                     T.C. Memo. 1995-524



                   UNITED STATES TAX COURT


       DOYLE A. KING, Petitioner v. COMMISSIONER OF
               INTERNAL REVENUE, Respondent

       NEVAN Y. KING, Petitioner v. COMMISSIONER OF
               INTERNAL REVENUE, Respondent
Docket Nos. 26059-93, 26060-93.           Filed November 6, 1995.

   Petitioners filed no Federal tax returns for 1990 and
   1991, and failed to produce books and records from
   which their taxable income could be determined. Held:
   respondent's application of Consumer Price Index (CPI)
   to petitioners' 1989 return information to determine
   their 1990 and 1991 income approved; Held, further,
   respondent's revised application of CPI to petitioners'
   1989 return figures for the purpose of asserting
   increased deficiencies not approved; Held,
   further, petitioners are liable for additions
   to tax under secs. 6651(a)(1), I.R.C., and
   6654, I.R.C.


      Doyle A. King and Nevan Y. King, pro se.

      Robert E. Cudlip, for respondent.
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                MEMORANDUM FINDINGS OF FACT AND OPINION

          NIMS, Judge: Respondent determined deficiencies in

petitioners' Federal income tax and additions to tax as follows:


                          Doyle A. King
                                           Additions to Tax
 Year     Deficiency             Sec. 6651    Sec. 6654
 1990       $9,517                $2,334       $- 0 -
 1991       15,473                 3,853         878

                          Nevan Y. King
                                   Additions to Tax
 Year      Deficiency                     Sec. 6651 Sec. 6654
 1990       $28,908                         $7,227    $- 0 -
 1991        35,964                          8,991     2,050

        By Amended Answer, respondent asserts the following

 increased deficiencies:

                               Doyle A. King
                                               Additions to Tax
     Year    Deficiency             Sec. 6651(a) Sec. 6654
     1990     $28,291                     $6,218       $1,490
     1991      28,772                   7,193        1,656

                               Nevan Y. King
                                      Additions to Tax
     Year    Deficiecncy             Sec. 6651(a) Sec. 6654
     1990     $40,317            $9,224      $1,578
     1991      41,871                   10,460       2,406

  After concessions, the issues for decision are:

 (1) Whether petitioner Doyle A. King (Doyle) received wages of

$2,400 and $1,000 in 1990 and 1991, respectively.

        (2) Whether petitioners received interest income of $351 and $750

in 1990 and 1991, respectively.

        (3) Whether Doyle had Schedule C income from his Delta Valley

Realty business of $50,831 and $52,971 in 1990 and 1991, respectively.
                                  - 3 -

       (4) Whether Doyle had a Schedule C business net loss from Matol

of $12,610 and $13,141 in 1990 and 1991, respectively.

       (5) Whether petitioner Nevan Yvonne King (Yvonne) had Schedule C

income from her Yvonne King real estate business of $93,001 and

$96,916 in 1990 and 1991, respectively.

       (6) Whether Yvonne had partnership income from the King &

Anderson Partnership of $7,051 and $7,348 in 1990 and 1991,

respectively.

       (7) Whether Doyle is liable for self-employment taxes of $5,400

and $5,728 in 1990 and 1991, respectively.

       (8) Whether Yvonne is liable for self-employment taxes of $7,849

and $9,414 in 1990 and 1991, respectively.

       (9) Whether petitioners are entitled to self-employment tax

deductions in 1990 and 1991 equal to one-half of their selfemployment

tax.

       (10) Whether petitioners are entitled to a deduction for two

personal exemptions in each of the taxable years, 1990 and 1991.

       (11) Whether petitioners' deduction for personal exemptions is

subject to a partial phase-out under section 151(d)(3) in 1991.

       (12) Whether petitioners are entitled to itemized deductions of

$12,049 and $9,739 in taxable years 1990 and 1991, respectively.

       (13) Whether petitioners are liable for the addition to tax for

failure to file pursuant to section 6651(a)(1) for 1990 and 1991.

       (14) Whether petitioners are liable for the addition to the tax
                                   - 4 -

for failure to pay estimated tax pursuant to section 6654 for 1990 and

1991.

