                                 T.C. Memo. 2012-153



                           UNITED STATES TAX COURT



                     JOHN H. SCHOPPE, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 9867-10.                             Filed May 30, 2012.



       John H. Schoppe, pro se.

       Inga C. Plucinski, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


       SWIFT, Judge: Respondent determined against petitioner deficiencies for the

six years in issue and additions to tax for failure to file, failure to pay, and failure to

make estimated tax payments as follows:
                                         -2-

                                                 Additions to tax1

    Year      Deficiency      Sec. 6651(a)(1)      Sec. 6651(a)(2)     Sec. 6654

    2002        $9,945            $1,943.33           $2,159.25         $238.78
    2003        10,629             2,391.53            2,657.25          274.24
    2004        16,590             3,732.75            4,147.50          475.41
    2005        12,314             2,770.65                  (1)         493.90
    2006         9,048             2,035.80                  (1)         428.18
    2007         7,095             1,596.38                  (1)         322.90
      1
       To be computed in the Rule 155 calculation.

      The primary issue for decision is whether petitioner has adequately

substantiated deductions claimed for business expenses.

                                 FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. Petitioner is 68

years old and resides in Utah.

      In spite of years of poor health and illness (namely, liver disease and

degenerative arthritis), for many years petitioner has been actively and primarily

engaged as a sole proprietor in a number of real estate related activities, and

petitioner has held various business licenses. Petitioner was a real estate agent,




      1
        All section references are to the Internal Revenue Code applicable to the
years in issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                          -3-

broker, consultant, appraiser, and an instructor of real estate licensing classes, as

well as a financial planner and an insurance agent.

      Petitioner was engaged full time in his various real estate related and other

activities, generally six days a week. At least for some of the years before us,

petitioner owned some rental property.

      Petitioner kept track of expenses incurred each day on a calendar for each

year on which he would make only vague notations of the amounts and payees

relating to the expenses (e.g., “$15.95 Ho Jo”). Also on the calendar, petitioner

would make brief notations of his automobile or truck mileage driven each day.

Generally, neither on his calendar nor anywhere else would petitioner note or

describe the business purpose for his expenses and mileage. Although available at

the trial and referenced on direct and cross-examination of petitioner, none of

petitioner’s calendars applicable to 2002 through 2007 was offered into evidence.

      Although it is not completely clear from the record regarding petitioner’s

banking practices, it appears that petitioner maintained one checking account into

which he deposited income from his real estate related activities and out of which

petitioner paid the bulk of his business and personal expenses.

      Petitioner did not timely file Federal income tax returns for the years in issue.

Also, except for small amounts of Federal income tax withheld from wages he
                                         -4-

received in two of the years in issue, petitioner did not pay (and has not paid) any

Federal income tax for the years in issue.

      On audit respondent summoned petitioner’s bank records. On the basis of

deposits into petitioner’s bank accounts to calculate his unreported real estate

related income and third-party information to calculate petitioner’s unreported

wages, and under authority of section 6020(b), respondent prepared for petitioner

substitutes for returns and notices of deficiency and charged petitioner with the

following income:

 Income from         2002        2003         2004     20051       2006       2007

Real estate     $29,606        $42,202       $58,449 $24,664 $35,471       $25,728
Wages            11,300          ---           ---    17,881   1,194         3,945
Unemployment
   compensation   3,752          ---           ---      ---         ---        ---
Social Security    ---           ---           ---      ---        3,701      6,558
   Total         44,658         42,202        58,449   42,545     40,366     36,231

      1
       Per respondent’s stipulation, the above amounts for 2005 represent some
adjustments to the audit determination.

      In preparing the substitutes for returns, because of lack of substantiation by

petitioner, respondent allowed petitioner no business expense deductions against the

real estate related income charged to petitioner. For each year respondent did allow

petitioner a standard deduction and a personal exemption.
                                          -5-

