternatively, an addition to tax for failure to file a timely

return under section 6651(a)(1), for each year in issue.    We hold

that he is liable for an addition to tax for failure to file a

timely return under section 6651(a)(1) for each year;

     (4)    whether petitioner is liable for an addition to tax for

failure to pay his tax liability under section 6651(a)(2) for

each year in issue.    We hold that he is;

     (5)    whether petitioner is liable for an addition to tax for

failure to pay estimated tax under section 6654 for each year in

issue.     We hold that he is liable for additions to tax for years

2000 through 2003, but not for 1999.

                           FINDINGS OF FACT

     Some facts have been stipulated and are so found.    The

stipulated facts and the exhibits submitted therewith are

incorporated herein by this reference.

     At the time he filed his petition, petitioner resided in

Arlington, Virginia.

     Petitioner received taxable income of $926,511, $692,617,

$1,116,134, $284,120, and $201,718 in 1999, 2000, 2001, 2002, and

2003, respectively.    The bulk of this was self-employment income

that petitioner received as a hospital reimbursement consultant.

During the relevant period, petitioner worked with nearly 1,000
                                 -4-

hospitals reviewing and preparing Medicare cost reports.

Petitioner performed all of the auditing work himself, and the

hospitals compensated him with a percentage of the additional

payments he obtained for them.   In connection with his business,

petitioner paid commissions to business associates who obtained

contracts for him, made Freedom of Information Act (FOIA)

requests, and incurred other expenses.   Petitioner also paid

$75,503 of mortgage interest during this period.

     Petitioner began his business before 1996, and he timely

filed his Federal income tax returns and paid his tax liabilities

every year through 1998.   Petitioner filed extensions to file tax

returns for years 1999 through 2003, but he did not file returns

for those years.   During an examination of the years in issue, a

revenue agent attempted to meet with petitioner and to obtain

documents from him, but petitioner was unresponsive.   As a

result, respondent requested documents from third parties and

prepared returns for years 1999 through 2003 pursuant to section

6020(b).   Petitioner did not make estimated tax payments or have

any withholding for those years, but he did make a $112,000

payment toward his 2000 tax liability.

     On May 24, 2006, respondent issued a notice of deficiency to

petitioner for years 1999 through 2003, and petitioner timely

petitioned this Court contesting respondent’s determinations.

Petitioner strongly opposes the beliefs and actions of a
                                 -5-

particular organization (the Organization), and he asks that we

allow him to audit the Organization and pay the taxes he owes out

of the proceeds of that audit, even though petitioner’s tax

liability is not related to the Organization.   Petitioner has not

filed Federal income tax returns for any year after 2003, and he

does not intend to file voluntarily any returns or pay any tax

until respondent takes some action against the Organization.       In

trying to resolve some of the issues in this case, petitioner has

provided summaries of his expenses for the years in issue but has

not provided any corroborating documents.

                               OPINION

Deductions

     A taxpayer bears the burden of proving that the

Commissioner’s determinations set forth in the notice of

deficiency are incorrect.   Rule 142(a)(1); Welch v. Helvering,

290 U.S. 111, 115 (1933).    Tax deductions are a matter of

legislative grace, and a taxpayer has the burden of proving that

he is entitled to the deductions claimed.   Rule 142(a)(1);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).      In

addition, a taxpayer must keep sufficient records to substantiate

any deductions claimed.    Sec. 6001; New Colonial Ice. Co. v.

Helvering, supra at 440.    Section 7491(a) does not apply in this

case because petitioner has not substantiated the deductions he
                                 -6-

seeks or shown that he has maintained sufficient records.     Sec.

7491(a)(2)(A) and (B).

     In his petition, petitioner claimed that respondent erred by

not computing his deductions for Schedule C expenses, Schedule A

interest, charitable contributions, and property taxes paid

during the years in issue, but he did not state how much these

expenses amounted to.    As evidence that he is entitled to

deductions, petitioner introduced two summaries of his expenses

during the years in issue.    The summaries contain general

captions such as “PHONE”, “DONATIONS”, and “AM EXP GOLD”, the

amounts of the expenses, and usually dates for each expense.

