                            T.C. Memo. 1998-38



                          UNITED STATES TAX COURT



                       WALE O. OSIJO, Petitioner v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent


       Docket No. 16925-96.                      Filed January 28, 1998.


       Wale O. Osijo, pro se.


       Mark A. Weiner, for respondent.


                            MEMORANDUM OPINION

       NAMEROFF, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7443A(b)(3)1 and Rules 180, 181, and

182.       Respondent determined deficiencies and additions to tax in

petitioner’s Federal income tax for the taxable years 1989

through 1994 as set forth below:

       1
        All section references are to the Internal Revenue Code
in effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
                                 - 2 -


                                         Addition to Tax
     Year           Deficiency           Sec. 6651(a)(1)
     1989             $2,214                  $554
     1990              2,189                   547
     1991              3,088                   772
     1992              4,109                 1,027
     1993              1,470                   368
     1994                471                   118

     In the notice of deficiency, respondent determined that

petitioner had failed to file Federal income tax returns for all

subject years.    Respondent further determined for the years 1989

through 1992 that petitioner earned Schedule C income in the

respective amounts of $10,637, $10,637, $13,970, and $17,797.

These determinations were based upon Bureau of Labor statistics

for one person living in rented premises in the Fresno,

California, area, and were adjusted downward, in some years, to

account for nontaxable worker’s compensation that petitioner had

received.

     For the taxable years 1993 and 1994, respondent determined

that petitioner earned interest income of $8,862 and $10,

respectively, and Schedule C income of $3,750 and $4,050,

respectively.    For 1994, respondent further determined that

petitioner had nonemployee compensation of $2,959.

     For each of the years 1989 through 1994, respondent

determined that petitioner was liable for self-employment tax,

and, for the years 1990 through 1994, that petitioner was

entitled to a deduction for one-half of the self-employment tax

determined.   Finally, respondent determined that petitioner was
                                 - 3 -


liable for additions to tax under section 6651(a)(1) for all

years before the Court.     The issues for decision pertain to

whether respondent was correct in making the above

determinations.

        Some of the facts have been stipulated, and they are so

found.     The stipulation of facts and the attached exhibits are

included herein by this reference.       Petitioner resided in Fresno,

California, at the time he filed his petition.

                              Background

     Petitioner graduated from Western Kentucky University in

1986.     Soon after, he moved to the Fresno area and worked for a

restaurant as an assistant manager.      In 1987, petitioner moved to

Oakland, California, to study in a master’s in business

administration program with a concentration in taxation at Golden

Gate University.

     To support himself through school, petitioner worked several

part-time jobs, including working as a security guard at an

Oakland housing complex.     On October 7, 1988, while petitioner

was on night shift with 2 other security guards at the housing

complex, assailants entered the security office with high-powered

rifles and began shooting.     One guard was killed and one escaped.

Petitioner was shot 15 times in the abdominal area and was taken

to the Alameda County Hospital.
                                 - 4 -


     After an approximate 3-month stay in the hospital,

petitioner was discharged to a convalescent hospital.     Initially,

petitioner’s employer paid for his convalescent care.     Soon

after, however, petitioner’s employer refused to pay for the

rehabilitation, and petitioner had to leave the convalescent

hospital.2

     Petitioner then returned to Fresno to live with his twin

brother and his sister-in-law.    Petitioner’s sister-in-law was a

nurse and provided him with medical attention.   During his

recovery period, which extended through November 1989, petitioner

did not work.

     In November 1989, petitioner’s brother and sister-in-law

moved to Nigeria.   From that point on, petitioner was on his own,

and he began to rebuild his life.    He decided to return to school

and attended Long Beach State University, where he lived in the

dormitory.   For the fall 1990 term, petitioner changed

universities and enrolled at the University of California at

Irvine.

     Meanwhile, petitioner hired an attorney, Arthur Levy, to

secure disability income from the Employment Development

Department of the California Department of Employment (EDD).


     2
        While petitioner was in the hospital, the California
Department of Victims of Violent Crime paid petitioner’s rent on
his Oakland studio apartment. The department also assisted
petitioner in returning to Fresno from the convalescent hospital.
                                 - 5 -


Commencing October 7, 1988, the EDD began paying petitioner

temporary disability of $133.33 per week.   Subsequently,

petitioner hired attorney Gary Snyder to pursue other claims.    On

or about July 17, 1991, petitioner resolved his claims against

the California Department of Industrial Relations Uninsured

Employer’s Fund.   Petitioner was awarded temporary disability of

$133.33 per week from October 7, 1988, through October 5, 1989,

in addition to permanent disability of $133.33 per week from

October 12, 1989, through July 17, 1991, subject to certain

deductions.   Deductions were made for temporary disability

previously paid, for moneys paid by the EDD from October 6, 1988,

through August 25, 1989, at $133.33 per week, and for Mr.

