                              T.C. Memo. 2018-170



                        UNITED STATES TAX COURT



          RONNIE J. SMITH AND SHEILA C. SMITH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 24821-15.                        Filed October 15, 2018.



      Bryan W. Caddell, for petitioners.

      William F. Castor, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      CHIECHI, Judge: Respondent determined deficiencies in petitioners’

Federal income tax (tax) for their taxable years 2011, 2012, and 2013 of $74,364,

$7,164, and $9,922, respectively.
                                         -2-

[*2] The issues remaining for decision are:1

      (1) Are petitioners required for each of their taxable years 2011, 2012, and

2013 to include in income the amount of “[t]otal income” that their wholly owned

S corporation reported in its tax return for each of those years as well as a certain

additional amount of income that respondent determined in the notice for each of

those years? We hold that they are.

      (2) Are petitioners entitled for each of their taxable years 2011, 2012, and

2013 to deduct any expenses with respect to certain respective personal services

that they performed during each of those years? We hold that they are not.

      (3) Are petitioners entitled for their taxable year 2011 to deduct $21,940

with respect to a claimed net operating loss carryover? We hold that they are not.

                               FINDINGS OF FACT2

      Some of the facts have been stipulated and are so found.

      Petitioners resided in Oklahoma at the time they filed the petition.


      1
        There are other questions relating to certain determinations in the notice of
deficiency for petitioners’ taxable years 2011, 2012, and 2013 (notice) that are
computational in that their resolution flows automatically from our resolution of
the issues that we address herein.
      2
        Unless otherwise indicated, our findings of fact and opinion pertain to
petitioners’ taxable years 2011, 2012, and 2013, the years at issue. For clarity, we
sometimes expressly refer in our findings of fact and opinion to one or more of
those years.
                                         -3-

[*3] Petitioner, Ronnie J. Smith (Mr. Smith), worked as an employee of Lucent

Technologies (Lucent) for almost 29 years until he retired in 1999. Since his re-

tirement, Mr. Smith received at all relevant times, including during 2011, 2012,

and 2013, certain retirement income from Lucent. At all relevant times, including

during 2011, 2012, and 2013, Mr. Smith received Social Security benefits, as did

petitioner, Sheila C. Smith (Ms. Smith). (We shall sometimes refer collectively to

Mr. Smith and Ms. Smith as the Smiths.)

      From at least 2007 through at least 2013, Mr. Smith performed certain per-

sonal services as a handyman, and Ms. Smith performed certain personal services

as an office manager for Hillcrest Golf & Country Club (Hillcrest).

      In July 2007, pursuant to the advice of Warren W. Simpson, who was the

Smiths’ accountant and the president of Spectrum Financial (Spectrum), an ac-

counting firm, the Smiths incorporated under the laws of the State of Oklahoma,

and each owned 50 percent of the outstanding stock of, Smith Solutions, Inc.

(Smith Solutions). For taxable years 2007 through at least 2013, Smith Solutions

was an S corporation for tax purposes.

      On the date on which the Smiths incorporated Smith Solutions, its board of

directors (board), which consisted of Mr. Smith and Ms. Smith, held an organiza-

tional meeting. At that meeting, the board (1) adopted the bylaws of Smith Solu-
                                         -4-

[*4] tions (bylaws), (2) elected Mr. Smith as president and Ms. Smith as both

secretary and treasurer of Smith Solutions,3 (3) passed a resolution to open a bank

account for Smith Solutions (bank account resolution),4 and (4) passed a resolu-

tion authorizing and directing the president of Smith Solutions “to enter into

employment contracts with certain employees” (employment contract resolution).

      As noted above, the employment contract resolution authorized and directed

the president of Smith Solutions “to enter into employment contracts with certain

employees” and required that “such contract * * * be for the term and the rate

stated in the attached Employment Agreements.” At no time did Smith Solutions

enter into any employment agreement, written or oral, with any person, including

Mr. Smith or Ms. Smith. At no time did Mr. Smith consider himself or Ms. Smith

to be an employee of Smith Solutions.

      Pursuant to its bylaws, Smith Solutions was authorized to pay Mr. Smith

and Ms. Smith salaries in their respective positions as its president and its secre-

tary and treasurer. However, at no time did Smith Solutions pay Mr. Smith or Ms.



      3
        At all relevant times, Mr. Smith and Ms. Smith retained their positions as
the directors and the officers of Smith Solutions.
      4
       The document containing the bank account resolution, entitled “RESOLU-
TION: OPEN BANK/CHECKING ACCOUNTS”, did not include the name of any
bank in the blank space provided for such a designation.
                                        -5-

[*5] Smith any compensation in those respective positions. Nor did it at any time

pay Mr. Smith or Ms. Smith any wages or other compensation in some other

capacity.

      During at least 2011 and most of 2012, Hillcrest received monthly invoices

(Hillcrest invoices) with respect to Ms. Smith’s services as its office manager.5

Each of those invoices showed the amount due for each month with respect to

those services. The following language appeared at the top of each of the Hillcrest

invoices:

                                  Sheila Smith
                       Smith Solutions, Inc. FED ID# * * *
                              ************
                           Oklahoma City, OK 73159

The address shown at the top of each Hillcrest invoice is the Smiths’ home ad-

dress. The bottom of each Hillcrest invoice was digitally signed in the name of

“Sheila C. Smith”.

      During 2011, 2012, and 2013, Hillcrest made payments to Smith Solutions

for Ms. Smith’s personal services that totaled $6,189, $12,404, and $6,570,6


      5
      There are no Hillcrest invoices in the record for the months of July,
October, and December 2012 or for any months in 2013.
      6
        We found that during 2013 Hillcrest made payments to Smith Solutions
totaling $6,570 for Ms. Smith’s personal services. The parties stipulated that dur-
                                                                      (continued...)
                                        -6-

[*6] respectively. Hillcrest made certain of those payments by check payable to

“Smith Solutions, Inc.” (Hillcrest checks).

      Hillcrest issued Form 1099-MISC, Miscellaneous Income, for each of 2011

(Hillcrest 2011 Form 1099-MISC), 2012 (Hillcrest 2012 Form 1099-MISC), and

2013 (Hillcrest 2013 Form 1099-MISC).7 (We shall sometimes refer collectively

to the Hillcrest 2011 Form 1099-MISC, the Hillcrest 2012 Form 1099-MISC, and

the Hillcrest 2013 Form 1099-MISC as the Hillcrest Forms 1099-MISC.) The

IRMF data that the IRS maintained with respect to each of the Hillcrest Forms

1099-MISC showed the name “SHIELA [sic] SMITH” under the heading



      6
        (...continued)
ing 2013 Hillcrest paid Smith Solutions $6,750 for Ms. Smith’s personal services.
The parties also stipulated that in the notice respondent determined for petitioners’
taxable year 2013 to include $6,750 in Schedule C, Profit or Loss From Business
(Schedule C), relating to the personal services that Ms. Smith rendered to Hillcrest
during that year. It appears that there may have been typographical errors in the
amounts stated in those stipulations. The respective amounts stated in those
stipulations are clearly contrary to the facts that we have found are established by
the record, and we shall disregard them. See Cal-Maine Foods, Inc. v.
Commissioner, 93 T.C. 181, 195 (1989).
      7
       Hillcrest 2011 Form 1099-MISC, Hillcrest 2012 Form 1099-MISC, and
Hillcrest 2013 Form 1099-MISC are not in the record. Instead, copies of pertinent
portions of the so-called Information Returns Master File (IRMF) online taxpayer
system (IRMF data) that the Internal Revenue Service (IRS) maintained with
respect to those forms and that showed the data that Hillcrest reported on each of
those forms are in the record. As discussed below, at no time was Hillcrest
required to issue Form 1099-MISC to a corporation such as Smith Solutions.
                                       -7-

[*7] “PAYEE ENTITY DATA”, the name “HILLCREST GOLF & COUNTRY

CLUB” under the heading “PAYER ENTITY DATA”,8 and “NONEM COM” paid

of $6,819, $12,404, and $6,570 for 2011, 2012, and 2013, respectively.