        (15) Whether respondent correctly applied the Consumer Price

Index (CPI) to petitioners' 1989 joint return figures to determine

petitioners' 1990 and 1991 tax liability, and to establish asserted

increased liabilities.

        Respondent concedes that petitioners are entitled to a filing

status of "married, filing joint return."

                             FINDINGS OF FACT

         Some of the facts have been stipulated. The stipulation of facts

and the attached exhibits are incorporated herein by this reference.

        Petitioners were residents of Stockton, California, when they

filed their petitions. Doyle is primarily a real estate broker. In

1990 and 1991, and in prior years, he owned and operated a real estate

brokerage business under the name of Delta Valley Realty (Delta

Valley). During 1990 and 1991, Yvonne worked at Delta Valley as a real

estate agent.

        In 1990, Yvonne received non-employee compensation income of

$111,855 from Delta Valley as reported on a Form 1099. In the same

year, she had Form 1099 non-employee compensation income of $1,998

from Phoenix International Marketing Corporation of Sparks, Nevada.

        Neither petitioner filed a timely Federal income tax return for

1990 or 1991. However, copies of signed joint returns for 1990 and

1991 were stipulated. Respondent's opening brief states that these
                                - 5 -

documents were delivered to respondent's counsel on November 14, 1994,

approximately 3 weeks before the call of the calendar upon which this

case was listed for trial. Official IRS transcripts of petitioners'

accounts do not reflect that the returns were ever formally filed.

     Petitioners' 1989 tax year was the subject of a previous case in

this Court; namely, King v. Commissioner, T.C. Memo. 1994-318. For

that year petitioners filed a joint Federal income   tax return. Since

petitioners had filed no returns for 1990 and 1991 at the time

respondent's agent began the audit of petitioners' tax affairs for

those years, and failed to provide records on the basis of which

petitioners' correct liability could be determined, the revenue agent

reconstructed petitioners' income for 1990 and 1991 by reference to

information provided by third parties (IRP) and by application of the

consumer price index (CPI) to amounts reported on petitioners' 1989

return.

     Since Doyle and Yvonne filed no returns, respondent issued

separate notices of deficiency to them for the years in issue.

Petitioners' 1989 joint return contained three separate Schedules C,

two for Doyle and one for Yvonne. Since California is community

property state, respondent took a protective position in the notices

of deficiency, attributing to each petitioner 100 percent of such

petitioner's income, and also attributing to each petitioner 50

percent of the other petitioner's Schedule C income. Since respondent

now concedes that petitioners' 1990 and 1991 income tax liability may
                                  - 6 -

be computed on the basis of married, filing jointly, respondent's

protective position will be modified under Rule 155.

      The notice of deficiency issued to Doyle was based upon the

adjustments in the following chart:

           Item and Source                 1990        1991
           Wages - information from
           third party IRP               $2,400     $1,000
           Interest - IRP                    130       370
           Doyle King's two 1989
           Schedules C (Delta Valley Realty
           and Matol) -
           1990 and 1991 - CPI            9,075     9,456
           One-half of Yvonne's 1989
           Schedule C - Yvonne King
           Real Estate
          (1990 IRP income; CPI expenses)45,832
          (1991 CPI based upon the
             1990 figures)                          47,757
           Rental income - source unknown -0-        8,000
           Exemption deduction           (2,050)    (2,150)
           Self-employment tax deduction (641)        (668)
           Mortgage interest deduction -


     1990 and 1991 - IRP                  (7,368)   (7,536)
   Schedule A phase-out amount               -0-       477
        Total adjustments                 47,378    56,706
           Income tax                     11,565    14,137
           Prepayment credit               3,330       -0-
           Income tax balance    8,235    14,137
           Self-employment tax             1,282       1,336
           Total tax liability            9,517     15,473

     (The Revenue Agent who prepared the original deficiency

notices totaled Doyle's 1989 gross income from the two Schedules

C and applied the CPI to that figure, and totaled Doyle's 1989

expenses from the two Schedules C and applied the CPI to that

figure to arrive at one combined 1990 Schedule C net income for

Doyle.)
                                        - 7 -

         The prepayment credit was erroneously taken into

consideration prior to arriving at the deficiency figure. The

deficiency should have been calculated without taking into

consideration prepayment credits.