However, the summaries provide no indication of which expenses

were for business purposes and which were for personal purposes,

and it is not clear which of the expenses petitioner is seeking

to deduct.   Petitioner credibly testified that he paid

commissions to business associates in exchange for referrals, and

the names of these associates match some of the captions on the

expense summaries.

     On the basis of this evidence and information that

petitioner provided while negotiating with respondent, respondent

concedes that under section 162(a) petitioner is entitled to

$214,645, $122,520, $239,965, $82,986, and $29,904 of Schedule C

business expense deductions for commissions and FOIA request fees

paid for taxable years 1999, 2000, 2001, 2002, and 2003,
                                 -7-

respectively.   On the basis of third party information returns,

respondent also concedes that under section 163 petitioner is

entitled to Schedule A deductions for mortgage interest expenses

in the amounts of $22,000, $18,933, $17,909, and $16,661 for

taxable years 2000, 2001, 2002, and 2003, respectively.    We

accept these concessions.    See Cohan v. Commissioner, 39 F.2d

540, 543-544 (2d Cir. 1930).

     As to the remaining expenses, petitioner offered no evidence

that he actually incurred them or that he is entitled to a

deduction for them, and therefore he has not met his burden of

proving that he is entitled to claim deductions for any expenses

to the extent that they exceed respondent’s concessions.

Petitioner’s Audit Request

     Petitioner asks that we allow him to audit the Organization,

which is not a party to this case, and that he be able to pay his

taxes out of the proceeds of that audit.   There is no provision

in the Code that gives us the authority to allow one taxpayer to

audit another taxpayer in order to reduce his tax deficiency.

Therefore, we deny petitioner’s request.

Additions to Tax

     Section 6651(f) and (a)

     Respondent asserts that petitioner is liable for an addition

to tax under section 6651(f) for each year in issue.   Section

6651(f) imposes a penalty of up to 75 percent of the amount of
                                -8-

tax required to be shown on the tax return if a taxpayer fails to

file a required return due to fraud.    Alternatively, respondent

asserts that petitioner is liable for additions to tax under

section 6651(a).   Section 6651(a) imposes an addition to tax of

up to 25 percent of the amount required to be shown as tax if a

taxpayer fails to file a timely return.

     Petitioner concedes that he received significant income each

year from 1999 through 2003, and he failed to file Federal income

tax returns for those years.   Therefore, to determine whether

petitioner is liable for the additions to tax under section

6651(f), we need only to determine whether petitioner possessed

the requisite fraudulent intent.

     The Commissioner bears the burden of proving fraud by clear

and convincing evidence.   Sec. 7454(a); Rule 142(b).   Mere

suspicion of fraud is not sufficient.     Petzoldt v. Commissioner,

92 T.C. 661, 700 (1989).   Fraud is an intentional wrongdoing

designed to evade taxes believed to be owing.    Miller v.

Commissioner, 94 T.C. 316, 332 (1990).2    Therefore, the

Commissioner must show that the taxpayer failed to file a

required return with the intent to evade taxes known or believed



     2
       We consider the same factors under sec. 6651(f) that are
considered in imposing the fraud penalty under sec. 6663 and
former sec. 6653(b). Clayton v. Commissioner, 102 T.C. 632, 653
(1994); see also Neely v. Commissioner, 116 T.C. 79, 85-86 (2001)
(applying the extensive body of law addressing fraud in the
context of income, estate, and gift taxes to the employment tax
context).
                                -9-

to be owing by conduct intended to conceal, mislead, or otherwise

prevent the collection of taxes.      Parks v. Commissioner, 94 T.C.

