                              T.C. Memo. 2013-155



                        UNITED STATES TAX COURT



                    LORI R. LAMB, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                    GARY E. LAMB, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 16905-11, 20996-11.             Filed June 20, 2013.



      Frederick J. O’Laughlin, for petitioners.

      Jamie M. Stipek and H. Elizabeth H. Downs, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MARVEL, Judge: These cases are consolidated for purposes of trial and

opinion. The cases involve the 2008 Federal income tax of Lori R. Lamb and

Gary E. Lamb, a married couple. In a notice of deficiency issued to Mrs. Lamb on
                                        -2-

[*2] April 11, 2011, respondent determined a deficiency in her 2008 Federal

income tax of $10,700 and additions to tax under section 6651(a)(1) and (2)1 of

$772 and $378, respectively. In a notice of deficiency issued to Mr. Lamb on June

6, 2011, respondent determined a deficiency in his 2008 Federal income tax of

$17,986 and additions to tax under sections 6651(a)(1) and (2) and 6654(a) of

$4,047, $2,068, and $578, respectively.

      After concessions,2 the issues for decision are: (1) whether Mr. Lamb

received unreported nonemployee compensation; (2) whether petitioners received

additional income attributable to unreported cash withdrawals from their business

bank accounts; (3) whether petitioners are entitled to various deductions claimed

on their untimely filed 2008 return; (4) whether petitioners are liable for additions



      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code in effect for the year in issue, and Rule references are to the Tax Court Rules
of Practice and Procedure. Some monetary amounts have been rounded to the
nearest dollar.
      2
        Petitioners concede that they are liable for the gambling income as
determined by respondent, and Mrs. Lamb concedes that she is liable for the wage
income as determined by respondent. Respondent concedes that petitioners are
entitled to a joint filing status and are each entitled to claim a $3,500 personal
exemption deduction for 2008. Respondent also concedes that petitioners are
entitled to the child tax credit, withholding credits, and rebate recovery credits
claimed on their untimely filed return, as well as deductions for the home
mortgage interest and State income tax withholding claimed on an attached
Schedule A, Itemized Deductions.
                                          -3-

[*3] to tax under section 6651(a)(1) and (2); and (5) whether Mr. Lamb is liable

for an addition to tax under section 6654(a).

                                FINDINGS OF FACT

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

facts is incorporated herein by this reference. Petitioners resided in Oklahoma at

the time they filed their petitions.

I.    Background

      A.       Petitioners’ Business Activities

      Mrs. Lamb is a registered nurse. During 2008 she received wages of

$61,046 from Midwest Regional Medical Center, LLC.

      Mr. Lamb works in the residential construction industry. Mr. Lamb

provides new home construction services through his business, Gary Lamb

Construction, LLC (Gary Lamb Construction). He also provides framing services

through Express Framing, a subsidiary business of Gary Lamb Construction.

      For 2008 respondent received a number of information returns with respect

to Mr. Lamb, including the following: (1) a Form 1099-MISC, Miscellaneous

Income, from Willie Lambs Construction (WLC)3 reporting nonemployee

compensation of $32,688; (2) a Form 1099-MISC from Wholesale Granite

      3
          WLC is a business owned and operated by Mr. Lamb’s brother.
                                         -4-

[*4] Countertops reporting nonemployee compensation of $4,272; and (3) a

Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., from Gary

Lamb Construction.4

      B.       Petitioners’ Bank Accounts

      During 2008 petitioners maintained two accounts at First National Bank:

(1) an account (account No. 6821) titled “Gary Lamb Construction LLC”; and (2)

an account (account No. 9194) titled “Lori R Lamb DBA Express Framing and

Custom Home Building”. Petitioners also maintained a personal bank account.

Both petitioners had access to all three accounts.

