                        T.C. Memo. 2006-68



                      UNITED STATES TAX COURT



    DANIEL C. McMANUS, Petitioner v. COMMISSIONER OF INTERNAL
                       REVENUE, Respondent



     Docket Nos. 12336-04, 12711-04.     Filed April 10, 2006.




     Philip A. Putman, for petitioner.

     Monica Gingras, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes for 2001 and 2002 (years at

issue) of $39,799 and $21,789, respectively, as well as additions

to tax under section 6651(a)(1) of $9,949 and $5,447, and
                               - 2 -

additions to tax under section 6654 of $1,590 and $728,

respectively.1

     The issues for decision are:   (1) Whether petitioner failed

to report income of $113,469 and $68,233 for 2001 and 2002,

respectively; and (2) whether petitioner is liable for additions

to tax under sections 6651(a)(1) and 6654.

                         FINDINGS OF FACT

     Petitioner resided in La Habra, California, when he filed

the petitions.

     During the years at issue, petitioner was an insurance

salesperson licensed by the California Department of Insurance.

Petitioner entered into agency agreements with various insurance

companies.   Under these agency agreements petitioner worked as an

independent contractor, soliciting applications for long-term

health care insurance.

     On April 23, 1999, petitioner entered into an agency

agreement with Bankers United Life Assurance Co. (Bankers United)

designating him a contracting insurance agent.2   Pursuant to the

agreement, petitioner sold long-term convalescent care insurance

coverage for Bankers United.   Bankers United assigned petitioner


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended. All Rule references are
to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated. Amounts are rounded to the nearest dollar.
     2
       Bankers United merged into Life Investors Insurance Co. of
America on Dec. 31, 2001.
                                 - 3 -

two sales agent numbers and created a monthly account analysis

under each of petitioner’s agent numbers showing the account

activity.     Each monthly account analysis reflects entries for the

policies petitioner sold as an agent for Bankers United.     Bankers

United paid commissions via monthly checks based on the policies

petitioner sold.

     On May 13, 1999, petitioner entered into an “Assignment of

Commissions” contract, whereby he assigned to Salt Creek Services

all interest in his commissions due from Bankers United.

Petitioner signed the “Assignment of Commissions” as both

assignor and assignee.     Pursuant to petitioner’s request, Bankers

United paid his commission checks to Salt Creek Services.

Petitioner claimed Salt Creek Services was an irrevocable family

trust, an ongoing business, and his employer.

         Bankers United marked the checks as commission payments on

the monthly account analysis.     Bankers United printed out the

commission checks and manually compared them to the monthly

account analysis to verify accuracy.     The checks and monthly

account analysis statements were then mailed out together to Salt

Creek Services.3

     Bankers United filed a Form 1099-MISC, Miscellaneous Income,

reporting petitioner earned commissions totaling $113,469 in 2001


     3
       However, some of the commissions from Bankers United, for
the years at issue, on policies sold by petitioner were made
payable to the State of California Franchise Tax Board.
                               - 4 -

and $52,871 in 2002 as an agent for Bankers United.4   In

addition, respondent asserted four other insurance companies

reported petitioner was paid total commissions of $15,362 in

2002.5

     Petitioner failed to file Federal income tax returns and

failed to pay Federal income taxes for the years at issue.   Using

third-party information returns, on April 21, 2004, respondent

issued separate notices of deficiency to petitioner for the years

at issue, setting forth unreported income of $113,469 and

$68,233, respectively, together with Federal income tax

liabilities of $39,799 and $21,789, respectively, as well as

additions to tax under section 6651(a)(1) of $9,949 and $5,447,

and additions to tax under section 6654(a) of $1,590 and $728,

respectively.

     Petitioner timely filed petitions regarding his 2001 and

2002 deficiencies on July 15 and July 19, 2004, respectively.

These cases were consolidated on February 11, 2005, for briefing,

trial, and opinion.   Trial was held on this matter on March 17,



     4
       The commissions for 2001 were reflected by Bankers United
as follows: $70,304.52 (agent No. 58AG93 earnings) + $192.88
(agent No. 58AG93 renewals) + $26,882.90 (agent No. 58V384
earnings) + $16,088.89 (agent No. 58V384 renewals) = $113,469.19
     5
       The Form 4549, Income Tax Examination Changes, for 2002
reflected that petitioner received commissions of $1,826 from New
York Life Insurance Co., $6,414 from John Hancock Life Insurance
Co., $4,829 from GE Capital Insurance, and $2,293 from
Continental Casualty Co.
                                 - 5 -

2005.    Although petitioner did not appear, petitioner’s counsel

did.    Petitioner’s counsel did not introduce witnesses or provide

documentary evidence in support of petitioner’s position.

                                OPINION

       Petitioner asserts he is not liable for the deficiency and

additions to tax respondent determined because:      (1) Petitioner

did not receive income in the years at issue because he assigned

the income to a trust; (2) respondent failed to meet the burden

of producing evidence that the income earned during the years at

issue was attributable to petitioner; (3) respondent failed to

meet the burden of producing evidence that petitioner is liable

for additions to tax; and (4) the person who issued the notices

of deficiency lacked delegated authority.