         The notice of deficiency issued to Yvonne was based upon the

adjustments in the following chart:

         Item and Source                       1990          1991
         One-half of Doyle's wages - IRP     $1,200          $500
         Interest - IRP                         221           370
         one-half of Doyle's two
         Schedules C net income               4,538         4,728
         Schedule C
         Yvonne King Real Estate
           (1990 IRP income, CPI expenses)   91,663           -0-
           (1991 CPI applied to the 1990 figures)           95,513
         Rental income - source unknown        -0-           8,000
         Exemption deduction                 (2,050)       (1,118)

         Self-employment tax deduction          (3,925)    (4,590)

_   _

Mortgage interest deduction -
   1990 and 1991 - IRP                          (5,411)     (7,536)
      Total adjustments                         86,236      97,503*

          *Per the deficiency notice.
        Income tax                              24,389      26,784
        Prepayment credit                        3,330          -0
        Income tax balance                      21,059      26,784
        Self-employment tax                      7,849       9,180
        Total tax liability                     28,908      35,964

        The prepayment credit was erroneously taken into

consideration prior to arriving at the deficiency figure. The

deficiency should have been calculated without taking into

consideration prepayment credits.

        For 1990 and 1991, petitioners had income, as reflected in
                                - 8 -

third party documents, as follows:


    Source                               1990           1991
    Diversified 10, Inc. -

    Doyle's wages                        $2,400        $1,000
    Union Safe Deposit Bank
      interest                              260               20
    Stockton Savings Bank
       interest                              91               22
    U.S. Treasury                                            697
    King & Anderson Partnership           7,051
    Delta valley Realty -
      Yvonne's non-employee
      compensation                      111,855
    Phoenix International Marketing
      Corporation                         1,998

    Respondent concedes that neither Doyle or Yvonne received

$8,000 in rental income for 1991, and that petitioners are

entitled to a $6 deduction in 1991 for early interest withdrawal

penalty.

        Doyle had a net loss of $12,610 from his Matol business in

1990. Doyle had discontinued his involvement with the Matol

business by 1991, so is entitled to no loss deduction for that

year.

        Doyle is liable for 1990 self-employment tax based upon his

  net self-employment income from his Delta Valley Realty

business,      reduced by a net loss of $12,610 from his Matol

business.

        Doyle is liable for 1991 self-employment tax based upon his

  net self-employment income from his Delta Valley Realty

business.
                                - 9 -

        Yvonne is liable for 1990 self-employment tax based upon

her     net self-employment income from her Yvonne King Real

Estate Sales       & Service business. She is also liable for 1991

self-employment tax based upon her net self-employment income

from that business.

        Doyle is entitled to self-employment tax deductions for

1990     and 1991 under section 164(f) in amounts equal to one-

half of his self-employment income from Delta Valley Realty in

those years. Yvonne is entitled to self-employment tax

deductions for 1990 and 1991 under section 164(f) in amounts

equal to one-half of her self-employment tax for those years.

        Petitioners are entitled to itemized deductions in 1990 of

$9,739, which amount is mortgage interest of $12,777 less $3,038

   of mortgage interest allowed on Doyle's 1990 Schedule C for

Delta Valley Realty.

        Petitioners are entitled to itemized deductions in 1991 of

12,049, which amount is mortgage interest of $15,215 less $3,166

      of mortgage interest allowed on Doyle's 1991 Schedule C for

Delta         Valley Realty, and the $6 interest penalty referred

to above.

        Petitioners made payments towards their 1990 tax liability

of $6,842, which consists of an estimated tax payment on April

15, 1990, of $6,659, plus a withholding tax credit of $183,

based upon Doyle's wages from Diversified 10, Inc. Petitioners
                             - 10 -

made no payments of their 1991 tax liability.

     A Form 1041, U.S. Fiduciary Income Tax Return, for

1991,for an entity known as "King Trust" was filed with the IRS

Service Center in Andover, Massachusetts, on September 30,

1992. A Form 1041, U.S. Fiduciary Income Tax Return, for 1991,

for an entity known as "Delta Valley Realty Trust" was filed

with the IRS Service Center in Philadelphia, Pennsylvania, on

September 28, 1992.

     Petitioners are entitled to one personal exemption each

for 1990 and 1991.