Snyder’s attorney fees.   Thus, on July 17, 1991, petitioner

received a final settlement of $8,717.81.

     In 1990, Gary Snyder introduced petitioner to attorney

Georgia Michell (Ms. Michell).    Petitioner hired Ms. Michell to

represent him in a personal injury action relating to the

injuries he sustained in the 1988 shooting incident.3   Petitioner

signed a contract agreeing to pay Ms. Mitchell a fee of 40

percent of the damages award if the case was settled or tried and

a 45-percent fee if appellate work was required.   Ms. Michell, on

     3
        A substantial portion of the factual findings at this
point is derived from the findings set forth in the unpublished
opinion of the Court of Appeal of the State of California, First
Appellate District, Division Five, in the case of Osijo v. Ganong
and Michell et al., said opinion having been filed Apr. 12, 1996.
                                - 6 -


petitioner’s behalf, filed a lawsuit against various defendants,

including petitioner’s employer (the security company) and the

managers and owners of the housing complex.    Many of the

defendants were insolvent or judgment proof.    There was, however,

an applicable insurance policy issued by Home Insurance Companies

(Home Insurance).4

     In July 1991, Ms. Michell, without petitioner’s knowledge or

consent, settled the case against the defendants for $250,000,

and a check was issued by Home Insurance to the “Trust Account of

Ganong & Michell, as Trustees For Wale O. Osijo” in the amount of

$250,000 on July 26, 1991.    In 1993, petitioner was asked by Ms.

Michell to sign a settlement distribution statement reflecting

the following:

     Funds received                        $250,000.00
     Less legal fees                        112,500.00
                                            137,500.00
     Costs advanced1    $4,807.10

     To Be Paid
     Department of Industrial Relations
       Uninsured Employers Fund             $10,000.00
     Balance due client                     122,692.90
     Interest on account                      8,844.15
       Total                                131,537.05
     1
         Details of the costs advanced are omitted.



     4
        As part of the litigation, petitioner signed a
“Plaintiff’s Response To Form Interrogatories (set. #1)”, which
included the following response: “Question 2.6(a) Self-employed
tax and management consultant, 4516 East Belmont Avenue, Fresno
California 93702.”
                                - 7 -


Petitioner refused to sign that document and disputes its

accuracy.    However, petitioner did receive from Ms. Michell a

check for $131,537.05 sometime during 1993.    Petitioner began to

pursue legal remedies against Ms. Michell in the California

courts for legal malpractice.    Part of those measures are still

pending.    Suffice it to say that, at the time of trial before

this Court, it has been held that Ms. Michell had breached her

contract with petitioner and had claimed excessive fees.

     Beginning in 1993, several family members and friends came

to petitioner to have their 1992 Federal income tax returns

prepared by him because they knew petitioner had a strong

background in business administration and taxation.    Petitioner

credibly testified that he prepared no more than 10 tax returns

in 1993.    Petitioner stated that he may have charged as much as

$200 per return, but he is not sure whether he collected from

everyone the money owed to him.    In 1994, petitioner prepared

between 10 and 15 returns, including one for a friend whom he

charged $450.

                            Discussion

     The Commissioner’s determination in the notice of deficiency

is presumed correct, and petitioner bears the burden of proving

otherwise.    Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).

Where a taxpayer has not filed a tax return, respondent may

reconstruct a taxpayer’s unreported income.    Holland v. United
                                - 8 -


States, 348 U.S. 121 (1954).   The reconstruction of income must

be reasonable in light of all of the surrounding facts and

circumstances.    Giddio v. Commissioner, 54 T.C. 1530, 1533

(1970).

     For the taxable years 1989 through 1992, we find that

petitioner was not engaged in any income-producing activity.

Respondent’s reliance upon an answer to an interrogatory filed in

a lawsuit (see supra note 4) is misplaced.     While petitioner may

have identified himself in the answer to an interrogatory as a

tax management consultant, calling oneself that does not

necessarily indicate that he had in fact engaged in such

activity.   We also note that the actual interrogatory that

petitioner answered was not presented to the Court, and thus we

are unaware of the full context of petitioner’s answer.

     On the other hand, petitioner has satisfactorily established

that he was not engaged in income-producing activity during 1989

through 1992.    We find that during that time petitioner was

recovering from serious gunshot wounds, attending university,

and/or pursuing his legal remedies.     Petitioner received

nontaxable income from various agencies of the State of

California which he used to support himself.5    Accordingly, for




     5
        Respondent does not contest the nontaxability of those
proceeds.
                               - 9 -


taxable years 1989 through 1992, we hold that petitioner did not

fail to report income.