A.     Assignment of Income

       Petitioner asserts he did not earn the commissions paid by

Bankers United for the years at issue because he assigned all his

commissions to Salt Creek Services.       Section 61(a) defines gross

income for purposes of calculating taxable income as “all income

from whatever source derived”.    This broad definition includes

“Compensation for services, including fees, commissions, fringe

benefits, and similar items”.    Sec. 61(a)(1); sec. 1.61-2(a)(1),

Income Tax Regs.    One of the fundamental principles of the

Federal income tax is that income must be taxed to the one who

earns it.    Lucas v. Earl, 281 U.S. 111 (1930).     Attempts to
                               - 6 -

subvert this principle by deflecting income away from its true

earner to another entity through contractual arrangements,

however drafted, are not recognized as dispositive for Federal

income tax purposes.   Id. at 114-115; Vercio v. Commissioner, 73

T.C. 1246, 1253 (1980).   The Supreme Court has referred to this

assignment of income rule as “the first principle of income

taxation”, Commissioner v. Culbertson, 337 U.S. 733, 739 (1949),

and “a cornerstone of our graduated income tax system”, United

States v. Basye, 410 U.S. 441, 450 (1973).

     Petitioner does not dispute that the amount paid to Salt

Creek Services for work performed must be taxed to the earner of

the income.   Instead, petitioner asserts that for tax purposes,

Salt Creek Services should be considered to have earned the

income (i.e., was the “true earner” of the income) for the years

at issue because of the assignment.    However, petitioner, not

Salt Creek Services, was entitled to receive the commissions from

Bankers United.   The agency agreement was between petitioner and

Bankers United.   Moreover, the record does not contain any

evidence showing an agreement existed between petitioner and Salt

Creek Services.   Lastly, outside of his assertions, petitioner

produced no evidence showing Salt Creek Services actually

existed.

     Accordingly, the Court concludes the assignment to Salt

Creek Services was ineffectual to shift the tax burden away from
                                - 7 -

petitioner.   The total amount paid to Salt Creek Services in

consideration for petitioner’s personal services is includable in

his gross income.

B.   Burdens of Production and Proof

     1.   Section 6201(d)

     If a taxpayer asserts a reasonable dispute with respect to

any item of income reported on a third-party information return

and the taxpayer has fully cooperated with the Secretary, the

Secretary has the burden of producing reasonable and probative

information concerning that deficiency in addition to the

information return.    Sec. 6201(d).

     Petitioner did not assert any reasonable dispute with

respect to income reported by the third-party payors.    Petitioner

did not testify at trial, called no witnesses, and produced no

relevant evidence.    Therefore, the Court concludes respondent

does not have the burden of production under section 6201(d).

     2.   Determination in Unreported Income Cases

     The Court of Appeals for the Ninth Circuit has determined

that in order for the presumption of correctness to attach to the

deficiency determination in unreported income cases, the

Commissioner must establish “some evidentiary foundation”

connecting the taxpayer with the income-producing activity,

Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir.

1979), revg. 67 T.C. 672 (1977), or demonstrate the taxpayer
                                 - 8 -

received unreported income, Edwards v. Commissioner, 680 F.2d

1268, 1270 (9th Cir. 1982); see Petzoldt v. Commissioner, 92 T.C.

661, 689 (1989).

     There is an evidentiary foundation connecting petitioner

with an income-producing activity.       The Court finds that

petitioner was an insurance agent during the years at issue and

received commission income from insurance companies.

     Petitioner bears the burden of proving that respondent’s

determinations are incorrect.     See Rule 142(a).    Petitioner

provided no evidence to dispute respondent’s determination of

petitioner’s receipt of income for the years at issue.

Therefore, the Court concludes petitioner received taxable income

of $113,469 and $68,233 in 2001 and 2002, respectively.

C.   Additions to Tax

     Pursuant to section 7491(c), the Commissioner has the burden

of production with respect to any penalty, addition to tax, or

additional amounts.     The burden of production requires the

Commissioner only to come forward with sufficient evidence

indicating it is appropriate to impose additions to tax.        Higbee

v. Commissioner, 116 T.C. 438, 446 (2001).

     Petitioner did not file returns for the years at issue, and

he did not make estimated tax payments with respect to his tax

liabilities for those years.     There is no evidence that

petitioner paid any tax for the years at issue.       Thus, respondent
                                 - 9 -

has met the burden of production, and petitioner is liable for an

addition to tax for failure to file under section 6651(a)(1) of

$9,949 and $5,447 for 2001 and 2002, respectively, and an

addition to tax under section 6654 for failure to pay estimated

tax of $1,590 and $728 for 2001 and 2002, respectively.

D.   Delegated Authority

     As a final argument, petitioner asserts that the person who

issued the notice of deficiency for the years at issue lacked

proper authority.   It is well settled the Secretary or his

delegate may issue notices of deficiency.    Secs. 6212(a),

7701(a)(11)(B) and (12)(A)(i); see Pendola v. Commissioner, 50

T.C. 509, 512-514 (1968).   For these reasons and petitioner’s

failure to provide authority to the contrary, the Court finds

petitioner’s argument is without merit.

     The Court, in reaching its holding, has considered all

arguments made and concludes that any arguments not mentioned

above are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                      Decisions will be entered

                                 for respondent.
