                               T.C. Memo. 2014-105



                         UNITED STATES TAX COURT



                 JAMES C. MILLER, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 8505-13.                       Filed June 2, 2014.



      James C. Miller, Jr., pro se.

      Scott Lyons, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      LAUBER, Judge: For petitioner’s 2007, 2008, and 2009 tax years, the

Internal Revenue Service (IRS) determined deficiencies in Federal income tax and
                                         -2-

[*2] additions to tax under sections 6651(a)(1) and (2) and 6654(a) in the

following amounts:1

                                                Additions to tax
  Year     Deficiency     Sec. 6651(a)(1)       Sec. 6651(a)(2)         Sec. 6654
 2007        $22,312           $5,020               $5,578                $1,015
 2008        23,870             5,371          to be determined             767
 2009        16,798             3,780          to be determined             402

      The issues for decision are: (1) whether petitioner received but failed to

report nonemployee compensation (we hold that he did); (2) whether petitioner is

entitled to deduct alleged expenses reported on Schedules C, Profit or Loss From

Business (we hold that he is not); (3) whether petitioner is liable for additions to

tax pursuant to section 6651(a)(1) for failing to timely file Federal income tax

returns (we hold that he is); (4) whether petitioner is liable for additions to tax

pursuant to section 6651(a)(2) for failing to timely pay Federal income tax (we

hold that he is); (5) whether petitioner is liable for additions to tax pursuant to

section 6654 for failure to pay estimated Federal income tax (we hold that he is);

and (6) whether petitioner engaged in behavior warranting the imposition of a


      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure (Rules). All monetary amounts are
rounded to the nearest dollar.
                                         -3-

[*3] penalty pursuant to section 6673(a) (we hold that he did but will refrain from

imposing a penalty).

                                FINDINGS OF FACT

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

facts and the attached exhibits are incorporated herein by this reference. At the

time he filed his petition, petitioner resided in Georgia.

      Petitioner was self-employed and engaged in various jobs as a handyman

and maintenance worker. Petitioner’s primary trade was roofing, but he also per-

formed sheet rock repairs, minor plumbing, and painting for various businesses.

During the tax years at issue petitioner admitted that he performed such tasks for

Georgia Farm Bureau Mutual Insurance Co. (Georgia Farm Bureau), which hired

him to repair storm damage to properties it insured. He admitted that he also

performed such tasks for Belk & Co., which hired him to do maintenance and

repairs on real estate it owned.

      Petitioner failed to file a Form 1040, U.S. Individual Income Tax Return,

for 2006, 2007, 2008, or 2009. The IRS received information returns, Forms

1099-MISC, Miscellaneous Income, reporting that petitioner during these years

received payments from the following payors in the following amounts:
                                        -4-

          [*4] Payor            2007              2008                 2009
 Georgia Farm Bureau          $44,214            $16,108              $3,240
 Belk & Co.                    29,799             63,562              31,951
 Crystal Products Co.           1,140               -0-                  -0-
 Regions Bank                    -0-                -0-                  865
 Wells Fargo Bank                -0-                -0-               26,429
   Total                       75,153             79,670              62,485

Using this information, the IRS prepared substitutes for returns (SFRs) for 2007,

2008, and 2009 that met the requirements of section 6020(b). These returns

included as income the nonemployee compensation listed above and allowed a

standard deduction for a single filer and one exemption.

      On January 23, 2013, respondent issued petitioner a notice of deficiency for

2007, 2008, and 2009 based on the SFRs and a separate notice of deficiency for

2010 and 2011. Petitioner filed a timely petition in this Court from the 2007-09

notice and alleged errors for those years, but he did not petition from the 2010-11

notice. Thus, the years at issue are limited to 2007-09.2

      2
        On December 2, 2013, petitioner sought to put the 2010-2011 tax years into
issue by moving to amend his petition for 2007-09. This motion failed to comply
in several respects with this Court’s Rules; petitioner was given 30 days to file a
properly signed motion and lodge an amended petition, but he did neither. In any
event, even if a proper motion for leave to amend were before us, we would deny
it. Petitioner’s motion for leave to amend his 2007-09 petition could not have
                                                                       (continued...)
                                        -5-

[*5] On September 6, 2013, this case was calendared for trial in Columbia, South

Carolina. Concurrently with the notice of trial, the Court mailed petitioner its

standing pretrial order which requires the parties, among other things, to stipulate

facts to the maximum extent possible. Petitioner was advised that if failure to

stipulate is due to lack of cooperation by either party, “the Court may order

sanctions against the uncooperative party.” During the discovery phase, respon-

dent served petitioner with requests for admissions, asking him to admit that he

received specified amounts of income from specified payors as set forth above. To

each such request, petitioner responded that he “can neither admit nor deny”

receiving the amounts in question.

