                         T.C. Memo. 2005-160



                       UNITED STATES TAX COURT



               ROBERT C. DAVIS, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19813-03.               Filed June 29, 2005.



     Robert C. Davis, Jr., pro se.

     Jeffrey E. Gold, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined the following defi-

ciency in, and additions to, petitioner’s Federal income tax

(tax):
                                   -2-

                                          Additions to Tax

 Year     Deficiency   Sec. 6651(a)(1)1    Sec. 6651(a)(2) Sec. 6654(a)
 2000      $103,811       $21,728.92          $12,071.62     $5,150.77

The issues remaining for decision are:

     (1) Is petitioner entitled to deduct for 2000 a theft loss

under section 165?     We hold that he is not.

     (2) Is petitioner liable for 2000 for the addition to tax

under section 6651(a)(1)?      We hold that he is.

     (3) Is petitioner liable for 2000 for the addition to tax

under section 6654(a)?      We hold that he is to the extent stated

herein.

                            FINDINGS OF FACT

     Most of the facts have been stipulated by the parties and

are so found.

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

resided in Annapolis, Maryland.

     On May 24, 2000, petitioner and June Davis (Ms. Davis), his

wife, executed a contract (custom house contract) with Mona

Builders & Developers, Inc., (Mona Builders).        That contract

provided in pertinent part:

     ARTICLE ONE -- THE WORK

     MONA BUILDERS & DEVELOPERS, INC. [Mona Builders] shall
     perform all work required by the Contract Documents for


    1
      All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
                             -3-

the complete construction of the home described in the
plans attached hereto and to be built on Lot #30 Perder
Lane, South River Colony, Anne Arundel County, Mary-
land. The lot is not part of this contract.

     *        *       *       *       *         *       *

ARTICLE FOUR -- CONTRACT SUM

The Owner [petitioner and Ms. Davis] shall pay to MONA
BUILDERS & DEVELOPERS, INC. for the performance of the
work, subject to additions and deductions by change
order as provided in the General Conditions, in current
funds, the sum of $935,000.00 (Nine Hundred Thirty Five
Thousand Dollars).

ARTICLE FIVE -- PAYMENT

The Contract sum will be paid as follows:

1.       Upon ratification of Contract.         $ 15,000.00
2.       Upon installation of foundation, 1st    159,240.00
         floor joists and decking installed.
3.       Upon installation of exterior walls,  184,000.00
         roof sheathed and interior partitions
         framed.
4.       Upon rough-ins of plumbing, mechani-    230,000.00
         cal and electric, roof shingles in-
         stalled and installation of windows
         and doors.
5.       Upon drywall being finished, exterior 230,000.00
         walls completed, and house trimmed
         out.
6.       Upon plumbing, electrical, mechanical 116,760.00
         fixtures installed; kitchen cabinets
         installed; flooring installed; paint-
         ing completed and approval by Anne
         Arundel County inspector.
                                      TOTAL     $ 935,000.00

MONA BUILDERS & DEVELOPERS, INC. will adhere to the
lending institution’s draw schedule; MONA BUILDERS &
DEVELOPERS, INC. will be a named party on each draw
                               -4-

check. The above is our standard draw schedule. We
would prefer 8 to 10 draw payments due to the amount of
the contract.

ARTICLE SIX -- CHANGE ORDERS

1)       Every custom home has a few change orders. As the
         project evolves, you will probably want to make
         some changes. That’s one of the great opportuni-
         ties you have by custom building. The Project
         Manager is available to discuss any changes you
         consider. On average, change orders amount to 4-
         9% of the Proposal Price. We suggest you plan
         accordingly.

     *        *       *         *       *       *       *

6)       Please note, a fee of 15% for overhead and profit
         will be added to the actual and/or estimated cost
         for all change orders. The fee is waived for
         change orders that result in a credit. [Handwrit-
         ten addition.] Upon substantial completion of the
         Contract, all amounts due to Owner as a credit
         shall be increased by 10% for reimbursement to
         Owner of overhead and profit previously included
         in the contract sum.

     *        *       *         *       *       *       *

ARTICLE ELEVEN -- MONA BUILDERS & DEVELOPERS, INC.

11.1 MONA BUILDERS & DEVELOPERS, INC. shall supervise
and direct the Work, using best skill and attention.
MONA BUILDERS & DEVELOPERS, INC., shall be solely
responsible for all construction means, methods, tech-
niques, sequences and procedures for coordinating all
portions of the Work under the Contract.

     *        *       *         *       *       *       *

11.3 MONA BUILDERS &      DEVELOPERS, INC. shall at all
times enforce strict      discipline and good order among
employees, and shall      not employ on the Work any unfit
person or anyone not      skilled in the task assigned to
him.

     *        *       *         *       *       *       *
                          -5-

ARTICLE SEVENTEEN -- PAYMENTS

17.1 Payments shall be made as provided in Article five
of this agreement.

17.2 Payments may be withheld on account of (1) defec-
tive Work not remedied, (2) claims filed, (3) failure
of MONA BUILDERS & DEVELOPERS, INC. to make payments
properly to Subcontractors for labor, materials, or
equipment or (4) damage to another contractor.