      During the period from at least 2011 through 2012, Mr. Smith periodically

performed certain personal services as a handyman for Integris Health (Integris),

Eskridge Honda (Eskridge), Michael and Sandra Milligan (collectively, Milli-

gans), and James and Cathy Adams (collectively, Adamses).

       Each of Integris, Eskridge, and the Milligans received certain invoices

relating to Mr. Smith’s performance of certain personal services (sometimes

collectively, invoices relating to Mr. Smith’s personal services).9 The following

language appeared at the top of each of the invoices relating to Mr. Smith’s

personal services:

                                      Smith Solutions, Inc.
      Smith Solutions, Inc.           ************
                                      Oklahoma City, Oklahoma 73159
                                      ************
                                      FED ID# * * *




      8
      The name “Willow Creek Golf and Country Club” appeared under the
heading “PAYER ENTITY DATA” for taxable year 2013.
      9
     The record does not contain any invoices sent to, or received by, the
Adamses relating to certain personal services that Mr. Smith performed for them.
                                        -8-

[*8] The address shown at the top of each of the invoices relating to Mr. Smith’s

personal services is the Smiths’ home address. Each of those invoices showed,

inter alia, the date(s) on which Mr. Smith performed certain personal services, the

number of hours that he worked on each day, and the hourly rate charged for those

services.

      During at least 2011, Integris made certain payments by check relating to

Mr. Smith’s performance of certain personal services for it (Integris checks).

Most of the Integris checks were made payable to “Smith Solutions, Inc.” Two of

the Integris checks, both of which were dated October 13, 2011, were made pay-

able to “Sheila Smith”.

      During at least 2011 and 2012, Eskridge made certain payments by check

relating to Mr. Smith’s performing certain personal services for it (Eskridge

checks). Most of the Eskridge checks were made payable to “Smith Solutions,

Inc.” One of the Eskridge checks, dated February 11, 2011, was made payable to

“Ron Smith”.

      During at least 2011 and 2012, the Milligans made certain payments by

check relating to Mr. Smith’s performance of certain personal services for them

(Milligan checks). One of the Milligan checks, dated May 20, 2011, was made
                                        -9-

[*9] payable to “Smith Solutions, Inc.” Certain of the Milligan checks, dated

January 30 and June 20, 2012, respectively, were made payable to “Ron Smith”.

      During at least 2011 and 2012, the Adamses made certain payments by

check relating to Mr. Smith’s performance of certain personal services for them

(Adamses checks). Virtually all of the Adamses checks were made payable to

“Ron Smith”.

      At all relevant times, petitioners maintained various bank accounts at

WEOKIE Credit Union (WEOKIE), in Oklahoma City, Oklahoma. Petitioners

maintained a savings account identified as “S011” (savings account); two check-

ing accounts identified as “S013” and “S014”, respectively (S013 checking

account and S014 checking account, respectively); a money market account

identified as “S019” (money market account); and a certificate of deposit account

identified as “S021” (COD account). (We shall refer collectively to the savings

account, the S013 checking account, the S014 checking account, the money

market account, and the COD account as the WEOKIE accounts.)

      Petitioners did not maintain any bank account in the name of, or on behalf

of, Smith Solutions. During the years at issue, petitioners deposited into one or

more of the WEOKIE accounts, inter alia, Hillcrest checks, Integris checks,

Eskridge checks, Milligan checks, and Adamses checks.
                                          - 10 -

[*10] Spectrum prepared Form 1120S, U.S. Income Tax Return for an S Cor-

poration (Form 1120S), for Smith Solutions for each of its taxable years 2011

(2011 Form 1120S), 2012 (2012 Form 1120S), and 2013 (2013 Form 1120S).

      In its 2011 Form 1120S, Smith Solutions claimed “[t]otal income (loss)” of

$29,805 consisting of “[m]erchant card and third-party payments”, “[t]otal de-

ductions” of $26,127, and “[o]rdinary business income (loss)” of $3,678. Smith

Solutions’ total deductions of $26,127 consisted of $568 of “[r]epairs and main-

tenance”, $85 of “[t]axes and licenses”, $4,438 of “[d]epreciation”, and $21,036 of

“[o]ther deductions”. The $21,036 of other deductions comprised the following:

                                   Item            Amount
                          Accounting                $510
                          Auto and truck
                           expense                  1,124
                          Meals (50%)                402
                          Office expense              17
                          Supplies                  6,806
                          Telephone                 1,059
                          Medical                   9,606
                          Home office rent          1,512
                           Total                   21,036
                                       - 11 -

[*11] Smith Solutions did not claim as a deduction in its 2011 Form 1120S any

“[c]ompensation of officers” or “[s]alaries and wages”.

      Smith Solutions included Schedule K, Shareholders’ Pro Rata Share Items

(Schedule K), with its 2011 Form 1120S (2011 Schedule K). The 2011 Schedule

K showed “[o]rdinary business income (loss)” of $3,678, a “[s]ection 179 deduc-

tion”10 of $409, and “[i]ncome/loss reconciliation” of $3,269.

      In its 2012 Form 1120S, Smith Solutions claimed “[t]otal income (loss)” of

$14,830 consisting of “[g]ross receipts or sales”, “[t]otal deductions” of $30,422,

and “[o]rdinary business income (loss)” of !$15,592. Smith Solutions’ total

deductions of $30,422 consisted of $43 of “[t]axes and licenses”, $4,106 of

“[d]epreciation”, and $26,273 of “[o]ther deductions”. The $26,273 of other

deductions comprised the following:




      10
         All section references are to the Internal Revenue Code (Code) in effect
for the years at issue. All Rule references are to the Tax Court Rules of Practice
and Procedure.
                                           - 12 -

[*12]                               Item            Amount
                           Accounting                $560
                           Auto and truck
                            expense                  4,946
                           Insurance                 1,083
                           Meals (50%)                378
                           Office expense              906
                           Supplies                  2,701
                           Telephone                   623
                           Medical                  13,024
                           Home office rent          1,621
                           Multimedia                 431
                            Total                   26,273

Smith Solutions did not claim as a deduction in its 2012 Form 1120S any “[c]om-

pensation of officers” or “[s]alaries and wages”.

        Smith Solutions included Schedule K with its 2012 Form 1120S (2012

Schedule K). The 2012 Schedule K showed “[o]rdinary business income (loss)”

of !$15,592, and “[i]ncome/loss reconciliation” of !$15,592.