      Having received no cooperation from petitioner, respondent served sub-

poenas duces tecum on the entities that had reported paying nonemployee compen-

sation to him during 2007-09. On January 22, 2014, petitioner filed a motion to

quash these trial subpoenas. Four entities receiving subpoenas subsequently

provided relevant documents to respondent. On January 28, 2014, petitioner filed

a motion in limine to preclude respondent from introducing at trial any documen-


      2
       (...continued)
provided the Court with jurisdiction over his 2010 or 2011 tax year because it was
filed more than 90 days after the IRS mailed the notice of deficiency for 2010-11.
See O’Neil v. Commissioner, 66 T.C. 105, 107 (1976).
                                        -6-

[*6] tary evidence produced pursuant to the subpoenas. On February 5, 2014, the

Court denied both motions because the evidence was relevant and because peti-

tioner had refused to cooperate in preparing the case for trial and refused to pro-

vide meaningful answers to respondent’s request for admissions. Both motions

were frivolous and appear to have been interposed for purposes of delay.

      Petitioner refused to stipulate that he received any specific amounts of

money from the five payors listed above. He contends that he incurred various

expenses related to his Schedule C handyman business. But he failed to produce

any business records or other documentary evidence to establish the nature of

these expenses or substantiate the amounts thereof.

                                     OPINION

I.    Burden of Proof

      The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and the taxpayer bears the burden of proving those determina-

tions erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). For

the presumption to adhere in cases involving receipt of unreported income, the de-

ficiency determination must be supported by “some evidentiary foundation linking

the taxpayer to the alleged income-producing activity.” See Blohm v. Commis-

sioner, 994 F.2d 1542, 1549 (11th Cir. 1993), aff’g T.C. Memo. 1991-636. The
                                       -7-

[*7] taxpayer bears the burden of proving his entitlement to deductions allowed by

the Code and of substantiating the amounts of claimed deductions. INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a), Income Tax Regs.

Petitioner does not contend, and the evidence does not establish, that the burden of

proof shifts to respondent under section 7491(a) as to any issue of fact. Respon-

dent bears the burden of production, but petitioner bears the burden of proof, with

respect to the additions to tax under sections 6651 and 6654. See sec. 7491(c).

II.   Gross Income

      Section 61(a) defines gross income as “all income from whatever source

derived” and includes compensation for services, whether furnished by the

taxpayer as an employee, a self-employed person, or an independent contractor. A

taxpayer must maintain books and records establishing the amount of his or her

gross income. See sec. 6001. If a taxpayer fails to maintain the required books

and records, the Commissioner may determine the taxpayer’s income by any

method that clearly reflects income. See sec. 446(b); Petzoldt v. Commissioner,

92 T.C. 661, 693 (1989). The Commissioner has great latitude in reconstructing a

taxpayer’s income, and the reconstruction “need only be reasonable in light of all

surrounding facts and circumstances.” Petzoldt, 92 T.C. at 687. The Commission-

er may reconstruct a taxpayer’s income using third-party information returns. See
                                        -8-

[*8] Parker v. Commissioner, 117 F.3d 785 (5th Cir. 1997); Ketler v.

Commissioner, T.C. Memo. 1999-68.

      Respondent determined petitioner’s gross income using Forms 1099-MISC

supplied by five payors. Respondent introduced transcripts of petitioner’s account

confirming that the IRS had received these Forms 1099-MISC. Respondent also

introduced into evidence certified third-party records establishing the payments to

petitioner.3 These documents satisfy respondent’s burden to produce some

evidentiary foundation linking petitioner with the alleged income-producing

activity, and it was thus petitioner’s burden to prove these determinations erro-

neous. Petitioner put on no evidence apart from his own testimony, and he did not

meet his burden of proving he had not received the unreported income.4


      3
        The Georgia Farm Bureau records included a Form W-9, Request for
Taxpayer Identification Number and Certification, that petitioner completed at its
request, a list of payments made to petitioner, and copies of checks made out to
petitioner. The Belk & Co. records included copies of Forms 1099-MISC issued
to petitioner and a list of payments made to him. The Crystal Products Co. records
included a copy of the Form 1099-MISC issued to petitioner and a copy of the
check issued to him.
      4
       Section 6201(d) provides that the IRS in certain circumstances cannot rely
solely on information returns to establish unreported income but “shall have the
burden of producing reasonable and probative information” in addition thereto.
This provision applies only were the taxpayer “asserts a reasonable dispute with
respect to any item of income reported on an information return” and only if “the
taxpayer has fully cooperated with the Secretary.” Petitioner has not asserted “a
                                                                      (continued...)
                                        -9-

[*9] After initially disputing that he had received any of the income in question,

petitioner conceded that he had done substantial work during the tax years at issue

for Georgia Farm Bureau and Belk & Co. With respect to Crystal Products Co.,

respondent submitted a Form 1099-MISC reporting payment to petitioner of

$1,140 in 2007, together with canceled checks payable to petitioner for “indirect

labor costs.” Petitioner’s only response was that he did not remember that job.