17.3 The making of final payment shall constitute a
waiver of all claims by the Owner except these arising
from (1) unsettled liens, (2) faulty or defective Work
discovered after Substantial Completion, (3) failure of
the Work to comply with the requirements of the Con-
tract Documents and code or (4) terms of any special
guarantees required by the Contract Documents. The
acceptance of final payment shall constitute a waiver
of all claims by MONA BUILDERS & DEVELOPERS, INC.
except these previously made in writing and still
unsettled.

   *       *       *       *       *       *       *

ARTICLE NINETEEN -- MONA BUILDERS & DEVELOPERS, INC.
LIABILITY INSURANCE

MONA BUILDERS & DEVELOPERS, INC. shall purchase and
maintain such insurance as will protect from claims
under workman’s compensation acts and other employee
benefit acts, from claims for damages because of bodily
injury, including death, and from claims for damages to
property which may arise out of or result from MONA
BUILDERS & DEVELOPERS, INC. operations under this
Contract.

   *       *       *       *       *       *       *

ARTICLE TWENTY TWO -- CHANGES IN THE CONTRACT

22.1 The Purchaser [petitioner and Ms. Davis] without
invalidating the Contract may order Changes in the Work
consisting of additions, deletions, or modifications,
the Contract Sum and the Contract Time being adjusted
accordingly. All such Changes in the Work shall be
authorized by written Change Order signed by the Pur-
chaser and Builder.
                                -6-


     22.2 The Contract Sum and Contract Time may be changed
     only by Change Order.

     22.3 The cost or credit to the Purchaser from a Change
     in the Work shall be determined by mutual agreement.

     ARTICLE TWENTY THREE -- CORRECTION OF WORK

     MONA BUILDERS & DEVELOPERS, INC. shall correct any Work
     that fails to conform to the requirements of the Con-
     tract Documents where such failure to conform appears
     during the progress of the Work, and shall remedy any
     defects due to faulty materials, equipment or workman-
     ship which appear within a period of one year from the
     Date of Substantial Completion of the Contract or
     within such longer period of time as may be prescribed
     by law or by the terms of any applicable special guar-
     antee required by the Contract Documents. The provi-
     sions of the Article Twenty Three apply to Work done by
     Subcontractors as well as to Work done by direct em-
     ployees of MONA BUILDERS & DEVELOPERS, INC.

        *       *       *       *       *         *     *

     ARTICLE TWENTY FIVE -- TERMINATION BY THE PURCHASER

     If MONA BUILDERS & DEVELOPERS, INC. defaults or ne-
     glects to carry out the Work in accordance with the
     Contract Documents or fails to perform any major provi-
     sions of the Contract, the Purchaser may, after seven
     days written notice to MONA BUILDERS & DEVELOPERS,
     INC., and without prejudice to any other remedy he may
     have, make good such deficiencies and may deduct the
     cost thereof from the payment then or thereafter due
     MONA BUILDERS & DEVELOPERS, INC. or, at his option, may
     terminate the Contract.

     At a time not disclosed by the record after petitioner and

Ms. Davis executed the custom house contract, Mona Builders began

construction of the house (custom house) described in that

contract.   Mona Builders obtained certain insurance policies from

State Auto Property & Casualty Insurance Company (State Auto) in
                                  -7-

order to maintain the insurance required by the custom house

contract.

     The workmanship in constructing the custom house was gener-

ally poor.   In addition, during construction of the custom house

Mona Builders (1) used in certain structural components of that

house materials that were inferior to those required by the

custom house contract and (2) failed to install certain other

required structural components.    (We shall refer to the inferior

and missing structural components as the structural defects of

the custom house.)   As a result of the structural defects of the

custom house, the custom house was structurally unsound.

     On or about August 29, 2001, petitioner and Ms. Davis moved

into the custom house.   Thereafter, at the request of petitioner

and Ms. Davis, Mona Builders continued to perform services in

connection with finishing and repairing the custom house.   On or

about September 25, 2001, Mona Builders stopped work on the

custom house.

     Sometime after petitioner and Ms. Davis moved into the

custom house, petitioner discovered the structural defects of the

custom house.

     In October 2001, Mona Builders commenced litigation in the

Circuit Court for Anne Arundel County, Maryland (Maryland Circuit

Court) against petitioner and Ms. Davis with respect to the

custom house (custom house litigation) in which it sought payment
                                 -8-

from them of $23,065.    In December 2001, petitioner and Ms. Davis

filed a counterclaim (custom house litigation counterclaim) in

the custom house litigation in which petitioner and Ms. Davis

alleged, inter alia, that Mona Builders violated the Maryland

Custom Home Protection Act and breached the custom house con-

tract.

     On June 7, 2002, petitioner sent a letter (June 7, 2002

letter) by certified mail, return receipt requested, to State

Auto.    That letter stated in pertinent part:

          We are involved in litigation with Mona Builders
     and Developers, Inc. (Mona), the company that built our
     house. A copy of our Amended Counter-Complaint is
     attached. As part of that litigation, we recently
     discovered serious structural problems with our house.
     We have been told by our experts that Mona failed to
     build our house in compliance with the architectural
     drawings that were part of our agreement with them. At
     present we do not know the full extent of the problems,
     nor do we have cost estimates for necessary remedial
     action. * * *

          We understand that Mona purchased from the State
     Auto Insurance Companies a commercial general liability
     policy, and an excess liability umbrella policy, to
     cover the construction of our house. The number of
     those policies is PBP1005193. We do not know whether
     Mona has notified the State Auto Ins. Companies of the
     pending litigation and our claims against Mona.