654, 661 (1990).   The Commissioner may not simply rely upon the

taxpayer's failure to show error in the determinations of the

deficiencies.   DiLeo v. Commissioner, 96 T.C. 858, 873 (1991),

affd. 959 F.2d 16 (2d Cir. 1992).     Furthermore, the mere failure

to report income is not sufficient to establish fraud, Merritt v.

Commissioner, 301 F.2d 484, 487 (5th Cir. 1962), affg. T.C. Memo.

1959-172, but a pattern of consistent underreporting of income,

especially when accompanied by other circumstances showing an

intent to conceal, may justify the inference of fraud, Holland v.

United States, 348 U.S. 121, 139 (1954); Parks v. Commissioner,

supra at 664.   However, where there is no evidence of fraudulent

intent, such as falsification, concealment, or deception, the

Commissioner has not carried his burden.     Kotmair v.

Commissioner, 86 T.C. 1253, 1260 (1986).

     After considering petitioner’s testimony as a whole, we find

that petitioner lacked the requisite fraudulent intent at the

times he was required to file returns for 1999 through 2003.     As

respondent points out, petitioner failed to file returns for 1999

through 2003, did not make estimated tax payments for those

years, and was not particularly cooperative with respondent, and

these are “badges of fraud” from which we may infer fraudulent

intent.   Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir.
                                  -10-

1986), affg. T.C. Memo. 1984-601.        However, respondent offered no

evidence that petitioner tried to mislead, conceal, or deceive

respondent.     Mere unhelpfulness is not sufficient.     Petitioner

has clearly been consumed with the Organization for many years,

and his testimony at trial was strong evidence that this

obsession, rather than an intention to deceive, was the cause of

petitioner’s failure to file timely returns.       While his current

position is that he will not file returns or pay taxes unless his

demands are met, there is no evidence that petitioner had formed

this intention when he was required to file his returns for 1999

through 2003.    Therefore, we find that respondent has failed to

carry his burden of proving fraud by clear and convincing

evidence.

     Section 6651(a)(1) imposes an addition to tax if a taxpayer

fails to timely file a required Federal income tax return, unless

the taxpayer shows that the failure is due to reasonable cause

and not due to willful neglect.      Section 7491(c) places the

burden of production on the Commissioner to present sufficient

evidence showing that the imposition of an addition to tax or

penalty on a taxpayer is appropriate.       Higbee v. Commissioner,

116 T.C. 438, 446 (2001).      If the Commissioner makes such a

showing, the burden of proof is on the taxpayer to raise any

issues that would negate the appropriateness of the penalty, such

as reasonable cause.     Id.
                                 -11-

     Petitioner stipulated that he failed to file Federal income

tax returns for 1999 through 2003.      Furthermore, petitioner’s

only explanation for failing to file is that he was not sure that

he was required to file, which is not a reasonable cause in these

circumstances.     See United States v. Boyle, 469 U.S. 241, 251

(1985).   Therefore, we find that petitioner is liable for an

addition to tax under section 6651(a) for each year in issue.

     Section 6651(a)(2)

     Respondent claims that petitioner is liable for an addition

to tax under section 6651(a)(2) for each year in issue.     Section

6651(a)(2) imposes an addition to tax of 0.5 percent per month

(up to a maximum of 25 percent) for failure to make timely

payment of the tax shown on a return, unless the taxpayer shows

that the failure is due to reasonable cause, and not due to

willful neglect.     The addition to tax applies only when an amount

of tax is shown on a return.     Cabirac v. Commissioner, 120 T.C.

163, 170 (2003).    Under section 6651(g), a return prepared by the

Secretary pursuant to section 6020(b) is treated as a return

filed by the taxpayer for the purpose of determining the amount

of an addition to tax under section 6651(a)(2).

     The Commissioner bears the burden of producing evidence that

the imposition of an addition to tax under section 6651(a)(2) is

appropriate, and upon such proof the taxpayer bears the burden of
                               -12-

proving that his failure to pay was due to a reasonable cause.

Sec. 7491(c); Higbee v. Commissioner, supra.