With respect to Regions Bank, respondent submitted a Form 1099-MISC reporting

payment to petitioner of $865 in “nonemployee compensation” during 2009.

Petitioner revealed familiarity with the local business activities of Regions Bank

but said he had no recollection of receiving this money.

      With respect to Wells Fargo Bank, respondent submitted a Form 1099-

MISC reporting payment to petitioner of $26,429 in “nonemployee compensation”

during 2009. Petitioner testified that he had a mortgage with Wachovia Bank,

which was acquired by Wells Fargo, and he speculated that the Form 1099-MISC

might somehow have been connected with his mortgage. But the IRS transcript of


      4
        (...continued)
reasonable dispute” concerning the accuracy of any information return and has
utterly failed to cooperate with the IRS. In any event, respondent supplied third-
party business records to corroborate the information shown on most of the Forms
1099-MISC.
                                        - 10 -

[*10] his account separately shows mortgage interest paid to Wachovia Bank in

2008 and 2009. The Form 1099-MISC was furnished by a separate entity, Wells

Fargo Bank NA, and it distinctly reports a 2009 payment to petitioner of

“nonemployee compensation.”

       Petitioner’s testimony at trial was vague, inconsistent, and unconvincing.

He produced no evidence that casts doubt on the accuracy of the information set

forth in the Forms 1099-MISC and in the payors’ business records. We according-

ly conclude that the amounts set forth in the notice of deficiency are properly in-

cludable in petitioner’s gross income for 2007-09. See, e.g., Lamb v.

Commissioner, T.C. Memo. 2013-155.

III.   Schedule C Deductions

       A taxpayer may deduct “all the ordinary and necessary expenses paid or in-

curred during the taxable year in carrying on any trade or business,” but he must

maintain sufficient records to substantiate such expenses. Secs. 162(a), 6001; sec.

1.6001-1(a), Income Tax Regs. If a taxpayer establishes that deductible expenses

were incurred but fails to establish the precise amounts, we may estimate

allowable amounts in appropriate circumstances. Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930). However, there must be evidence in the record
                                        - 11 -

[*11] that provides a rational basis for such an estimate. Vanicek v. Commis-

sioner, 85 T.C. 731, 742-743 (1985).

      Petitioner provided the Court with no documentary evidence in the form of

invoices, receipts, bank records, or credit card statements to support his claimed

deductions. His testimony concerning his purported records was inconsistent. At

first, he said he was too busy to keep records; he later asserted that his records

were lost during a household move incident to a marital breakup. He provided no

evidence to establish the categories of business expenses that he incurred or the

relative volume of expenses within any category.

      Having presented the Court with no evidence of his actual expenses, peti-

tioner asserted that he should be allowed deductions on the basis of a flat

percentage of his gross income under the Cohan rule. According to petitioner:

“You can claim a percentage of business expenses and profit for a business

enterprise even if you have no records to substantiate your business expenses. For

example, a plumbing subcontractor could claim as expenses 60% of the form

1099s that the IRS received from the contractors.” To support his claimed

deductions, petitioner sought to move into evidence, over respondent’s objection,

a document purporting to show average costs of roofers nationwide. This

document was not admitted into evidence because petitioner failed to exchange it
                                       - 12 -

[*12] with respondent before trial, as required by the standing pretrial order. See

Rules 104(c)(2), 123(b), 131(b); Moretti v. Commissioner, 77 F.3d 637, 644 (2d

Cir. 1996).

      In any event, we are not obligated to make an estimate under the Cohan rule

in these circumstances. Petitioner produced no evidence to establish the cate-

gories or volume of his expenses, the terms of his contracts with the businesses for

which he worked, or the percentage of his work that actually involved roofing. He

refused to cooperate with the Commissioner to prepare this case for trial; he made

no meaningful effort to substantiate the expenses underlying the claimed

deductions; and he produced no documentary evidence from which the Court

could extrapolate a reasonable estimate of his business expenses. See Stephens v.

Commissioner, __ Fed. Appx. __, No. 13-14235, slip op. at 4-5 (11th Cir. May 8,

2014) (refusing to apply the Cohan rule where the taxpayer provided no receipts of

his claimed expenses and only general testimony about them), aff’g T.C. Memo.

2013-47; Lerch v. Commissioner, 877 F.2d 624, 627-629 (7th Cir. 1989) (refusing

to apply the Cohan rule where the taxpayer failed to present evidence to support

the claimed deductions), aff’g T.C. Memo. 1987-295; Ellis Banking Corp. v.