        In its 2013 Form 1120S, Smith Solutions claimed “[t]otal income (loss)” of

$9,036 consisting of “[g]ross receipts or sales” of $10,196 less “[c]ost of goods

sold” of $1,160, “[t]otal deductions” of $20,080, and “[o]rdinary business income

(loss)” of !$11,044. Smith Solutions’ total deductions of $20,080 consisted of
                                           - 13 -

[*13] $44 of “[t]axes and licenses”, $2,983 of depreciation, and $17,053 of

“[o]ther deductions”. The $17,053 of other deductions comprised the following:

                                    Item            Amount
                          Accounting                 $560
                          Auto and truck
                          expense                    3,099
                          Meals reduced               370
                          Office expense              943
                          Supplies                   6,691
                          Telephone                   806
                          Home office rent           1,322
                          Multimedia                 3,262
                            Total                   17,053

Smith Solutions did not claim as a deduction in its 2013 Form 1120S any “[c]om-

pensation of officers” or “[s]alaries and wages”.

      Smith Solutions included Schedule K with its 2013 Form 1120S (2013

Schedule K). The 2013 Schedule K showed “[o]rdinary business income (loss)”

of !$11,044, and “[i]ncome/loss reconciliation” of !$11,044.

      Smith Solutions issued to each of Mr. Smith and Ms. Smith Schedule K-1,

Shareholder’s Share of Income, Deductions, Credits, etc. (Schedule K-1), for each
                                         - 14 -

[*14] of its taxable years 2011 (collectively, 2011 Schedules K-1), 2012 (collec-

tively, 2012 Schedules K-1), and 2013 (collectively, 2013 Schedules K-1).

      In each of its 2011 Schedules K-1, Smith Solutions showed $1,839 as each

of Mr. Smith’s and Ms. Smith’s shares of its claimed “[o]rdinary business income

(loss)” of $3,678 and $205 as each of their shares of its claimed “[s]ection 179

deduction” of $409.

      In each of its 2012 Schedules K-1, Smith Solutions showed !$7,796 as each

of Mr. Smith’s and Ms. Smith’s shares of its claimed “[o]rdinary business income

(loss)” of !$15,592.

      In each of its 2013 Schedules K-1, Smith Solutions showed !$5,522 as each

of Mr. Smith’s and Ms. Smith’s shares of its claimed “[o]rdinary business income

(loss)” of !$11,044.

      Spectrum prepared Form 1040, U.S. Individual Income Tax Return (return),

for petitioners for each of their taxable years 2011 (2011 return), 2012 (2012

return), and 2013 (2013 return).

      In their 2011 return, petitioners reported, inter alia, “[w]ages, salaries, tips,

etc.” of $89 and “[o]ther income” of !$21,940 with respect to a claimed net

operating loss carryover. Petitioners included Schedule E, Supplemental Income

and Loss (Schedule E), with their 2011 return (2011 Schedule E). In their 2011
                                         - 15 -

[*15] Schedule E, petitioners claimed with respect to Smith Solutions total “[n]on-

passive income from Schedule K-1” of $3,678, a “[s]ection 179 expense deduc-

tion” of $410, and “[t]otal partnership and S corporation income or (loss)” of

$3,268.

      In their 2012 return, petitioners reported, inter alia, “[w]ages, salaries, tips,

etc.” of $18. Petitioners included Schedule E with their 2012 return (2012 Sched-

ule E). In their 2012 Schedule E, petitioners claimed with respect to Smith Solu-

tions a total “[n]onpassive loss from Schedule K-1” of !$15,592, and “[t]otal

partnership and S corporation income or (loss)” of !$15,592.

      In their 2013 return, petitioners reported, inter alia, no “[w]ages, salaries,

tips, etc.” Petitioners included Schedule E with their 2013 return (2013 Schedule

E). In their 2013 Schedule E, petitioners claimed with respect to Smith Solutions

a total “[n]onpassive loss from Schedule K-1” of !$11,044, and “[t]otal partner-

ship and S corporation income or (loss)” of !$11,044.

      Respondent assigned a revenue agent to examine each of Smith Solutions’

taxable years 2011, 2012, and 2013. Thereafter, the revenue agent expanded that

examination to include each of petitioners’ taxable years 2011, 2012, and 2013.

Petitioners did not maintain books and records relating to Smith Solutions and

gave the revenue agent only certain redacted bank statements relating to their
                                        - 16 -

[*16] taxable year 2011. Consequently, the revenue agent obtained by summonses

unredacted bank statements relating to each of petitioners’ taxable years 2011,

2012, and 2013.

      After having obtained the unredacted bank statements for each of peti-

tioners’ taxable years 2011, 2012, and 2013, the revenue agent performed a bank

deposits analysis in order to ascertain whether Smith Solutions had underreported

the gross receipts that it had reported in each of its 2011 Form 1120S, 2012 Form

1120S, and 2013 Form 1120S. (We shall refer collectively to the revenue agent’s

bank deposits analysis for each of petitioners’ taxable years 2011, 2012, and 2013

as the bank deposits analyses in question.)

      As part of the bank deposits analyses in question, the revenue agent ana-

lyzed each deposit into each of the WEOKIE accounts during each of the years

2011, 2012, and 2013 in order to determine the total deposits into each of those

accounts, and the total deposits into all of those accounts, during each of those

years. The revenue agent then analyzed each deposit into the WEOKIE accounts

during each of the years 2011, 2012, and 2013 in an effort to determine whether

any of those deposits was not taxable because, for example, it was a loan, a trans-

fer from another bank account, or another type of nontaxable deposit. As a final

step in the bank deposits analyses in question, the revenue agent reduced the total
                                       - 17 -

[*17] deposits into the WEOKIE accounts during each of the years 2011, 2012,

and 2013 that she had determined by the total amount that she had determined

were nontaxable deposits in order to arrive at the total amount of taxable deposits

into the WEOKIE accounts for each of those years.

      Pursuant to the bank deposits analyses in question, the revenue agent

determined that petitioners had total taxable deposits for their taxable years 2011,

2012, and 2013 of $199,752, $15,612, and $21,203, respectively. The revenue

agent concluded that during each of the years 2011, 2012, and 2013 Mr. Smith in

his individual capacity and Ms. Smith in her individual capacity, and not Smith

Solutions, had performed certain personal services for certain persons. The rev-

enue agent decided that consequently the total taxable deposits for each of peti-

tioners’ taxable years 2011, 2012, and 2013 that she had determined pursuant to

the bank deposits analyses in question should be allocated between Mr. Smith and

Ms. Smith. The revenue agent further concluded that the respective amounts of

taxable deposits for those years so allocated should be included as gross income in

separate respective Schedules C for Mr. Smith and for Ms. Smith for petitioners’

taxable years 2011, 2012, and 2013.

      In deciding how to allocate to Ms. Smith a portion of the total taxable de-

posits that she had determined for each of petitioners’ taxable years 2011, 2012,
                                        - 18 -

[*18] and 2013, the revenue agent began by reviewing the Hillcrest Forms 1099-

MISC. That is because Ms. Smith had performed certain personal services during

each of those years only for Hillcrest. The revenue allocated to Ms. Smith for

petitioners’ taxable years 2011, 2012, and 2013 is the respective amounts of non-

employee compensation that Hillcrest showed it had paid in the Hillcrest Forms

1099-MISC during those years for Ms. Smith’s personal services, i.e., $6,819,

$12,404, and $6,570 for 2011, 2012, and 2013, respectively. The revenue agent

then reduced the respective total taxable deposits of $199,752, $15,612, and

$21,203 that she had determined for petitioners’ taxable years 2011, 2012, and

2013 by those respective amounts of nonemployee compensation that Hillcrest

paid for Ms. Smith’s personal services. The revenue agent allocated to Mr. Smith

the respective balances of those respective total taxable deposits for those years,

i.e., $192,933, $3,208, and $14,633 for petitioners’ taxable years 2011, 2012, and

2013, respectively.