      C.       Petitioners’ Gambling Activities

      In addition to their business activities, during 2008 petitioners spent a

significant amount of time gambling at casinos in Oklahoma, including Sac & Fox

Casino, Kickapoo Casino, and Chickasaw Nation Casino. To fund their gambling

activities, petitioners made cash withdrawals from automatic teller machines

(ATMs) at the casinos from their two business bank accounts as follows: (1)

petitioners withdrew $23,317 from account No. 6821; and (2) petitioners withdrew

$163 from account No. 9194. Petitioners did not keep any written records with

respect to their gambling activities.

      4
          Neither petitioners nor respondent introduced a copy of the Schedule K-1.
                                        -5-

[*5] During 2008 Mrs. Lamb received gambling income of $5,350 from Sac &

Fox Casino. During 2008 Mr. Lamb received gambling income as follows: (1)

$6,880 from Sac & Fox Casino; (2) $31,964 from Kickapoo Casino; and (3)

$1,440 from Chickasaw Nation Casino.

II.   Petitioners’ Tax Reporting and the Notices of Deficiency

      Petitioners failed to timely file Federal income tax returns for 2008.

Respondent subsequently prepared substitutes for returns for petitioners under

section 6020(b).

      On April 11, 2011, respondent issued to Mrs. Lamb a notice of deficiency

for 2008. Respondent determined that Mrs. Lamb failed to report wages of

$61,046 and gambling winnings of $5,350. Respondent also determined that she

was liable for additions to tax under section 6651(a)(1) and (2).

      On June 6, 2011, respondent issued to Mr. Lamb a notice of deficiency for

2008. Respondent determined that Mr. Lamb failed to report gambling income of

$40,284 and self-employment income of $36,960. Respondent also determined

that he was liable for additions to tax under sections 6651(a)(1) and (2) and

6654(a).
                                          -6-

[*6] III.        Petitioners’ Tax Court Proceedings

       After petitioners received the notices of deficiency Frederick J. O’Laughlin

filed a petition with this Court on behalf of each petitioner. By notices dated May

10, 2012, the Court set each of petitioners’ cases for trial during the Court’s

October 15, 2012, Oklahoma City, Oklahoma, trial session and mailed to each of

them and Mr. O’Laughlin a notice setting case for trial and a standing pretrial

order. The standing pretrial order required the parties, among other things, to

exchange documents and other data that the parties intended to use at trial not less

than 14 days before the first day of the trial session, to stipulate facts to the

maximum extent possible, and to prepare a pretrial memorandum and submit it to

the Court and the opposing party not less than 14 days before the first day of the

trial session.

       On October 12, 2012, petitioners filed a joint Form 1040, U.S. Individual

Income Tax Return, for 2008. Mr. O’Laughlin prepared petitioners’ return. On

the Form 1040 petitioners reported wages of $61,047 and gambling income of

$45,634. On an attached Schedule A petitioners claimed deductions for State

income tax, real estate taxes, and home mortgage interest, as well as a gambling

loss of $45,634. Petitioners also attached a Schedule C, Profit or Loss From

Business, for Gene’s Muffler, on which they claimed a net loss of $2,029. On an
                                         -7-

[*7] attached Schedule E, Supplemental Income and Loss, petitioners reported net

income from rental property of $331 and a nonpassive loss from Gary Lamb

Construction of $5,759. On an attached statement petitioners acknowledged that

Mr. Lamb received Forms 1099-MISC from WLC and Wholesale Granite

Countertops but indicated that Mr. Lamb did not report the nonemployee

compensation on petitioners’ return because the income was received and reported

by Gary Lamb Construction.

      Despite the Court’s standing pretrial order and multiple requests from

respondent’s counsel, Mr. O’Laughlin did not submit to respondent’s counsel

copies of documents petitioners intended to use at trial by the document exchange

deadline, October 1, 2012. On October 12, 2012, Mr. O’Laughlin attempted to

untimely provide to respondent’s counsel supporting documentation with respect

to petitioners’ claimed deductions. Although petitioners had filed a 2008 joint

return on October 12, 2012, Mr. O’Laughlin did not provide respondent’s counsel

with a copy of that return before trial. Mr. O’Laughlin also failed to prepare and

submit to the Court and respondent’s counsel a pretrial memorandum for either of

petitioners’ cases as required by the Court’s standing pretrial order.