     For taxable year 1993, respondent determined, inter alia,

that petitioner received interest income in the amount of $8,862,

of which $18 is interest earned on funds held at Glendale Federal

Bank and $8,844 is interest that had accrued on the “settlement”

funds held by Ms. Michell.   Petitioner concedes the $18 amount,

but contests the fact that he received interest income from Ms.

Michell.   Allegedly, when Ms. Michell received the $250,000

settlement check from Home Insurance, she deposited it into an

interest-bearing trust account.   The record before us, however,

does not include any details of the account, including the terms

of the trust or in which years and in what amounts said interest

was earned.

     Petitioner currently is contesting the validity of the

settlement Ms. Michell arranged on his behalf.   The California

Court of Appeals has held that Ms. Michell is entitled to legal

fees of only $100,0006, not the $112,500 she retained.

Petitioner’s claim against Ms. Michell for breach of fiduciary

duty remains unresolved.

     Respondent has not offered any evidence in support of the

determination that petitioner had unreported interest income of

$8,844 in 1993.   The purported distribution statement was offered

     6
         This is 40% of the $250,000 settlement amount.
                              - 10 -


by petitioner as part of his presentation of the sequence of

events pertaining to his litigation travails.   The contents of

that document are disputed by petitioner and are pure hearsay.

Ms. Michell was not called as a witness to support its contents,

and it does not lend persuasive support to respondent’s

determination.   Thus, in view of petitioner’s credible denial

that he received such interest, we hold that petitioner did not

receive any taxable interest income from his attorney or any

trust in 1993.

     Respondent also determined for the 1993 year that petitioner

earned Schedule C income of $3,750 resulting from the preparation

of 25 tax returns at $150 per return.   We conclude, based upon

petitioner’s testimony, that petitioner had $2,000 of Schedule C

income, resulting from the preparation of 10 tax returns at $200

apiece.   Petitioner has failed to present any books and records

of his 1993 tax preparation business.   Accordingly, he has failed

to prove which of his clients, if any, failed to pay his fee.     In

addition, petitioner claims that he had legitimate business

expenses to offset that income.   However, he has failed to

substantiate any business expenses.    While our conclusions herein

result in no taxable income for petitioner for 1993 (as

petitioner’s income for the year is less than the combined amount

of his personal exemption and standard deduction), petitioner
                               - 11 -


will be liable for self-employment tax, which shall be determined

under Rule 155.

     For taxable year 1994, respondent determined that petitioner

had interest income of $10, which petitioner does not contest,

nonemployee compensation of $2,959, which respondent concedes,

and Schedule C self-employment income of $4,050, allegedly fees

resulting from the preparation of 25 tax returns, 24 at $150 each

and 1 at $450.    We conclude that petitioner had 15 clients for

whom he prepared income tax returns, 14 at $200 apiece (totaling

$2,800) and 1 at $450, resulting in unreported Schedule C self-

employment income of $3,250.    Again, petitioner has not

substantiated that he had incurred business expenses in deriving

his Schedule C income, and we shall not allow any such expenses.

While petitioner does not have taxable income for 1994, he has

self-employment income upon which self-employment tax is owed,

which shall be computed under Rule 155.

     Lastly, we consider respondent’s determination that

petitioner was liable for additions to tax under section

6651(a)(1) for the years 1989 through 1994. In view of our

holding that petitioner had no taxable income for the years 1989

through 1992, it follows that there is no underpayment to which a

section 6651(a)(1) addition to tax would be applicable.

Accordingly, respondent is not sustained on this issue for those

years.
                              - 12 -


     For taxable years 1993 and 1994, however, we have concluded

that petitioner had income from self-employment in the amounts of

$2,000 and $3,250, respectively.   Section 6017 provides that

every individual who has self-employment income of $400 or more

shall file a return with respect to self-employment tax.   Section

1.6017-1(a)(1), Income Tax Regs., provides, in part:

     A return is required under this section if an individual has
     self-employment income, as defined in section 1402(b), even
     though he may not be required to make a return under section
     6012 for purposes of the tax imposed by section 1 or 3 [i.e.
     income tax]. Provisions applicable to returns under section
     6012(a) shall be applicable to returns under this section.
     [Emphasis added.]

     Petitioner was a tax return preparer and should have been

aware of these provisions.   Moreover, other than indicating that

he was busy representing himself in his litigation against Ms.

Michell (with substantial travel and research time required)

petitioner has offered no reasonable excuse for his failure to

file returns for 1993 and 1994.    He was able to prepare returns

for others during this period and could have found the time to

prepare his own.   Upon due consideration of the entire record, we

conclude that petitioner is liable for additions to tax under

section 6651(a)(1) for the years 1993 and 1994.


                                          Decision will be entered

                                     under Rule 155.