      Respondent issued the notice to petitioners. In the notice, respondent

determined that each of Mr. Smith and Ms. Smith has the following amounts of
                                        - 19 -

[*19] Schedule C income11 for their taxable years 2011, 2012, and 2013 from the

performance of personal services during those years:12

       Name                  2011                 2012                 2013
     Mr. Smith              $192,933             $3,208               $14,633
     Ms. Smith                6,819              12,404                 6,570

      Respondent further determined in the notice that petitioners are not entitled

for their taxable year 2011 to a deduction of $21,940 with respect to a claimed net

operating loss carryover.

                                       OPINION

      We address first petitioners’ position that the presumption of correctness

that is generally accorded to determinations in a notice of deficiency does not

apply here and that consequently petitioners do not have the burden of establishing

that respondent’s determinations in the notice that they are contesting are errone-

ous. In support of that position, petitioners allege that the revenue agent “made


      11
         The respective sums of the respective total amounts of Schedule C income
for petitioners’ taxable years 2011, 2012, and 2013 that respondent determined
Mr. Smith and Ms. Smith have for those years equal the total taxable deposits that
the revenue agent determined on the basis of the bank deposits analyses in
question.
      12
        Respondent also determined in the notice to disallow the Schedule E
“Total partnership and S corporation income or (loss)” that petitioners claimed in
each of their 2011 return, 2012 return, and 2013 return.
                                         - 20 -

[*20] numerous mistakes in [the] calculation of the F4549-A [Income Tax Exam-

ination Changes attached to the notice], and those mistakes, cumulatively, con-

stitute a violation of the ‘presumption of correctness’ on the F4549-A.”

      By way of illustration of the types of claims that petitioners advance in

support of their position that the presumption of correctness that is generally

accorded to determinations in a notice of deficiency does not apply here, peti-

tioners claim that the revenue agent should have examined petitioners’ tax returns

for years prior to the taxable years at issue in order to determine the validity of

their claimed deduction for their taxable year 2011 with respect to a claimed net

operating loss carryforward. By way of further illustration, petitioners claim that

certain of the taxable deposits that the revenue agent determined on the basis of

the bank deposits analyses in question are not taxable.

      We believe that petitioners are attempting to look behind the notice in this

case. As a general rule, we will not look behind a notice of deficiency to examine

the evidence used or the propriety of the Commissioner’s motives in making the

Commissioner’s determinations. See Greenberg’s Express, Inc. v. Commissioner,

62 T.C. 324, 327 (1974). We have recognized two exceptions to that general rule.

See Graham v. Commissioner, 82 T.C. 299, 308-309 (1984), aff’d, 770 F.2d 381

(3d Cir. 1985). First, we may look behind a notice of deficiency where there is
                                       - 21 -

[*21] substantial evidence of unconstitutional conduct by the Commissioner. See

id. at 308. Second, we may look behind a notice of deficiency where the Commis-

sioner of Internal Revenue introduces no evidence but instead rests on the pre-

sumption of correctness and the taxpayer challenges the notice on the grounds that

it is arbitrary. See id. at 308-309.

      None of petitioners’ claims supports their position that the presumption of

correctness that is generally accorded to determinations in a notice of deficiency

does not apply here and that consequently petitioners do not have the burden of

establishing that respondent’s determinations in the notice that they are contesting

are erroneous. The record is devoid of any evidence of unconstitutional conduct

by respondent, let alone any substantial evidence of unconstitutional conduct. In

addition, respondent is not merely relying on the presumption of correctness that is

generally accorded to determinations in a notice of deficiency; respondent intro-

duced certain documentary and testimonial evidence in this case.

      On the record before us, we hold that we will not look behind the notice that

respondent issued to petitioners for their taxable years 2011, 2012, and 2013. On

that record, we further hold that the presumption of correctness that is generally

accorded to determinations in a notice of deficiency applies to the determinations

in the notice that respondent issued to petitioners for those years. We also hold
                                         - 22 -

[*22] that petitioners bear the burden of establishing that respondent’s determina-

tions in the notice that remain at issue are erroneous.

      Before turning to the issues that remain for our consideration, we address

petitioners’ attempts on brief to disregard certain stipulations in the stipulation of

facts that the parties signed and that we made part of the record at the beginning of

the trial in this case. Rule 91(e) provides that a stipulation, to the extent of its

terms, is to be treated as a conclusive admission by the parties to the stipulation,

unless otherwise permitted by us or agreed upon by those parties. We will not

permit a party to a stipulation to qualify, change, or contradict a stipulation in

whole or in part except that we may do so where justice requires. See id.

      On the record before us, we hold that justice does not require us to set aside

any of the stipulations that petitioners attempt to disregard on brief. See id. On

that record, we further hold that, except as stated supra note 6, and as discussed

below with respect to the Hillcrest Forms 1099-MISC, we find no evidence that is

clearly contrary to any of those stipulations, and we will not disregard them. See

Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989).

      One final matter that we address before considering the issues that remain

for decision is that petitioners’ briefs are replete with factual allegations that are

not established by the record in this case. By way of illustration, petitioners con-
                                         - 23 -

[*23] tend that they maintained “a Balance Sheet, a Profit and Loss [sic], and

extensive other books and records” relating to Smith Solutions. The record is

devoid of any such documents. Another example of an unsupported factual alle-

gation that petitioners advance on brief is their allegation that certain deposits that

respondent determined are taxable are in fact nontaxable gifts and/or inheritances

that they received from Ms. Smith’s mother. The record is devoid of reliable

evidence establishing that allegation. We will not rely on any of petitioners’

factual allegations that are not established by the record in order to resolve the

issues presented.

      We now turn to the issues that we must decide. We address first whether

petitioners are required for each of their taxable years 2011, 2012, and 2013 to

include in income the amount of “[t]otal income” that their wholly owned S

corporation reported in each of its 2011 Form 1120S, 2012 Form 1120S, and 2013

Form 1120S as well as a certain additional amount of income that respondent

determined in the notice for each of those years. In order to resolve that issue, we

must decide whether the respective personal services that Mr. Smith and Ms.

Smith performed for certain persons during 2011, 2012, and 2013 were performed

in their respective individual capacities or as employees or other agents of Smith

Solutions.
                                       - 24 -

[*24] It is well established that income must be taxed to the actual earner of the

income. See, e.g., United States v. Basye, 410 U.S. 441 (1973); Commissioner v.

Culbertson, 337 U.S. 733 (1949); Lucas v. Earl, 281 U.S. 111 (1930). “In the

corporate context, however, the actual earner test may be inadequate because a

corporation can earn income only through the personal services of its employees

and agents.” Haag v. Commissioner, 88 T.C. 604, 611 (1987), aff’d without

published opinion, 855 F.2d 855 (8th Cir. 1988). Where a corporation relies on

the personal services of an employee to produce income, the question arises

whether the corporation is actually conducting the business or whether the em-

ployee is conducting the business in his/her individual capacity. The relevant test

is who controls the earning of the income. See, e.g., Haag v. Commissioner, 88

T.C. at 611; Vercio v. Commissioner, 73 T.C. 1246, 1253 (1980).