      On October 15, 2012, the Court called these cases from the calendar and

held a pretrial conference. During the pretrial conference the Court questioned
                                        -8-

[*8] Mr. O’Laughlin regarding his failure to comply with the Court’s standing

pretrial order. Mr. O’Laughlin represented that he was unable to provide pretrial

memoranda to the Court because of his caseload. He further represented that

petitioners failed to timely provide him all of the relevant documentation. Mr.

O’Laughlin also asserted that he was not required to provide the documentation

because respondent’s paralegal, rather than respondent’s counsel, made the request

for the documentation.

      By order dated October 15, 2012, the Court consolidated these cases for

purposes of trial, briefing, and opinion. The Court held a trial in these cases on

October 16, 2012. At the conclusion of the trial the Court ordered petitioners to

produce to respondent within 30 days: (1) documentation to substantiate the

amounts reported on their purportedly filed 2008 return, including the income and

expenses claimed on their Schedule C and Schedule E; (2) copies of petitioners’

bank account statements annotated to direct respondent to any withdrawals that

related to gambling expenses; and (3) a copy of the 2008 return for Gary Lamb

Construction as well as related books and records. The Court ordered respondent

to verify whether petitioners had filed their 2008 return. The Court also ordered

the parties to file a joint status report by December 14, 2012.
                                              -9-

[*9] On December 13, 2012, respondent filed a status report. In the status report

respondent’s counsel represented that petitioners had filed a signed return for 2008

on October 12, 2012. Respondent’s counsel also represented that: (1) Gary Lamb

Construction had filed a return for 2008; (2) the filed return showed zeroes on

every line; and (3) although Gary Lamb Construction later filed an amended

return, respondent’s counsel was unable to obtain a copy of the amended return.

Finally, respondent’s counsel represented that neither petitioners nor Mr.

O’Laughlin had attempted to provide any of the requested documentation and that

Mr. O’Laughlin had refused to communicate with respondent’s counsel or

participate in a conference call with respondent’s counsel and the Court.

Petitioners failed to file a status report.

       On January 7, 2013, respondent filed a motion for leave to amend answers

to conform pleadings to the evidence, pursuant to Rule 41, and the Court lodged

the amendments to the answers. In the motion respondent requested leave to

amend the answers to assert that petitioners received unreported taxable income

when they withdrew cash from their business accounts to use for personal

gambling purposes. By order dated January 11, 2013, this Court ordered

petitioners to file a response to respondent’s motion on or before January 31,

2013. Petitioners failed to do so. Accordingly, by order dated February 13, 2013,
                                       - 10 -

[*10] the Court granted respondent’s motion and ordered that respondent’s

amendments to answers be filed.

                                    OPINION

I.    Burden of Proof

      Generally, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and the taxpayer bears the burden of proving that the

determinations are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933). The burden of proof shifts to the Commissioner, however, if the

taxpayer produces credible evidence to support the deduction or position, the

taxpayer complied with the substantiation requirements, and the taxpayer

cooperated with the Secretary5 with regard to all reasonable requests for

information. Sec. 7491(a); see also Higbee v. Commissioner, 116 T.C. 438, 440-

441 (2001). In addition, if the Commissioner raises a new issue or seeks an

increase in the deficiency, the Commissioner has the burden of proof as to the

new issue or the increased deficiency. See Rule 142(a)(1).


      5
       The term “Secretary” means “the Secretary of the Treasury or his delegate”,
sec. 7701(a)(11)(B), and the term “or his delegate” means “any officer, employee,
or agency of the Treasury Department duly authorized by the Secretary of the
Treasury directly, or indirectly by one or more redelegations of authority, to
perform the function mentioned or described in the context”, sec.
7701(a)(12)(A)(i).
                                       - 11 -

[*11] Petitioners do not contend that section 7491(a)(1) applies, and the record

establishes that they did not satisfy the section 7491(a)(2) requirements.