(We shall refer to petitioner’s claim to any of the proceeds from

the insurance policies that State Auto issued to Mona Builders in

connection with the construction of the custom house as peti-

tioner’s insurance claim.)

     On November 8, 2002, petitioner and Ms. Davis sent a letter
                               -9-

(November 8, 2002 letter) to the Maryland Attorney General with

respect to Mona Builders and the custom house.   That letter

stated in pertinent part:

          On May 24, 2000, we entered into a Contract with
     Mona Builders and Developers, Inc. (Mona), for the
     construction of a custom home on a lot we had previ-
     ously purchased. The initial Contract price was
     $935,000. With change orders and upgrades, we paid
     more than $1,000,000 for the construction of our resi-
     dence.

          We are currently in the midst of a civil suit
     against Mona. However, in spite of the disclosure
     requirements of the Custom Home Protection Act (CHPA),
     and tens of thousands of dollars expended in formal
     discovery efforts, Mona has yet to disclose the names
     and addresses of many of the suppliers and subcontrac-
     tors who worked on our home. * * *

        *       *       *       *       *        *       *

          We have been in our house for a little over one
     year, and are continuing to discover that Mona deviated
     very significantly and very seriously from the archi-
     tectural plans we provided, and which were incorporated
     into our Contract. The house we paid Mona to build was
     not the house they constructed. Mona’s misrepresenta-
     tions, acts of malfeasance, and deliberate acts of
     fraud in building our home were, and continue to be,
     egregious.

          In summary, Mona deliberately and deceptively,
     without our knowledge or approval, failed to comply
     with the plans and specifications agreed to under our
     Contract. As a result of Mona’s deliberate failure to
     adhere to our construction plans, our house is struc-
     turally unsound and unsafe. * * *

        *       *       *       *       *        *       *

          Mona’s acts of fraud go beyond the substitutions
     and omissions in the physical construction of our home.
     Information obtained through our discovery efforts
     suggest [sic] that Mona may have fraudulently altered a
     subcontractor’s invoice, and may have fraudulently
                               -10-

     overcharged us for materials and supplies. * * *

     On February 3, 2003, State Auto commenced litigation in the

Maryland Circuit Court against petitioner and Mona Builders

(insurance litigation) in which it sought a declaratory judgment

that petitioner’s insurance claim was not covered by the insur-

ance policies that State Auto had issued to Mona Builders. At a

time not disclosed by the record after February 3, 2003, peti-

tioner and Ms. Davis filed a second amended counterclaim2 (insur-

ance litigation counterclaim) in the insurance litigation in

which they alleged, inter alia, that State Auto intentionally and

negligently misrepresented the terms of certain insurance poli-

cies that State Auto had issued to Mona Builders with respect to

the construction of the custom house.    Petitioner and Ms. Davis

alleged in the insurance litigation counterclaim:

     33.   After taking occupancy of the residence [custom
           house] in late August 2001, Davis [petitioner and
           Ms. Davis] discovered numerous items of defective
           or deficient work performed by MBD [Mona Builders]
           that resulted in damages throughout the residence
           to other parts of the residence. * * *

     Petitioner did not file a tax return (return) for taxable

year 2000.   Nor did he file a return for any of the taxable years

1995, 1996, 1997, 1998, and 1999.3    On March 20, 2003, respondent


     2
      The record does not disclose any information about any
counterclaim that petitioner and Ms. Davis filed in the insurance
litigation before they filed the second amended counterclaim.
     3
      Ms. Davis did not file a return for any of the taxable
                                                   (continued...)
                               -11-

prepared a substitute for return with respect to petitioner’s

taxable year 2000.

     On April 11, 2003, petitioner filed a document entitled

“Application for Statement of Charges” (April 11, 2003 applica-

tion) with the District Court of Maryland for Anne Arundel

County.   In that application, petitioner declared under oath:

           Between July 25, 2001 and Aug 8, 2001, Garrett
     Mona, Patrick Mona and Nick Mona intentionally misrep-
     resented their intent to complete work on our [peti-
     tioner’s and Ms. Davis’] house and repair defective
     work that existed at that time. As a result of their
     intentional misrepresentations, we paid an additional
     $120,543.00 to them. We discovered and confirmed the
     extent of the structural defects between July & Oct
     2002.

     On April 22, 2003, petitioner received a copy of a letter

from the Department of Inspection and Permits, Anne Arundel

County, in which it voided the certificate of occupancy that it

had issued with respect to the custom house.