     Petitioners' deduction for personal exemptions may be

subject to a computational partial phase-out under section

151(d)(3) in 1991.

     A 1991 "Corrected Form 1041," for Delta Valley Realty

Trust, which was presented at trial, but not filed with the

IRS, reflects total income of $202,454, and total deductions of

$202,381.

     On April 24, 1991, Doyle decided to "untax" after

attending several tax protester meetings. His so-called

untaxing followed Pilot Connection's "method and techniques"

which included not signing tax returns.

     William N. Van Dyke, a Stockton, California, attorney,

advised Doyle that in preparing for the trial of this case, he,

Doyle, should not reveal any information about any trust in
                            - 11 -

response to an informal request by the IRS, but only in

response to a discovery order or subpoena.

                            OPINION

     Petitioners are in the real estate business. Although they

filed a joint income tax return for 1989 which reflected

substantial income from their joint endeavors, they filed no

returns for 1990 and 1991, the years in issue. About 3 weeks

before trial they delivered signed joint returns for those

years to respondent's counsel. These documents are stipulated

as part of the record. Petitioners failed to produce any

records, either during the audit process or in preparation for

trial or at trial, on the basis of which respondent or the

Court could reconstruct their income. Consequently respondent

reconstructed petitioners' income by using third party

information and application of the CPI to amounts appearing on

petitioners' 1989 return, as modified pursuant to our opinion

in King v. Commissioner, T.C. Memo. 1994-318.

     Although both petitioners participated in the trial of

this case, only Doyle testified. In his testimony he made no

effort to establish the couples' correct taxable income for the

2 years in question. Rather, his testimony consisted mainly of

complaints about repeated IRS audits, which, judging from this

case, were the result of petitioners' own persistent refusal to
                            - 12 -

participate cooperatively in the audit process or preparation

for trial.

     Respondent's determinations in the notices of deficiency

are presumed correct, and the burden of proof rests with

petitioners to establish that such determinations are

incorrect. Rule 142(a). Respondent filed amended answers in

which increased deficiencies are asserted, and under the same

Tax Court Rule respondent bears the burden of proof as to these

increased amounts.

     If a taxpayer fails to file a return, the Commissioner may

reconstruct the taxpayer's income using third party

information, and such calculation is presumptively correct.

Avery v.Commissioner, 574 F.2d 467, 468 (9th Cir. 1978), affg.

T.C. Memo. 1976-129. Furthermore, if a taxpayer fails to

produce business books and records, the Commissioner is

authorized to determine the taxpayer's income using the CPI in

conjunction with a past year's return. Edwards v. Commissioner,

680 F.2d 1268 (9th Cir. 1982), affg. an unreported Tax Court

Order.

     Petitioners complain that Respondent's resort to third

party information and the use of the CPI is unfair because 1989

was a much better year for them than 1990 and 1991 due to the

collapse of the California real estate market. The fact that

the Court has no way of evaluating this contention is of
                            - 13 -

petitioners' own doing, due to their hit or miss approach for

presenting evidence in this case.

     We also note that the "corrected" 1991 Form 1041 for the

Delta Valley Realty Trust reported gross income of $202,454, an

indication that petitioners' real estate activities continued

to generate substantial sums for that year, at least.

     As previously stated, respondent filed an amended answer,

in which increased deficiencies are asserted. These increased

deficiencies constitute new matters, as to which respondent has

the burden of proof. Rule 142(a); Achiro v. Commissioner, 77

T.C. 881, 890 (1981).

     Respondent argues that the theory that was essentially

relied upon in determining the original deficiencies was relied

upon in arriving at the increased deficiencies. Accordingly,

respondent argues that she has sustained her burden of proof as

to the new matters through the "same theory" approach and

through the testimony of a revenue agent who prepared the

revised revenue agent's report upon which respondent's

increased deficiency figures are based. Insofar as the asserted

increased deficiencies are based upon CPI extrapolations, we do

not agree with respondent. Respondent cites no authority to

support her position, and we know of none.

     The presumption of correctness in favor of the

Commissioner is a procedural device that requires the taxpayer
                             - 14 -

to come forward with enough evidence to support a finding

contrary to the Commissioner's determination. Rockwell v.