      On November 6, 2009, petitioner finally submitted to respondent documents

that petitioner claims represent his Federal income tax returns for 2002 through

2007. For each of the years in issue except 2005, petitioner’s untimely tax returns

show total real estate related income close to the amount of income respondent

charged to petitioner in the substitutes for returns and in the notices of deficiency.2

      However, petitioner’s untimely 2002, 2005, 2006, and 2007 Federal income

tax returns also show substantial business expenses that offset the reported real

estate related income and reflect net business losses. Petitioner’s untimely 2003 and

2004 Federal income tax returns show net income from his real estate related

activities of $9,260 and $10,378, respectively, but itemized deductions and a

personal exemption offset the reported income for each year.

      Respondent has not processed petitioner’s untimely Federal income tax

returns, and respondent has not allowed petitioner any of the claimed business

expense or itemized deductions reflected on petitioner’s untimely Federal income

tax returns.




      2
        For 2005 respondent charged petitioner with $38,421 in real estate related
income. Petitioner’s untimely 2005 Federal income tax return reflected total real
estate related income of $18,755.
                                          -6-

                                      OPINION

      Gross income includes all income from whatever source. Sec. 61(a); see also

United States v. Burke, 504 U.S. 229, 233 (1992) (“The definition of gross income

under the Internal Revenue Code sweeps broadly.”). Bank deposits are considered

prima facie evidence of income; the taxpayer bears the burden of establishing that

such deposits were derived from nontaxable sources. Welch v. Commissioner, 204

F.3d 1228, 1230 (9th Cir. 2000), aff’g T.C. Memo. 1998-121; see also Clayton v.

Commissioner, 102 T.C. 632, 645-646 (1994); Harmer v. Commissioner, 4 Fed.

Appx. 673, 676 (10th Cir. 2001).

      At trial petitioner did not seriously challenge respondent’s determinations of

income, and no credible evidence suggests errors in respondent’s income

determinations for each year in issue.3

      Petitioner now claims, however, that the amounts of the business expense and

itemized deductions shown on his untimely Federal income tax returns for 2002

through 2007 should be allowed.




      3
       Respondent does acknowledge minor adjustments that need to be made to
respondent’s income determinations. Those adjustments are to be made in the Rule
155 calculation.
                                         -7-

      Generally, determinations made by respondent in a notice of deficiency are

presumed correct, and the taxpayer bears the burden of proving otherwise.4 See

Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).

      Specifically with regard to claimed business expense and itemized

deductions, the taxpayer bears the burden of proof by a preponderance of the

evidence. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). The

taxpayer’s burden includes the burden of substantiation, Hradesky v. Commissioner,

65 T.C. 87, 90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976), and a tax

return is not itself evidence of a taxpayer’s correct income or allowable expenses,

Taylor v. Commissioner, T.C. Memo. 2009-235 (citing Lawinger v. Commissioner,

103 T.C. 428, 438 (1994)).

      Petitioner states that his business activities were atypical, that his business

expenses and itemized deductions fully offset his income, and that he does not owe

any Federal income tax. Petitioner testified about and described some of his

business expenses. Petitioner states that because he was confident he owed no

Federal income tax and was “willing to forfeit” to the Government tax refunds he


      4
      For obvious reasons, no shift in the burden of proof in this case is
appropriate. See sec. 7491(a)(2).
                                          -8-

claims he was owed for at least some of the years in issue, petitioner did not worry

about and did not timely file Federal income tax returns for 2002 through 2007.

      Petitioner complains that respondent’s audit and trial representatives

steamrolled him and refused to accept the obvious business nature of all of his

activities and that respondent summarily rejected expenses shown on his calendars

and reflected by checks and credit card charges. Petitioner claims that essentially

all of his expenses represent business expenses.

      In response to the Court’s suggestion at trial, an effort was made to reach a

settlement as to an estimated percentage of petitioner’s real estate income that

would be treated as business expenses. Petitioner, however, would have none of it.

Petitioner emphatically refers to the financial status of his various activities as

“minus, minus, in the hole”.