     On May 1, 2003, petitioner and Mona Builders entered into a

settlement agreement (May 1, 2003 settlement agreement) with

respect to the custom house litigation.   As part of that settle-

ment agreement, Mona Builders agreed to purchase the custom house

from petitioner and Ms. Davis for $1,500,000.   On May 29, 2003,

pursuant to the May 1, 2003 settlement agreement, petitioner and

Ms. Davis transferred the custom house to Mona Builders in



     3
      (...continued)
years 1995, 1996, 1998, 1999, and 2000.
                               -12-

exchange for $1,500,000.

     On August 20, 2003, respondent issued to petitioner a notice

of deficiency (notice) with respect to petitioner’s taxable year

2000.   In that notice, respondent determined, inter alia, that

petitioner is liable for the taxable year at issue for the

respective additions to tax under sections 6651(a)(1) and

6654(a).

     On October 26, 2004, respondent received Form 1040, U.S.

Individual Income Tax Return, with respect to petitioner’s

taxable year 2000 (petitioner’s Form 1040 for 2000), which

respondent did not process as a return.   In that form, peti-

tioner, inter alia, claimed a $256,975 deduction under section

165 for a theft loss with respect to the custom house.

     On November 1, 2004, a jury awarded petitioner and Ms. Davis

$524,727 in compensatory damages (insurance litigation verdict)

with respect to the insurance litigation counterclaim.   The jury

found, inter alia, that the property damages that petitioner and

Ms. Davis sustained were not fully satisfied by the $1,500,000

paid to them pursuant to the May 1, 2003 settlement agreement.

As of the time of the trial in this case, the Maryland Circuit

Court was considering in the insurance litigation numerous

posttrial motions and had not reduced the insurance litigation

verdict to final judgment.
                               -13-

                              OPINION

     We first address section 7491(a).   The parties agree that

the examination in this case commenced after the effective date

of section 7491.   The parties disagree, however, over whether the

burden of proof shifts to respondent under that section.    Section

7491(a)(1) may shift the burden of proof to the Commissioner of

Internal Revenue with respect to any factual issue relevant to

determining the tax liability of a taxpayer provided that the

taxpayer has introduced credible evidence with respect to any

such issue and has complied with the applicable requirements of

section 7491(a)(2).

     As we understand petitioner’s position under section

7491(a), he contends that he introduced credible evidence con-

cerning the factual issues presented under section 165 (viz, when

he discovered the alleged theft loss with respect to the custom

house (alleged custom house theft loss) for which he is claiming

a deduction for taxable year 2000; the amount of the alleged

custom house theft loss; and the absence at the end of 2000 of a

reasonable prospect of recovery of the alleged custom house theft

loss) and that he complied with the applicable requirements of

section 7491(a)(2).4   Therefore, according to petitioner, the


     4
      Petitioner also contends that he introduced credible evi-
dence concerning the factual issue presented under sec.
6651(a)(1) (viz, whether he filed a return for taxable year 2000)
and that the burden of proof shifts to respondent under sec.
                                                   (continued...)
                              -14-

burden of proof with respect to such factual issues shifts to

respondent under section 7491(a)(1).

     Respondent counters that petitioner has not introduced

credible evidence concerning the factual issues presented under

section 165 and that he has not complied with the applicable

requirements of section 7491(a)(2).

     Credible evidence is evidence which, after critical analy-

sis, the Court would find sufficient upon which to base a deci-

sion on the issue if no contrary evidence were submitted.     Higbee

v. Commissioner, 116 T.C. 438, 442 (2001) (quoting H. Conf. Rept.

105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995).   Evidence

is not credible if the Court is not convinced that such evidence

is worthy of belief.   Id.

     Petitioner relies on his testimony with respect to the

factual issues presented under section 165.   As discussed below,

we found petitioner’s testimony regarding the time of his discov-



     4
      (...continued)
7491(a) with respect to the addition to tax under that section.
Petitioner does not contend that he introduced credible evidence
concerning the factual issues presented under sec. 6654(a) and
that the burden of proof shifts to respondent under sec. 7491(a)
with respect to the addition to tax under that section. Even if
petitioner were to advance such contentions with respect to sec.
6654(a), we would reject them, just as we reject petitioner’s
contention that the burden of proof with respect to the factual
issue presented under sec. 6651(a)(1) shifts to respondent under
sec. 7491(a). That is because sec. 7491(a) does not apply to
additions to tax and penalties under subtitle F of the Internal
Revenue Code. Higbee v. Commissioner, 116 T.C. 438, 447 n.6
(2001).
                                -15-

ery of the alleged custom house theft loss, the amount of the

alleged custom house theft loss, and the absence at the end of

2000 of a reasonable prospect of recovery of the alleged custom

house theft loss to be questionable, inconsistent with certain

other evidence, conclusory, vague, and/or general.    We shall not

rely on such testimony to establish the facts with respect to

such matters.    On the record before us, we find that petitioner

did not introduce credible evidence with respect to the factual

issues presented under section 165.    Having found that petitioner

did not introduce credible evidence with respect to such factual

issues, we need not resolve the dispute between the parties over

whether petitioner has complied with the applicable requirements

of section 7491(a)(2).    On the record before us, we find that the

burden of proof does not shift to respondent under section

7491(a)(1) with respect to any factual issues presented under

section 165.