Commissioner, 688 F.2d 1376, 1383 (11th Cir. 1982), aff’g in part, remanding in
                                         - 13 -

[*13] part T.C. Memo. 1981-123. Because petitioner did not meet his burden of

substantiation, we sustain respondent’s disallowance of his claimed deductions.

IV.   Additions to Tax

      A.     Failure To File

      Section 6651(a)(1) provides for an addition to tax of 5% of the tax required

to be shown on a return for each month or fraction thereof for which there is a fail-

ure to file the return, not to exceed 25% in toto. A taxpayer who files his return

late is liable for this addition to tax unless he shows that his failure was due to

reasonable cause and not due to willful neglect. Sec. 6651(a)(1); United States v.

Boyle, 469 U.S. 241, 245 (1985).

      Respondent produced IRS transcripts of petitioner’s account showing that

he did not file a return for 2007, 2008, or 2009, and petitioner stipulated that he

failed to file returns. His only excuse was his assertion that “no income tax return

was necessitated to be filed.” However, his nonemployee compensation during the

years at issue far exceeded the minimum amount of gross income requiring a

return to be filed. See sec. 6012(a). We accordingly sustain respondent’s

imposition of the addition to tax under section 6651(a)(1).
                                        - 14 -

[*14] B.     Failure To Pay

      Section 6651(a)(2) provides for an addition to tax when a taxpayer fails to

pay the tax shown on a return timely, unless the taxpayer proves that the failure

was due to reasonable cause and not due to willful neglect. An SFR prepared by

the IRS pursuant to section 6020(b) is treated as the “return” filed by the taxpayer

for purposes of section 6651(a)(2). See sec. 6651(g). For each month or fraction

thereof for which a failure to pay continues, section 6651(a)(2) adds 0.5% of the

tax required to be shown on such return, up to a maximum addition of 25%.

      Petitioner stipulated that the SFRs prepared by the IRS for 2007, 2008, and

2009 met the requirements of section 6020(b). Those returns indicate deficiencies

and balances due of $22,312, $23,870, and $16,798, respectively. Petitioner pre-

sented no evidence suggesting that his failure to pay was due to reasonable cause.

See Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). We accordingly

sustain the section 6651(a)(2) additions to tax.

      C.     Failure To Pay Estimated Tax

      Section 6654 imposes an addition to tax on an individual who underpays his

estimated tax. The addition to tax is calculated with reference to four required in-

stallment payments of the taxpayer’s estimated tax liability. Sec. 6654(c) and (d).

Each required installment is equal to 25% of the “required annual payment.” Sec.
                                         - 15 -

[*15] 6654(d). The “required annual payment” is equal to the lesser of: (1) 90%

of the tax shown on the individual’s return for that year (or, if no return is filed,

90% of his tax for such year) or (2) if the individual filed a valid return for the

immediately preceding taxable year, 100% of the tax shown on that return. See

sec. 6654(d)(1)(A), (B), and (C). A taxpayer has an obligation to pay estimated

tax only if he has a “required annual payment.” Wheeler v. Commissioner, 127

T.C. 200, 212 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008).

      Respondent’s burden of production under section 7491(c) requires him to

produce, for each year for which the addition is asserted, evidence that the tax-

payer had a “required annual payment” under section 6654(d). To do so, respon-

dent must establish the tax shown on the taxpayer’s return for the preceding year

or demonstrate that the taxpayer filed no such return. See Wheeler, 127 T.C. at

212; Schlussel v. Commissioner, T.C. Memo. 2013-185.

      Respondent met his burden of production because petitioner stipulated that

he did not file a return for 2006, 2007, 2008, or 2009. Petitioner’s “required

annual payment” thus equaled 90% of the tax due for each year. See sec. 6654(a),

(d)(1)(B). Petitioner stipulated that he paid no estimated tax for any year. We

accordingly sustain the section 6654(a) additions to tax.
                                       - 16 -

[*16] V.     Frivolous Position Penalty

      Section 6673(a)(1) authorizes this Court to impose a penalty not in excess

of $25,000 whenever it appears that: (1) the taxpayer has instituted or maintained

proceedings primarily for delay; (2) the taxpayer’s position is frivolous or ground-

less; or (3) the taxpayer unreasonably failed to pursue available administrative

remedies. Although petitioner did not advance classic “tax-protester” arguments,

he engaged in various tactics, including action and inaction, designed to delay

these proceedings and waste the resources of the Internal Revenue Service and the

Court. Although a section 6673(a)(1) sanction would be justified, we will refrain

from imposing a penalty now because this appears to be petitioner’s first appear-

ance in this Court. We warn petitioner that we will be less generous if there is a

next time.

      To reflect the foregoing,


                                                An appropriate order and

                                       decision will be entered.