     The parties stipulated that respondent prepared returns

pursuant to section 6020(b), and petitioner has not paid any of

the liability shown on those returns above the $112,000 he

already paid toward his 2000 tax liability.    Petitioner’s

statement that he will pay his tax liabilities when respondent

takes action against the Organization does not establish that he

failed to pay his tax liabilities due to a reasonable cause, and

therefore we hold that petitioner is liable for the addition to

tax under section 6651(a)(2) for each of the years 1999 through

2003 as computed by respondent.

     Section 6654

     Respondent also determined that petitioner is liable for

additions to tax under section 6654 for failure to pay estimated

income taxes for 1999 through 2003.   A taxpayer has an obligation

to pay estimated tax for a particular year only if he has a

“required annual payment” for that year.   Sec. 6654(d).     A

“required annual payment” is equal to the lesser of (1) 90

percent of the tax shown due for the year in issue (or, if no

return is filed, 90 percent of his tax for such year), or (2) if

the taxpayer filed a return for the immediately preceding taxable

year, 100 percent of the tax shown on that return.    Sec.

6654(d)(1)(B).   If the adjusted gross income shown on the
                               -13-

taxpayer’s return for the preceding taxable year exceeds

$150,000, a higher percentage may apply.   Sec. 6654(d)(1)(C).

     Respondent has proven that petitioner (1) was required to

file returns for 1999 through 2003, (2) did not file returns for

those years, (3) had an obligation to pay tax for each of those

years, and (4) did not make any estimated tax payments for those

years or have any tax withheld.   Therefore, respondent has met

his burden of production with respect to taxable years 2000

through 2003 because petitioner had a required annual payment

under section 6654(d)(1)(B) for each of those years.    Sec.

7491(c).   Petitioner has provided no contrary evidence, and we

find that no exemption under section 6654(e) applies.

Accordingly, we hold that petitioner is liable for the additions

to tax under section 6654 for taxable years 2000 through 2003.

     With respect to taxable year 1999, petitioner stipulated

that he had a tax liability for 1998 and paid this liability, but

the record contains no evidence as to the amount of petitioner’s

tax liability for 1998.   We have held that the Commissioner must

introduce evidence showing whether a taxpayer filed a return for

the year preceding the year in issue and, if so, the amount of

the tax shown on the return, in order to meet his burden; without

that information, the Court cannot complete the comparison

required by section 6654(d)(1)(B).    Wheeler v. Commissioner, 127

T.C. 200, 212 (2006); Smith v. Commissioner, T.C. Memo. 2007-121;
                                -14-

Brooks v. Commissioner, T.C. Memo. 2007-80.    The present case is

partially distinguishable because it is undisputed that

petitioner filed a return for 1998, he had some tax liability in

1998, he made no estimated tax payments for 1999, and he had no

tax withheld for 1999.    Therefore, petitioner had an obligation

to make some amount of estimated tax payment for 1999, but he

failed to do so.    However, respondent produced no evidence of how

much tax was shown on petitioner’s return for 1998.    Without this

evidence we cannot ascertain whether the required annual payment

for 1999 is determined by the amount of petitioner’s tax

liability for 1999, as respondent determined, or the amount shown

on his 1998 return, which could yield a much lower addition to

tax.    Therefore, respondent has not met his burden of producing

evidence that petitioner is liable for an addition to tax under

section 6654(a) for taxable year 1999.    See Wheeler v.

Commissioner, supra; Higbee v. Commissioner, supra.

Conclusion

       In sum, we conclude that petitioner is not entitled to any

Schedule A itemized deductions or Schedule C business expense

deductions above those that respondent has conceded.   In

addition, petitioner’s proposal to audit the Organization to

offset his income tax deficiency is not permitted by the Code.

Finally, petitioner is liable for additions to tax under section
                               -15-

6651(a)(1) and (2) for each year in issue, and under section 6654

for years 2000 through 2003.

     To reflect the foregoing and concessions by the parties,

                                           Decision will be entered

                                      under Rule 155.