     We turn next to whether petitioner is entitled to deduct

under section 165 for taxable year 2000 the alleged custom house

theft loss.    Section 165(a) allows a deduction for any loss

sustained during a taxable year and not compensated for by

insurance or otherwise.    Section 165(c)(3) limits the deduction

allowed by section 165(a) in the case of an individual to a loss

that arises from, inter alia, theft.    The amount of a loss that a

taxpayer is entitled to deduct under section 165 is the lesser of
                                 -16-

(1) the difference between the fair market value of the property

before the loss and the fair market value of the property after

the loss, the latter value in the case of loss by theft being

zero, or (2) the adjusted basis provided in section 1011 for

determining the loss from the sale or other disposition of the

property which was the subject of the loss.      Sec. 165(b); secs.

1.165-7(b)(1), 1.165-8(c), Income Tax Regs.      The basis for

determining the amount of the deduction for any loss is the

adjusted basis provided in section 1011 for determining the loss

from the sale or other disposition of the property which was the

subject of the loss.   Sec. 165(b).     With respect to a claimed

theft loss, such loss is sustained during the taxable year in

which a taxpayer discovers it.    Sec. 165(e).    Moreover, as we

concluded in Viehweg v. Commissioner, 90 T.C. 1248, 1255-1256

(1988):

     If in the year of the discovery of the loss there
     exists a claim for reimbursement with respect to which
     there is a reasonable prospect of recovery, then there
     is no closed and completed transaction fixed by identi-
     fiable events and thus no deductible loss. * * *

A reasonable prospect of recovery exists when the taxpayer has a

bona fide claim for recoupment and there is a substantial possi-

bility that such claim will be decided favorably for the tax-

payer.    Ramsay Scarlett & Co. v. Commissioner, 61 T.C. 795, 811

(1974), affd. 521 F.2d 786 (4th Cir. 1975).      Whether a reasonable

prospect of recovery exists is determined as of the end of the
                               -17-

taxable year for which the deduction is claimed.   Id.

     Petitioner bears the burden of proving that the alleged

custom house theft loss occurred and that the requirements of

section 165 have been met.   Allen v. Commissioner, 16 T.C. 163,

166-167 (1951).   In order to carry his burden, petitioner must

establish, inter alia, the existence of a theft within the

meaning of section 165 and the amount of the claimed theft loss.

See Elliott v. Commissioner, 40 T.C. 304, 311 (1963).    Whether

certain actions constitute theft for purposes of section 165

depends on the law defining the crime of theft in the jurisdic-

tion where the alleged theft occurred.   Monteleone v. Commis-

sioner, 34 T.C. 688, 692 (1960).

     It is petitioner’s position that he is entitled to a deduc-

tion under section 165 for taxable year 2000 with respect to the

alleged custom house theft loss in an unspecified amount in

excess of the $256,975 deduction that he claimed in petitioner’s

Form 1040 for 2000.   In support of that position, petitioner

argues that (1) Mona Builders’ actions with respect to the custom

house constituted theft under applicable Maryland law;

(2) petitioner discovered the alleged custom house theft loss in

October 2000; (3) the amount of the alleged custom house theft

loss exceeds by an unspecified amount the $256,975 theft loss

that petitioner claimed as a deduction in petitioner’s Form 1040

for 2000; and (4) petitioner did not have at the end of 2000 a
                                -18-

reasonable prospect of recovery of the alleged custom house theft

loss.

       It is respondent’s position that petitioner is not entitled

to a deduction under section 165 for taxable year 2000 with

respect to the alleged custom house theft loss.    In support of

that position, respondent argues that petitioner has failed to

carry his burden of establishing (1) that Mona Builders’ actions

with respect to the custom house constituted theft under applica-

ble Maryland law; (2) that petitioner discovered the alleged

custom house theft loss in October 2000 or at any other time in

2000; (3) the amount of the alleged custom house theft loss; and

(4) that petitioner did not have at the end of 2000 a reasonable

prospect of recovery of the alleged custom house theft loss.

       In the instant case, the parties agree that the law of

Maryland determines whether the actions of Mona Builders with

respect to the custom house constituted theft.    However, they

disagree over whether such actions constituted theft under such

law.    We need not resolve that disagreement.   That is because,

assuming arguendo that we were to find that the actions of Mona

Builders with respect to the custom house constituted theft under

applicable Maryland law, on the instant record, we nonetheless

would, and do below, reject petitioner’s position that he is

entitled to a deduction under section 165 for taxable year 2000

with respect to the alleged custom house theft loss.
                               -19-

     With respect to when petitioner discovered the alleged

custom house theft loss, petitioner claims that, because of the

ongoing nature of Mona Builders’ actions that resulted in the

alleged custom house theft loss, he became aware of different

aspects of that loss at different times.   According to peti-

tioner, for purposes of section 165 his discovery of the alleged

custom house theft loss occurred in October 20005 when he claims

he first became aware of certain aspects of that loss by deter-

mining that Mona Builders had (1) failed to give him credit for

certain amounts by which the allowance for bricks in the custom

house contract exceeded the amounts that Mona Builders actually

paid for such bricks (alleged brick theft) and (2) not installed

certain humidifiers as provided for in the custom house contract

(alleged humidifier theft).   Petitioner does not cite, and we

have not found, any authority supporting petitioner’s contention

that for purposes of section 165 his discovery of the alleged

custom house theft loss occurred when he first became aware of

any aspect of that loss.