      In United States v. Hartshorn, 751 F.3d 1194 (10th Cir. 2014), the U.S.

Court of Appeals for the Tenth Circuit (Court of Appeals), the court to which an

appeal in this case would normally lie, was asked to decide whether to sustain an

injunction under section 7408 that the U.S. District Court for the District of Utah

had imposed against an individual for promoting an abusive tax shelter in viola-

tion of section 6700. In order to decide that issue, the Court of Appeals con-

sidered whether a minister of a church is required to include in income and pay tax
                                        - 25 -

[*25] on income that he/she earns in his/her normal employment as a minister and

assigns to his/her church. In order to resolve that question, the Court of Appeals

first addressed “whether a minister’s income is tax exempt only if he receives it as

an agent of the church or whether * * * it is sufficient that a minister assigns

earnings to his church pursuant to a vow of poverty.” Hartshorn, 751 F.3d at

1198. In answering that latter question, the Court of Appeals examined the

decisions of certain other U.S. Courts of Appeals in the so-called vow-of-poverty

context. The Court of Appeals concluded on the basis of that review that those

other courts had held that a minister must be acting as an agent of the minister’s

church in order for the minister’s income to be exempt from tax. See id. at 1200.

      In Hartshorn, the Court of Appeals adopted the facts and circumstances

approach that the U.S. Court of Appeals for the Federal Circuit had adopted in a

vow-of-poverty context in Fogarty v. United States, 780 F.2d 1005 (Fed. Cir.

1986), as the appropriate test to use in order to determine whether a minister is

acting as an agent of the minister’s church in earning income. According to the

Court of Appeals, under such a facts and circumstances approach “courts may

consider various factors pertinent to the relationships between the religious order

and the minister, between the minister and the third-party employer, and between

the employer and the order.” Hartshorn, 751 F.3d at 1200. (We shall refer to the
                                        - 26 -

[*26] facts and circumstances approach that the Court of Appeals adopted in

Hartshorn as the Hartshorn test.)

      Although the ultimate issue in Hartshorn was whether to sustain an injunc-

tion, we believe that the Court of Appeals would apply the Hartshorn test in de-

termining whether petitioners are required for each of their taxable years 2011,

2012, and 2013 to include in income the amount of “[t]otal income” that their

wholly owned S corporation reported in each of its 2011 Form 1120S, 2012 Form

1120S, and 2013 Form 1120S. In our jurisprudence we have applied the so-called

two-prong test announced in Johnson v. Commissioner, 78 T.C. 882, 891 (1982),

aff’d without published opinion, 734 F.2d 20 (9th Cir. 1984), in determining who

earns income in a corporate context. However, we would reach the same result in

resolving the issue presented here whether we apply the Hartshorn test or that two-

prong test.

      We begin by examining the relationship during the years at issue between

Smith Solutions and each of Mr. Smith and Ms. Smith, see Hartshorn, 751 F.3d at

1200, in order to ascertain whether each of those relationships enabled Smith

Solutions to exercise control over the provision to certain persons of certain per-

sonal services by each of them and over the receipt of the payments for those

respective services. Petitioners contend that the bylaws of Smith Solutions con-
                                        - 27 -

[*27] stituted “the controlling written agreement” between Smith Solutions and

each of Mr. Smith and Ms. Smith13 and that those bylaws “provide[] a means for

the setting of salary for compensation of its officers (Petitioners)”.

      The bylaws of Smith Solutions contain nothing but typical boilerplate

relating to the responsibilities that the Smiths owed to Smith Solutions as cor-

porate directors and officers. Those bylaws do not establish that the Smiths owed

any contractual duties to Smith Solutions to perform any personal services on its

behalf. Nothing in the bylaws of Smith Solutions or in any other evidence in the

record establishes that Smith Solutions was able to control the performance of

respective personal services by Mr. Smith and Ms. Smith. See Hartshorn, 751

F.3d at 1200; Haag v. Commissioner, 88 T.C. at 612. Nor do those bylaws14



      13
        According to petitioners, “[t]he Bylaws document was drafted by an
attorney who should have known the legal requirements for a controlling written
agreement.”
      14
         One provision of the Smith Solutions bylaws entitled “Deposits” stated
that “[a]ll funds of the Corporation not otherwise employed shall be deposited
from time to time to the credit of the Corporation in such banks, trust companies
or other depositories as the Board of Directors may select.” That provision does
not address the performance of respective personal services by Mr. Smith and Ms.
Smith. Nor does it indicate what funds are “funds of the Corporation not
otherwise employed”. We note that in the bank account resolution the Smith
Solutions’ board did not designate in the blank space provided the name of a bank
or other depository institution into which “[a]ll funds of the Corporation not
otherwise employed shall be deposited from time to time”.
                                        - 28 -

[*28] establish that Smith Solutions “possessed the actual power to control the

receipt of funds”, Pacella v. Commissioner, 78 T.C. 604, 622 (1982), for the per-

formance of those respective personal services, see Hartshorn, 751 F.3d at 1200.

      Another significant factor in determining whether Smith Solutions in fact

earned the income that it reported in its 2011 Form 1120S, its 2012 Form 1120S,

and its 2013 Form 1120S relates to the employment contract resolution that its

board adopted. That resolution authorized and directed the president of Smith

Solutions “to enter into employment contracts with certain employees” and re-

quired that “such contract * * * be for the term and the rate stated in the attached

Employment Agreements.” At no time did Smith Solutions enter into any employ-

ment agreement, written or oral, with any person, including Mr. Smith or Ms.

Smith. Moreover, at no time did Mr. Smith consider himself or Ms. Smith to be an

employee of Smith Solutions. In addition, the record is devoid of evidence estab-

lishing that Smith Solutions would have any legal recourse against Mr. Smith and

Ms. Smith if they stopped performing their respective personal services for certain

persons. See Vercio v. Commissioner, 73 T.C. at 1254.

      It also is significant that Smith Solutions never compensated Mr. Smith and

Ms. Smith for the performance of their respective personal services for certain

persons. Nor did Smith Solutions report in its 2011 Form 1120S, 2012 Form
                                       - 29 -

[*29] 1120S, and 2013 Form 1120S any compensation of officers or salaries of

employees. Moreover, Mr. Smith and Ms. Smith did not report in their 2011

return, 2012 return, and 2013 return any wages or other compensation that Smith

Solutions paid them during 2011, 2012, and 2013. That is because Smith Solu-

tions never paid them any wages or other compensation. See Ruckman v. Com-

missioner, T.C. Memo. 1998-83, 1998 WL 77987, at *5.

      We also find it significant in determining whether Smith Solutions in fact

earned the income that it reported in its 2011 Form 1120S, its 2012 Form 1120S,

and its 2013 Form 1120S that there was no contractual relationship or similar

indicium between Smith Solutions and the persons using the respective personal

services of Mr. Smith and Ms. Smith that recognized or acknowledged that Smith

Solutions controlled them in the performance of those respective services. See,

e.g., Hartshorn, 751 F.3d at 1200; Ruckman v. Commissioner, 1998 WL 77987, at

*5.