      Petitioner notes that most real estate people pay their “agents” a commission

of around 60%, but insists that his business activities are not reflected by the norm,

that his business model is “odd”, that he is an “enigma”, and that 90-95% of his real

estate related income was passed on as commission expenses to six or seven

independent real estate agents that assisted him.

      At trial petitioner also suggested that some of the amounts deposited into his

bank accounts and treated by respondent as real estate income constituted
                                           -9-

nontaxable funds he received as loans from his commission agents in order to

provide him cashflow when his business was slow.

       At trial, however, petitioner did not call any of his commission agents as a

witness. He did not identify any of the checks he allegedly wrote as commission

checks, and he did not identify any of the specific amounts deposited into his bank

accounts over the years as nontaxable loans received.

       On cross-examination about the business or personal nature of expenses

shown on his calendars and in his check register, petitioner stated bluntly: “So if

it’s business or personal, it’s still a cost, and it’s mostly business because this is

business.”

       Testifying about the business or personal nature of a number of $15 overdraft

charges, petitioner stated: “In my mind, if I’m overdrawn, it’s because I don’t have

income from my business. So if it’s not income, it’s a business expense.”

       Asked at trial to explain some of the items making up the business travel

expense deductions shown on his untimely Federal income tax returns, petitioner

described, among other items, a January 16, 2007, Visa credit card charge as

payment for a business luncheon; but petitioner then acknowledged that the $38

expense was in payment for lift tickets at Snow Basin, a popular Utah ski resort.
                                        - 10 -

      Authority exists for a court to estimate a taxpayer’s business expenses where

a reasonable basis therefor exists. See Cohan v. Commissioner, 39 F.2d 540, 543-

544 (2d Cir. 1930). Business expenses subject to section 274(d) (e.g.,

entertainment and away-from-home meal and lodging expenses), however, may not

be estimated. See sec. 280F(d)(4)(A); Sanford v. Commissioner, 50 T.C. 823, 827

(1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969).

      But for the reasonable-basis and section 274(d) limitations on the authority

under Cohan to estimate a taxpayer’s deductible business expenses, we would be

inclined to attempt an estimate of petitioner’s allowable business expenses.

However, because of the difficulty on the record before us of knowing with any

confidence the correct nature of petitioner’s expenses and because of the significant

portion of petitioner’s claimed expenses that appears to be subject to section 274(d),

we decline to make any estimate under Cohan of petitioner’s deductible business

expenses.

      Other than one 2006 charitable contribution deduction of $807, petitioner has

not substantiated any of the claimed itemized deductions.

                                     Conclusion

      For 2002 through 2007 we sustain respondent’s determinations of the

amounts of petitioner’s income and wages, and petitioner is not entitled to any of
                                         - 11 -

the business expense deductions claimed on his untimely Federal income tax

returns.

      With one exception, petitioner has not substantiated any of the alleged

itemized deductions claimed on his untimely Federal income tax returns. The

claimed itemized deductions are not allowed, and petitioner is entitled to a standard

deduction for each year.

      Accordingly, we sustain respondent’s deficiency determination against

petitioner for each of the years involved herein, subject to adjustments respondent

has agreed to.

      Because we have sustained respondent’s deficiency determinations against

petitioner, respondent has met his burden of production with regard to each of the

additions to tax respondent determined against petitioner. See sec. 7491(c).

      Petitioner has established neither reasonable cause nor lack of willful

neglect with regard to the Federal income tax deficiencies that we today sustain.

For each year in issue we sustain respondent’s imposition of the section

6651(a)(1) and (2) and 6654 additions to tax for late filing of his tax returns, for

late payment of his Federal income tax liabilities, and for underpayment of his

annual estimated tax liability. See Wheeler v. Commissioner, 127 T.C. 200, 207-
                                      - 12 -

212 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008); Grosshandler v. Commissioner,

75 T.C. 1, 21 (1980).


                                                     Decision will be entered

                                               under Rule 155.