     Assuming arguendo that petitioner had carried his burden of

establishing that it is appropriate for purposes of section 165


     5
      At trial, on direct examination petitioner testified that
the alleged brick theft occurred in October 2004. According to
petitioner, that was when he had a conversation with Mona Build-
ers concerning the price that Mona Builders had charged Ms. Davis
and petitioner for bricks used in the custom house. However, the
record establishes that the custom house litigation counterclaim
was settled in May 2003.
                               -20-

to treat the time when he first became aware of any aspect of the

custom house theft loss as the time when he discovered such loss,

we turn to petitioner’s claim that he discovered the custom house

theft loss in October 2000.   In support of that claim, petitioner

relies on his testimony with respect to the alleged brick theft

and the alleged humidifier theft.     We found petitioner’s testi-

mony regarding the alleged brick theft to be questionable and

inconsistent with certain other testimony of petitioner.      Peti-

tioner testified:

     In October 2004,[6] we were discussing with Mona Build-
     ers the price that we had been charged and a payment we
     had made to them for bricks.

          The [custom house] contract specifies in the
     allowance paragraph that the bricks were supposed to be
     charged at $450,000. Excuse me. $450 per 1,000
     bricks. At that point we knew that we had already just
     paid them for about 40,000 bricks.

          We visited the brick dealer because we recognized
     that the price we had been quoted by the brick subcon-
     tractor was $310 per 1,000. * * *

         *      *         *     *         *       *       *

          * * * Despite asking for them, we received no
     invoices certifying the price of the bricks, and the
     only way we were ultimately able to obtain those in-
     voices was through the litigation that we started with
     Mona Builders over the problems with the house.

          When we received those invoices, they showed that
     the bricks were in fact charged that $310 per 1,000.
     [Emphasis added.]




     6
      See supra note 5.
                               -21-

     As we understand the foregoing testimony of petitioner, he

claims that he became aware of the invoices detailing the price

that Mona Builders had paid for the bricks used in the custom

house as a result of the discovery that he conducted in connec-

tion with the custom house litigation counterclaim.7   Although

the record does not disclose when discovery in the custom house

litigation counterclaim began, such discovery could not have

begun before petitioner filed that counterclaim in December

2001.8   Since petitioner claims that it was only as a result of

discovery by him in connection with the custom house litigation

counterclaim that he was able to obtain the information which led

him to conclude that Mona Builders had overcharged him for


     7
      Our understanding is consistent with the November 8, 2002
letter that petitioner and Ms. Davis sent to the Maryland Attor-
ney General. That letter stated in pertinent part:

          We are currently in the midst of a civil suit
     against Mona [custom house litigation counterclaim].
     However, in spite of the disclosure requirements of the
     Custom Home Protection Act (CHPA), and tens of thou-
     sands of dollars expended in formal discovery efforts,
     Mona has yet to disclose the names and addresses of
     many of the suppliers and subcontractors who worked on
     our home. * * *

         *       *       *       *       *       *       *

          * * * Information obtained through our discovery
     efforts suggest [sic] that Mona may have fraudulently
     altered a subcontractor’s invoice, and may have fraudu-
     lently overcharged us for materials and supplies. * * *
     8
      In October 2001, Mona Builders commenced the custom house
litigation in which petitioner filed the custom house litigation
counterclaim.
                               -22-

bricks, it would have been impossible for him to have obtained

such information in 2000.

     With respect to petitioner’s testimony regarding the alleged

humidifier theft, such testimony was vague as to when he became

aware of that alleged theft.   Indeed, petitioner did not even

give a timeframe in such testimony.    Petitioner’s only testimony

with respect to the alleged humidifier theft was that “We also

were charged for humidifiers that were not installed.    That was

$1,000 that we asked for verification for and did not receive

verification for.”

     On the record before us, we find that petitioner has failed

to carry his burden of establishing that he became aware of the

alleged brick theft and the alleged humidifier theft in October

2000 or at any time in that year.9    On that record, we further



     9
      Petitioner declared under oath (petitioner’s declaration)
in the April 11, 2003 application filed with the District Court
of Maryland for Anne Arundel County that “Between July 25, 2001
and Aug 8, 2001, Garrett Mona, Patrick Mona and Nick Mona inten-
tionally misrepresented their intent to * * * repair defective
work that existed at that time” in the custom house. That
declaration indicates to us that petitioner became aware of
certain unspecified defective work in the custom house sometime
prior to his moving into that house around Aug. 29, 2001. We
infer from petitioner’s declaration in the April 11, 2003 appli-
cation that petitioner became aware of certain defective work in
the custom house sometime in the summer of 2001. That inference
is consistent with other statements that petitioner made (1) in
the April 11, 2003 application, (2) in the November 8, 2002
letter to the Maryland Attorney General, and (3) in the insurance
litigation counterclaim. Petitioner’s declaration in the April
11, 2003 application does not evidence that petitioner became
aware of any defective work in the custom house in 2000.
                               -23-

find that petitioner has failed to carry his burden of establish-

ing that he discovered the alleged custom house theft loss in

October 2000 or at any other time in that year.