      With respect to the personal services that Ms. Smith performed for Hillcrest,

petitioners rely on the Hillcrest invoices that it received during 2011 and 2012 as a

factor weighing in their favor in determining whether Smith Solutions in fact

earned the income that it reported in its 2011 Form 1120S, its 2012 Form 1120S,

and its 2013 Form 1120S. Those invoices contained the same caption. That cap-
                                        - 30 -

[*30] tion showed the name “Smith Solutions, Inc.” However, the name “Sheila

Smith” also appeared immediately above the name “Smith Solutions, Inc.” We are

unable to find on the basis of the Hillcrest invoices that Hillcrest received during

2011 and 2012 that Hillcrest recognized or understood that it was contracting with

Smith Solutions for certain personal services of Ms. Smith, and not with Ms.

Smith in her individual capacity. Nor are we able to find from those invoices that

Hillcrest recognized or understood that Smith Solutions was exercising control

over Ms. Smith with respect to the personal services that she performed for it.

      Petitioners also rely on the Hillcrest checks that were payable to “Smith

Solutions, Inc.” as a factor weighing in their favor in determining whether Smith

Solutions in fact earned the income that it reported in its 2011 Form 1120S, its

2012 Form 1120S, and its 2013 Form 1120S. Although those checks establish that

Hillcrest was aware of the existence of Smith Solutions, they do not establish that

Hillcrest recognized or understood that it was contracting with Smith Solutions for

the performance of certain personal services by Ms. Smith. We are not persuaded

that Hillcrest made the Hillcrest checks payable to Smith Solutions because it

considered Smith Solutions as (1) the contracting party for the personal services

that Ms. Smith performed for it, (2) the entity that exercised control over Ms.

Smith with respect to the performance of those services, and (3) the entity that was
                                        - 31 -

[*31] entitled to compensation for those services. We believe that Hillcrest made

the Hillcrest checks payable to Smith Solutions because Ms. Smith asked it to do

so.

      Petitioners also point to the Hillcrest 2011 Form 1099-MISC, the Hillcrest

2012 Form 1099-MISC, and the Hillcrest 2013 Form 1099-MISC as favorable

facts in determining whether Smith Solutions in fact earned the income that it

reported in its 2011 Form 1120S, its 2012 Form 1120S, and its 2013 Form

1120S.15 The IRMF data that the IRS maintained with respect to each of the

Hillcrest Forms 1099-MISC showed the name “SHIELA [sic] SMITH ” under the

heading “PAYEE ENTITY DATA”, the name “HILLCREST GOLF & COUN-

TRY CLUB” under the heading “PAYER ENTITY DATA”,16 and “NONEM

COM” paid of $6,819, $12,404, and $6,570 for 2011, 2012, and 2013, respec-

tively. Although the parties stipulated that the Hillcrest Forms 1099-MISC were

“issued to Smith Solutions”, that stipulation is clearly contrary to the facts that we

have found are established by the record, and we shall disregard it. See Cal-Maine


      15
        The Hillcrest 2011 Form 1099-MISC, the Hillcrest 2012 Form 1099-
MISC, and the Hillcrest 2013 Form 1099-MISC are not in the record. Instead,
copies of pertinent portions of the IRMF data that the IRS maintained with respect
to those forms and that showed the data that Hillcrest reported on each of those
forms are in the record.
      16
           See supra note 8.
                                        - 32 -

[*32] Foods, Inc. v. Commissioner, 93 T.C. at 195. We find on the basis of the

IRMF data that Hillcrest understood that it had paid Ms. Smith nonemployee

compensation for the personal services that she had performed for it. It is sig-

nificant in this regard that at no time was Hillcrest required to issue Form 1099-

MISC to a corporation such as Smith Solutions. Only if a service provider is other

than a corporation is the person for whom personal services are rendered during a

taxable year required to issue Form 1099-MISC showing the compensation that

the person paid during the taxable year to such a service provider. See sec.

1.6041-3(p)(1), Income Tax Regs.

      With respect to the respective personal services that Mr. Smith performed

for Integris, Eskridge, the Milligans, and the Adamses, petitioners rely on certain

invoices that each of Integris, Eskridge, and the Milligans received relating to the

performance of those respective personal services for them as a factor weighing in

their favor in determining whether Smith Solutions in fact earned the income that

it reported in its 2011 Form 1120S, its 2012 Form 1120S, and its 2013 Form

1120S.17 Those invoices contained the same caption. The name “Smith Solutions,

Inc.” appeared at the top of each of those invoices. Mr. Smith’s name did not


      17
      The record does not contain any invoices sent to, or received by, the
Adamses relating to certain personal services that Mr. Smith performed for them.
                                        - 33 -

[*33] appear in the caption at the top of those invoices. As was true of the Hill-

crest invoices relating to certain personal services that Ms. Smith performed for

Hillcrest, we are unable to find on the basis of the invoices that each of Integris,

Eskridge, and the Milligans received that each of Integris, Eskridge, and the

Milligans recognized or understood that it was contracting with Smith Solutions

for certain personal services of Mr. Smith, and not with Mr. Smith in his individ-

ual capacity. Nor are we able to find from those invoices that each of Integris,

Eskridge, and the Milligans recognized or understood that Smith Solutions was

exercising control over Mr. Smith with respect to the personal services that he

performed for it.

      Petitioners also rely on the Integris checks, the Eskridge checks, the Mil-

ligan checks, and the Adamses checks relating to the performance of respective

personal services by Mr. Smith for them as a factor weighing in their favor in de-

termining whether Smith Solutions in fact earned the income that it reported in its

2011 Form 1120S, its 2012 Form 1120S, and its 2013 Form 1120S. Although

those checks establish that each of Integris, Eskridge, the Milligans, and the

Adamses was aware of the existence of Smith Solutions, they do not establish that

each of those persons recognized or understood that each was contracting with

Smith Solutions for the performance of certain personal services by Mr. Smith.
                                        - 34 -

[*34] We are not persuaded that each of Integris, Eskridge, the Milligans, and the

Adamses made the checks that each of them had written payable to Smith Solu-

tions because each considered Smith Solutions as (1) the contracting party for

certain respective personal services that Mr. Smith performed for each of them,

(2) the entity that exercised control over Mr. Smith with respect to the perfor-

mance of those respective services, and (3) the entity that was entitled to com-

pensation for those respective services. We believe that each of Integris, Eskridge,

the Milligans, and the Adamses made the checks that each of them had written

payable to Smith Solutions because Mr. Smith asked each of them to do so.

      Based upon our examination of the entire record before us, we find that

petitioners have failed to carry their burden of establishing that they did not earn

the income that Smith Solutions reported as “[t]otal income” in each of its 2011

Form 1120S, 2012 Form 1120S, and 2013 Form 1120S.

      We turn next to whether petitioners are required for each of their taxable

years 2011, 2012, and 2013 to include in income a certain additional amount of

income that respondent determined in the notice for each of those years on the

basis of the bank deposits analyses in question. It is petitioners’ position that they

are not required to do so. In support of that position, petitioners argue that certain
                                       - 35 -

[*35] of the taxable deposits that the revenue agent determined on the basis of the

bank deposits analyses in question are not taxable.

      Before addressing petitioners’ arguments regarding certain alleged non-

taxable deposits that they maintain the revenue agent included in taxable deposits

for each of their taxable years 2011, 2012, and 2013, we note that we examined

the bank deposits analyses in question and considered the testimony of the revenue

agent regarding those analyses, which we found to be credible. We conclude, as

summarized below, that the revenue agent conducted the bank deposits analyses in

question in accordance with applicable law. The revenue agent asked petitioners

to provide her with any books or records that they maintained for Smith Solutions

for the taxable years at issue. Petitioners informed the revenue agent that they did

not have any books and records. Petitioners provided the revenue agent only with

a redacted version of the bank records relating to the WEOKIE accounts for their

taxable year 2011. The revenue agent then decided to use the bank deposits meth-

od in order to determine the amount of petitioners’ taxable income for each of

their taxable years 2011, 2012, and 2013. See Nicholas v. Commissioner, 70 T.C.