Commissioner, 512 F.2d 882, 885 (9th Cir. 1975), affg. T.C.

Memo. 1972-133. The Court of Appeals for the Ninth Circuit has

characterized the burden of proof as a burden of persuasion.

Id.

      In the case before us respondent's initial determinations,

though based upon CPI extrapolations, are entitled to the

presumption of correctness which petitioners have failed to

overcome. They have failed to introduce any reliable evidence

on the basis of which the Court could arrive at a conclusion as

to their tax liabilities different from that determined by

respondent (giving effect, of course, to certain concessions by

respondent).

      The same may not be said of the increased deficiencies

asserted in the amended answer. The CPI extrapolations,

standing alone without the presumption of correctness that the

deficiency notices afford are insufficient to satisfy

respondent's burden of proof in this case. CPI extrapolations

are, almost by definition, educated guesses which respondent

may reasonably rely upon in deficiency notices under conditions

similar to those in this case, which taxpayers may refute by

introducing specific objective evidence showing the correct tax

liability. But here respondent has the burden of proof as to
                            - 15 -

asserted increased deficiencies under Rule 142(a), and we do

not accept these educated guesses as substitutes for actual

facts to satisfy respondent's burden of proof, or, in the words

of the Rockwell v. Commissioner, supra, the burden of

persuasion.

     Respondent's increased deficiencies are based to some

extent upon specific third party information, or upon documents

furnished by petitioners, themselves containing data

constituting admissions against interest. These items are

detailed in our findings of fact and are sufficient to shift to

petitioners the burden of going forward with the evidence,

which petitioners have not carried. we therefore sustain the

increased deficiencies to the extent based upon this type of

evidence.

     We have based our findings of fact upon the application of

the CPI to petitioners' 1989 return, third party documentation,

and respondent's concessions, but not by applying the CPI to

support respondent's asserted increased deficiencies. No useful

purpose would be served by reiterating each of these items at

this point.

     Petitioners, presumably on the advice of counsel, declined

to furnish copies of trust instruments or other documents that

would explain petitioners' relationship to the King Trust or

the Delta Valley Realty Trust. Doyle testified that he could
                              - 16 -

get the trust income, if there was income. The 1991 "Corrected

Form 1041" for the Delta Valley Realty Trust reflected "Other

Income" of $202,454, and net income of $73. The scanty

information that petitioners have chosen to reveal about the

two trusts is insufficient to overcome the presumption of

correctness of respondent's determination, as modified herein,

for 1991.

     Section 1401 imposes a tax on self-employment income of

individuals. Respondent properly determined that petitioners

are liable for self-employment tax on their respective business

incomes in 1990 and 1991. Section 164(f) provides a deduction

to an individual of an amount equal to one-half of the taxes

imposed by section 1401 for the taxable year. The amounts of

selfemployment taxes due and allowable.deductions under section

164(f) will be computed under Rule 155.

     Petitioners are entitled to one deduction each for

personal exemptions under section 151, subject, however, to a

possible “phaseout" under section 151(d)(3). The allowable

amounts will also be established in the Rule 155 computations.

     The Rule 155 computations will also give effect to

respondent's concession that petitioners are entitled to a filing

status of "married, filing joint return."

     Section 6651 imposes an addition to tax of 5 percent for each

month, or portion thereof, that a return is delinquent, up to a
                              - 17 -

maximum of 25 percent. While petitioners delivered signed 1990 and

1991 joint returns to respondent's counsel on November 14, 1994,

they filed nothing for those years prior to that time. Since

extensions of time within which to file were neither requested nor

granted for 1990 and 1991, the returns for those years were due on

April 15, 1991, and April 15, 1992, respectively. Petitioners are

therefore liable for the 25percent delinquency additions to tax for

1990 and 1991 pursuant to section 6651(a)(1).

     Petitioners made a 1990 estimated tax payment of $6,659, and

are entitled to a $183 withholding tax credit for 1990, and made no

estimated tax payments for 1991. Petitioners are liable for the

addition to tax under section 6654 for failing to make sufficient

estimated tax payments for those years. The correct amounts of

underpayment and additions to tax under section 6654 will be

determined under Rule 155.

To reflect the foregoing,

                                                Decisions will be

                                        entered under Rule 155.