     Assuming arguendo that petitioner had carried his burden of

establishing that he discovered the alleged custom house theft

loss in 2000, we turn to whether petitioner established the

amount of the alleged custom house theft loss which he claims he

is entitled to deduct under section 165.   As discussed above, the

amount of a loss that a taxpayer is entitled to deduct under

section 165 is the lesser of (1) the difference between the fair

market value of the property before the loss and the fair market

value of the property after the loss, the latter value in the

case of loss by theft being zero, or (2) the adjusted basis

provided in section 1011 for determining the loss from the sale

or other disposition of the property which was the subject of the

loss.   Sec. 165(b); secs. 1.165-7(b)(1), 1.165-8(c), Income Tax

Regs.

     With respect to the fair market value of the custom house

before the alleged custom house theft, petitioner introduced an

appraisal report prepared by Robert H. Campbell & Associates,

LLC, that was dated October 28, 2002 (October 28, 2002 appraisal

report) and that was prepared and provided to petitioner in

connection with the custom house litigation counterclaim.   That

appraisal report did not purport to establish the fair market
                                -24-

value of the custom house before the time in October 2000 when

petitioner alleges he discovered certain aspects of the alleged

custom house theft.   Instead, the October 28, 2002 appraisal

report purported to determine the diminished value of the custom

house as of October 1, 2002.

     With respect to the adjusted basis of Ms. Davis and peti-

tioner in the custom house, in the November 8, 2002 letter that

Ms. Davis and petitioner sent to the Maryland Attorney General,

they stated that they paid more than $1 million for the custom

house.    Petitioner failed to introduce any evidence that corrobo-

rated that statement.   Nor did petitioner introduce any evidence

that otherwise established the adjusted basis of Ms. Davis and

himself in the custom house (or in any property that was part of

the custom house and that was allegedly stolen, including the

bricks and humidifiers that were the subject of the alleged brick

theft and the alleged humidifier theft).

     On the record before us, we find that petitioner has failed

to carry his burden of establishing the fair market value of the

custom house before the time in October 2000 when petitioner

alleges he discovered certain aspects of the alleged custom house

theft and the adjusted basis of Ms. Davis and petitioner in the

custom house (or in any property that was part of the custom

house).   On that record, we further find that petitioner has

failed to carry his burden of establishing the amount of the loss
                                 -25-

which he claims he is entitled to deduct under section 165.

        Assuming arguendo that petitioner had carried his burden of

showing (1) that he discovered the alleged custom house theft

loss in 2000 and (2) the amount of the loss which he claims he is

entitled to deduct under section 165, we turn now to whether at

the end of 2000 petitioner had a reasonable prospect of recovery

of the alleged custom house theft loss.     The determination of

whether there is a reasonable prospect of recovery is made upon

facts known or reasonably foreseeable at the end of the taxable

year for which the theft loss deduction is claimed.     Ramsay

Scarlett & Co. v. Commissioner, 61 T.C. at 811-812.

     At trial, petitioner testified that as a result of the

discovery that he conducted in connection with the custom house

litigation counterclaim he became aware that Mona Builders had

only $75,000 in assets and was thinly capitalized (Mona Builders’

alleged financial condition).    Based on that testimony, peti-

tioner argues that Mona Builders was always thinly capitalized

and that therefore petitioner never had a reasonable prospect of

recovery from Mona Builders of the alleged custom house theft

loss.

     We found petitioner’s testimony with respect to Mona Build-

ers’ alleged financial condition to be questionable, conclusory,

vague, and general.    That testimony also appeared to be inconsis-

tent with Mona Builders’ ability on May 29, 2003, to purchase the
                              -26-

custom house from petitioner and Ms. Davis for $1,500,000.   Even

if we were to accept petitioner’s testimony about Mona Builders’

alleged financial condition, the argument that petitioner ad-

vances based on such testimony assumes that Mona Builders’

alleged financial condition requires the conclusion that peti-

tioner did not have a reasonable prospect of recovery of the

alleged custom house theft loss.   That Mona Builders may have had

only $75,000 in assets and/or been thinly capitalized does not

require the conclusion that petitioner did not have a reasonable

prospect of recovery of the alleged custom house theft loss.

     Assuming arguendo that we were to accept petitioner’s

testimony regarding Mona Builders’ alleged financial condition,

on the record before us, we find that petitioner did not carry

his burden of establishing that at the end of 2000 he did not

have a reasonable prospect of recovery of the alleged custom

house theft loss (or any portion thereof, including the alleged

brick theft and the alleged humidifier theft) by, for example,

withholding future payments to Mona Builders under article

seventeen of the custom house contract, requiring Mona Builders

to correct its work under article twenty-three of that contract,

or terminating the custom house contract under article twenty-

five and suing Mona Builders for breach of contract.   On that

record, we further find that petitioner did not carry his burden

of establishing that at the end of 2000 he did not have a reason-
                                 -27-

able prospect of recovery of the alleged custom house theft loss

(or any portion thereof).