1057, 1064 (1978); see also Petzoldt v. Commissioner, 92 T.C. 661, 693 (1989).

In conducting the bank deposits analyses in question, the revenue agent was

required to, and we find that she did, take into account any nontaxable source of a
                                       - 36 -

[*36] deposit of which she had knowledge. See Clayton v. Commissioner, 102

T.C. 632, 645-646 (1994).

      “A bank deposit is prima facie evidence of income and respondent need not

prove a likely source of that income.” Tokarski v. Commissioner, 87 T.C. 74, 77

(1986). Petitioners bear the burden of proving that respondent’s determinations of

income based on the bank deposits method are erroneous. See Clayton v. Com-

missioner, 102 T.C. at 645. Petitioners may satisfy that burden by establishing

that the deposits that remain at issue are derived from a nontaxable source. See

Nicholas v. Commissioner, 70 T.C. at 1064.

      We address now petitioners’ arguments regarding certain alleged nontax-

able deposits that they maintain the revenue agent included in taxable deposits for

each of their taxable years 2011, 2012, and 2013. With respect to their taxable

year 2011, petitioners point to four such alleged nontaxable deposits (alleged 2011

nontaxable deposits). Petitioners claim that a $25,000 deposit into the S013

checking account in April 2011 was “from the proceeds of the sale of a vintage

1936 Ford that was owned by Petitioner wife’s mother, Margaret Claborn.” Ac-

cording to petitioners, Ms. Smith’s mother “contracted Petitioners to sell * * * [the

vehicle] for her”, and after the sale of the vehicle Ms. Smith’s mother “gifted the

proceeds of the sale to the Petitioners.” Petitioners claim that they “provided com-
                                        - 37 -

[*37] plete documentation of this deposit to Appeals and to Respondent prior to

trial during the pretrial conference”, but were “denied the opportunity to stipulate

this evidence by the Respondent”.

      Petitioners also contend that a $1,550 deposit into the S013 checking

account in October 2011 was “from the proceeds of the sale of furniture from Ms.

Claborn” and that “[t]hese proceeds were gifted by Ms. Claborn to Petitioners

following the sale.” With respect to that $1,550 deposit, petitioners also claim that

they “provided complete explanation of this deposit to Appeals and to Respondent

prior to trial during the pretrial conference” but were “denied the opportunity to

stipulate to this evidence by the Respondent”.

      The last two alleged 2011 nontaxable deposits are two deposits of $136,000

and $900, respectively, into the COD account that were made on the same day on

August 29, 2011. Petitioners claim that each of those alleged 2011 nontaxable

deposits was a nontaxable transfer from one of their accounts into another of their

accounts (interaccount transfer). In support of their claim, petitioners point to a

bank statement for August 2011 which showed the following descriptions for the

respective deposits into the COD account on August 29, 2011, of $136,000 and

$900: “NEW ACCOUNT DEPOSIT TRANSFER--SMITH, SHEI” and “DEPOS-

IT TRANSFER--SMITH, SHEILA C”, respectively. With respect to the $136,000
                                       - 38 -

[*38] deposit into the COD account, petitioners also contend that it is “not logical

for a retired handyman, who normally had gross income of approximately $30,000

each year, to suddenly receive 4-5 times his annual income in one lump sum”.

      With respect to their taxable year 2012, petitioners point to one alleged

nontaxable deposit (alleged 2012 nontaxable deposit). Petitioners claim that a

$700 deposit into the S013 checking account in December 2012 consisted of

“proceeds of the sale of furniture from Ms. Claborn following her death” and was

“part of Petitioner wife’s inheritance”. Petitioners also claim that they “provided

complete explanation of this deposit [$700 deposit into the S013 checking ac-

count] to Appeals and to Respondent prior to trial during the pretrial conference,

but Petitioners were denied the opportunity to stipulate this evidence by the

Respondent”.

      With respect to their taxable year 2013, petitioners maintain that respondent

refused to stipulate certain “deposit records” for the period January 15 through

December 31, 2013. According to petitioners, “[i]f the deposit records for all of

2013 had been correctly submitted and stipulated, they would show” that numer-

ous deposits, albeit most of them relatively small in amount, which the revenue

agent had included in taxable deposits for their taxable year 2013, were nontaxable
                                        - 39 -

[*39] (alleged 2013 nontaxable deposits).18 (We shall sometimes refer collectively

to the alleged 2011 nontaxable deposits, the alleged 2012 nontaxable deposits, and

the alleged 2013 nontaxable deposits as petitioners’ alleged nontaxable deposits.)

      Petitioners rely almost exclusively on their contentions on brief, not on

evidence in the record, to establish their claims regarding petitioners’ alleged

nontaxable deposits. For example, petitioners do not point to or rely on any part

of the record that in fact establishes their claims that the $136,000 deposit and the

$900 deposit into the COD account on August 29, 2011, were interaccount trans-

fers. We acknowledge that the descriptions of the $136,000 and $900 deposits in

the pertinent records of the WEOKIE accounts as “NEW ACCOUNT DEPOSIT


      18
         As an illustration of the type of alleged 2013 nontaxable deposits, peti-
tioners contend that the “deposit records” for the period in 2013 after January 14,
2013, that, according to petitioners, respondent refused to stipulate would demon-
strate that $4,350 of a $14,263.03 deposit into the S013 checking account on
January 16, 2013, was “Petitioner wife’s proportionate amount from the sale of
their [sic] mother’s (Margaret Claborn) jewelry, silver, and scooter”. As further
examples, petitioners claim that they reported as taxable income certain of the
alleged 2013 nontaxable deposits and that respondent’s inclusion of those deposits
in petitioners’ income for the years at issue would result in double taxation of the
same income. Two illustrations of this type of alleged 2013 nontaxable deposits
are petitioners’ contentions (1) that $50 of a $1,085.22 deposit into the S013
checking account in February 2013 was from “a Citibank dividend check” which
petitioners claim they reported in the Schedule B, Interest and Ordinary
Dividends, included with their 2013 return and (2) that $158.22 of the same
$1,085.22 deposit into the S013 checking account was from “a Western Gas &
Royalty check” which petitioners claim they reported in their 2013 Schedule E.
                                         - 40 -

[*40] TRANSFER--SMITH, SHEI” and “DEPOSIT TRANSFER--SMITH,

SHEILA C”, respectively, suggest that those deposits involved, inter alia, some

type of “transfer”. We also acknowledge that it would be unusual for a handyman

like Mr. Smith and an office manager like Ms. Smith, who had no other source of

substantial income during the years at issue that is disclosed by the record in this

case, to deposit $136,000 in one transaction. However, none of the records of the