     Based upon our examination of the entire record before us,

we find that petitioner has failed to carry his burden of estab-

lishing that he is entitled to a deduction under section 165 for

taxable year 2000 with respect to the alleged custom house theft

loss (or any portion thereof).

     We turn next to whether petitioner is liable for the addi-

tion to tax under section 6651(a)(1).   Section 6651(a)(1) imposes

an addition to tax for failure to file a return on the date

prescribed for filing, unless petitioner proves that such failure

to file was due to reasonable cause, and not willful neglect.

Sec. 6651(a)(1); Higbee v. Commissioner, 116 T.C. at 447.

     Respondent must carry the burden of production with respect

to the addition to tax under section 6651(a)(1).   Sec. 7491(c);

Higbee v. Commissioner, supra at 446-447.   To satisfy respon-

dent's burden of production, respondent must come forward with

"sufficient evidence indicating that it is appropriate to impose"

the addition to tax.   Higbee v. Commissioner, supra at 446.

     We have found that petitioner did not file a return for

taxable year 2000.10   In finding that petitioner did not file a


     10
      We have also found (1) that petitioner did not file a
return for any of the taxable years 1995, 1996, 1997, 1998, and
1999 and (2) that Ms. Davis did not file a return for any of the
taxable years 1995, 1996, 1998, 1999, and 2000. Respondent
                                                   (continued...)
                                -28-

return for taxable year 2000, we reject petitioner’s uncorrobo-

rated and questionable testimony that on August 10, 2001, he

mailed petitioner’s Form 1040 for 2000 to respondent by deposit-

ing such form in a mailbox.11

     Based upon our examination of the entire record before us,

we find that respondent has carried respondent’s burden of

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

tax under section 6651(a)(1) that respondent determined in the

notice.

     Petitioner introduced no evidence and advances no argument

that his failure to file a return for 2000 was due to reasonable

cause, and not willful neglect.

     Based upon our examination of the entire record before us,

we find that petitioner has failed to carry his burden of showing

that his failure to file a return for taxable year 2000 was due

to reasonable cause, and not willful neglect.   Based upon that



     10
      (...continued)
introduced respective Forms 3050, Certification of Lack of Record
(Forms 3050), for petitioner’s taxable years 1995 through 2000
and Ms. Davis’s taxable years 1995, 1996, 1998, 1999, and 2000.
Absent a showing of some irregularity in such Forms 3050, which
petitioner has not made, we may rely on such forms. See, e.g.,
Davis v. Commissioner, 115 T.C. 35, 40-41 (2000).
     11
      It is noteworthy that petitioner, an attorney, was aware
of the importance of using certified mail in connection with
mailing important documents. Indeed, petitioner sent the June 7,
2002 letter notifying State Auto of petitioner’s insurance claim
by certified mail, return receipt requested.
                               -29-

examination, we further find that petitioner has failed to carry

his burden of demonstrating error in respondent’s determination

that he is liable for taxable year 2000 for the addition to tax

under section 6651(a)(1).

     We turn finally to whether petitioner is liable for the

addition to tax under section 6654(a).     Section 6654(a) imposes

an addition to tax in the case of an underpayment of estimated

tax by an individual.

     Respondent has the burden of production with respect to the

addition to tax under section 6654(a).12    Sec. 7491(c); Higbee v.

Commissioner, supra at 446-447.   We find that the record contains

evidence from which the parties, in the computations under Rule

155, will be able to calculate the amount of any required in-

stallment by petitioner within the meaning of section 6654(d)(1)

with respect to taxable year 2000 and the amount, if any, of an

underpayment of estimated tax for that year.    In the event that

such calculation were to establish that petitioner underpaid his


     12
      For purposes of sec. 6654(a), it is necessary to determine
whether there is an underpayment of a required installment of
estimated tax. See sec. 6654(a) and (b). In this connection,
the amount of any required installment is 25 percent of the
required annual payment. Sec. 6654(d)(1)(A). The required
annual payment is equal to the lesser of (1) 90 percent of the
tax shown in the return for the taxable year or, if no return was
filed, 90 percent of the tax for such year, or (2) if the indi-
vidual filed a return for the preceding taxable year, 100 percent
of the tax shown in such return. Sec. 6654(d)(1)(B). We have
found that petitioner did not file a return for 2000, the taxable
year at issue, or for 1999, the preceding taxable year.
                              -30-

estimated tax for taxable year 2000, we find that respondent has

satisfied respondent's burden of production with respect to the

addition to tax under section 6654(a) for that year.   In that

event, we further find on the instant record (1) that none of the

exceptions in section 6654(e) applies13 and (2) that petitioner

is liable for the addition to tax under section 6654(a) for

taxable year 2000.

     In the event that the calculation relating to section 6654

were to establish that petitioner did not underpay his estimated

tax for taxable year 2000, we find that respondent has not

satisfied respondent's burden of production with respect to the

addition to tax under section 6654(a) for that year and that

petitioner is not liable for such addition to tax.

     We have considered all of the contentions and arguments of

petitioner that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.

     To reflect the foregoing and the concessions of the parties,



                                     Decision will be entered

                              under Rule 155.




     13
      Petitioner does not take the position that one or more of
the exceptions in sec. 6654(e) apply in the instant case.