WEOKIE accounts or any other evidence in the record establishes that Mr. Smith

or Ms. Smith made a withdrawal of $136,000 and another withdrawal of $900

from one or more accounts that one or both of them maintained at one or more

financial institutions.19 In this regard, we note that the record establishes that the

revenue agent excluded from total deposits as nontaxable in determining taxable

deposits under the bank deposits analyses in question a $25,000 deposit into the

COD account, which was also made on August 29, 2011, the date on which the


      19
         Petitioners claim that the $136,000 and $900 deposits were transfers from
“a personal account owned by Petitioner wife established one year prior to the first
year of audit into a Certificate of Deposit owned jointly by Petitioners.” Nothing
in the record establishes the existence of a bank account or other depository ac-
count in the name of Ms. Smith, let alone that any such bank account or depository
account was the source of the $136,000 deposit and the $900 deposit. Petitioners
also claim that “[n]either of these deposits were cash deposits and the RA could
have easily traced both back to transfers between the personal account of Petition-
er wife * * * and Petitioners’ joint accounts.” We held above that petitioners are
not allowed to look behind the notice.
                                        - 41 -

[*41] $136,000 deposit and the $900 deposit were made into that account. The

description of that $25,000 deposit in the pertinent records of the WEOKIE ac-

counts was “DEPOSIT TRANSFER--SMITH, RONNIE J”. Unlike the $136,000

deposit and the $900 deposit, however, the record establishes that petitioners

withdrew $25,000 from the S013 checking account on the same day on which they

made that $25,000 deposit into the COD account.

      On the record before us, we find that petitioners have failed to carry their

burden of establishing that the source of the $136,000 deposit and the source of

the $900 deposit were one or more accounts that one or both of them maintained at

one or more financial institutions and that consequently each of those deposits was

an interaccount transfer.

      Another example of petitioners’ attempts to have us sustain without support

in the record their contentions that certain of the taxable deposits that the revenue

agent determined under the bank deposits analyses in question are not taxable

relates to their claim that respondent refused to stipulate certain “deposit records”

for the period January 15 through December 31, 2013. Even if we were to accept,

which we do not, petitioners’ contention that respondent refused to stipulate

certain “deposit records” for the period January 15 through December 31, 2013,

petitioners do not provide any reasonable explanation as to why they did not offer
                                        - 42 -

[*42] those “deposit records” into evidence at the trial in this case.20 And we

cannot fathom any reasonable explanation for the failure of petitioners, who have

the burden of proof on the issues presented, to do so unless, of course, they do not

have any such records.

      A final illustration of petitioners’ attempts to have us sustain without

support in the record their contentions that certain of the taxable deposits that the

revenue agent determined under the bank deposits analyses in question are not

taxable concerns petitioners’ claims that certain of their alleged nontaxable

deposits related to deposits from an inheritance that Ms. Smith received or to

deposits that they reported as income. The record simply does not establish those

claims.

      Based upon our examination of the entire record before us, we find that

petitioners have failed to carry their burden of establishing that they are not

required to include in income for the respective years at issue petitioners’ alleged

nontaxable deposits. On that record before us, we find that petitioners have failed

to carry their burden of establishing that they are not required to include in in-


      20
        We reject as highly questionable petitioners’ assertion on brief that “[d]ue
to some confusion leading up to and at trial, the Petitioners did not have adequate
opportunity to present extensive evidence at trial clearly outlining the non-taxable
deposits”.
                                         - 43 -

[*43] come for each of the years at issue a certain additional amount of income

that respondent determined in the notice for each of those years.

      We turn now to whether petitioners are entitled for each of their taxable

years 2011, 2012, and 2013 to deduct certain expenses that they contend were paid

in performing their respective personal services during each of those years. De-

ductions are a matter of legislative grace, and petitioners bear the burden of

proving entitlement to any deductions claimed. See INDOPCO, Inc. v. Commis-

sioner, 503 U.S. 79, 84 (1992). The Code and the regulations thereunder required

petitioners to maintain records sufficient to establish the amount of any deductions

claimed. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Moreover, section

162(a) generally allows a deduction for ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or business. In addition,

for certain kinds of expenses that are otherwise deductible under section 162(a),

such as those for “listed property”, as defined in section 280F(d)(4), a taxpayer

must satisfy certain additional substantiation requirements set forth in section

274(d) before such expenses will be allowed as deductions.

      Petitioners rely upon certain bank statements, certain credit card statements,

and certain vehicle records that are in the record to establish that they are entitled

to deduct certain expenses that they contend were paid in performing their respec-
                                         - 44 -

[*44] tive personal services during each of the years at issue. The documents on

which petitioners rely do not establish the respective types or the respective

amounts of the various expenses for which petitioners are claiming deductions.

Nor do those documents establish that any such claimed expenses are ordinary and

necessary expenses that petitioners paid or incurred during one or more of the

years at issue in performing their respective personal services.

      On the record before us, we find that petitioners have failed to carry their

burden of establishing that certain expenses for which they are claiming deduct-

ions for each of the years at issue are ordinary and necessary expenses that they

paid or incurred during one or more of those years at issue in performing their

respective personal services during each of those years. On that record, we also

find that, even if petitioners had carried that burden, they have failed to carry their

burden of establishing that certain kinds of expenses for which they are claiming

deductions for each of the years at issue, such as those for “listed property”, as

defined in section 280F(d)(4), satisfy certain additional requirements in section

274(d).

      Based upon our examination of the entire record before us, we find that

petitioners have failed to carry their burden of establishing that they are entitled

for each of their taxable years 2011, 2012, and 2013 to deduct certain expenses
                                        - 45 -

[*45] that they contend were paid in performing their respective personal services

during each of those years.

      We turn now to the last issue presented, namely, whether petitioners are

entitled for their taxable year 2011 to deduct $21,940 with respect to a claimed net

operating loss carryover (sometimes, claimed NOL deduction). Section 172(a)

allows a deduction for a net operating loss for the taxable year in an amount equal

to the sum of (1) the net operating loss carryovers to such year and (2) the net

operating loss carrybacks to such year. A net operating loss is defined as the

excess of deductions allowed by chapter 1 of the Code over the gross income,

subject to certain modifications in section 172(d).21 See sec. 172(c).

      In support of their position that they are entitled for their taxable year 2011

to their claimed NOL deduction, petitioners argue that “[r]espondent erred in

disallowing the Petitioners’ Net Operating Loss in the amount of $21,940 reported

on Petitioners’ F1040 for tax year 2011 since RA [the revenue agent] never exam-

ined tax returns and records and never gave Petitioners an opportunity to substan-

tiate that amount.”




      21
       One of the modifications in sec. 172(d)(1) is that no net operating loss
deduction is to be allowed in calculating the amount of a net operating loss.
                                         - 46 -

[*46] We held above that petitioners, not respondent, have the burden of proof on

each of the issues presented. Petitioners did not offer any evidence at the trial in

this case that establishes that they are entitled for their taxable year 2011 to their

claimed NOL deduction.22

      Based upon our examination of the entire record before us, we hold that

petitioners have failed to carry their burden of establishing that they are entitled

for their taxable year 2011 to deduct $21,940 with respect to a claimed net oper-

ating loss carryover.

      We have considered all of the parties’ respective contentions and arguments

that are not discussed herein, and we find them to be without merit, irrelevant,

and/or moot.

      To reflect the foregoing and the parties’ concessions,


                                                  Decision will be entered

                                        under Rule 155.




      22
         Petitioners did not even offer into evidence any tax return(s) that they had
filed for a taxable year before the years at issue. Even if they had, we have con-
sistently held that a taxpayer is not entitled to a deduction claimed in a tax return
that the taxpayer has filed merely because of the filing of the return. See, e.g.,
Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979).