Consequently, petitioners bear the burden of proof as to any disputed factual

issues, except with respect to the new issue asserted in respondent’s amendments

to answer. See Rule 142(a). Under Rule 142(a)(1), respondent bears the burden

of proof with respect to the issue of whether petitioners received additional

unreported taxable income when they withdrew cash from their business bank

accounts to use for personal gambling purposes.

      Under section 6201(d), if a taxpayer asserts a reasonable dispute with

respect to an item of income reported on an information return filed by a third

party and the taxpayer meets certain other requirements, the Commissioner bears

the burden of producing reasonable and probative evidence, in addition to the

information return, concerning the deficiency attributable to the income item. At

trial Mr. Lamb disputed that he personally received nonemployee compensation

from Wholesale Granite Countertops and WLC during 2008. Mr. Lamb admitted,

however, that he performed services for and received payment from those two

companies. He also admitted that his Social Security number appeared on both of

the Forms 1099-MISC.
                                       - 12 -

[*12] Petitioners have not raised any reasonable dispute with respect to the

accuracy of the information returns. Accordingly, the burden of production with

respect to the income did not shift to respondent under section 6201(d).

II.   Unreported Income

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

derived” and includes compensation paid 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. 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’s reconstruction of income “need only be

reasonable in light of all surrounding facts and circumstances.” Petzoldt v.

Commissioner, 92 T.C. at 687.

      The Commissioner has great latitude in reconstructing a taxpayer’s income.

See sec. 446(b); Petzoldt v. Commissioner, 92 T.C. at 687, 693. The

Commissioner may reconstruct a taxpayer’s income using third-party information

returns. See Parker v. Commissioner, 117 F.3d 785 (5th Cir. 1997); Ketler v.

Commissioner, T.C. Memo. 1999-68. The Commissioner also may use bank
                                        - 13 -

[*13] records and other third-party records to reconstruct a taxpayer’s income.

See Parkinson v. Commissioner, 647 F.2d 875, 876 (9th Cir. 1981), aff’g T.C.

Memo. 1979-319; see also Williams v. Commissioner, 999 F.2d 760, 764 (4th Cir.

1993), aff’g T.C. Memo. 1992-153.

      As noted above, the Commissioner’s deficiency determination normally is

entitled to a presumption of correctness. See Erickson v. Commissioner, 937 F.2d

1548, 1551 (10th Cir. 1991), aff’g T.C. Memo. 1989-552. However, when a case

involves unreported income and is appealable to the U.S. Court of Appeals for the

10th Circuit, as these cases appear to be absent a stipulation to the contrary, see

sec. 7482(b)(1)(A), (2), the Commissioner’s determination of unreported income is

entitled to a presumption of correctness only if the determination is supported by

some reasonable foundation, such as evidence linking the taxpayer to an income-

producing activity, see Weimerskirch v. Commissioner, 596 F.2d 358, 361-362

(9th Cir. 1979), rev’g 67 T.C. 672 (1977), or evidence that the taxpayer owned

liquid assets, see Erickson v. Commissioner, 937 F.2d at 1551-1552. Once the

Commissioner produces such evidence, the burden shifts to the taxpayer to rebut

the presumption by establishing that the Commissioner’s determination is arbitrary

or erroneous. See Ruidoso Racing Ass’n, Inc. v. Commissioner, 476 F.2d 502,

507-508 (10th Cir. 1973), aff’g in part, remanding in part T.C. Memo. 1971-194.
                                       - 14 -

[*14] Petitioners admitted that they had gambling income in 2008 but that they

did not keep any records of their gambling activity. Mr. Lamb also admitted that

he provided services to third-party payors for compensation. Although Mr. Lamb

claimed that he maintained records for Gary Lamb Construction and that the

income in question belonged to Gary Lamb Construction, he did not introduce

those records or make any attempt to reconstruct those records.

      Because the record establishes that petitioners were engaged in income-

producing activities during 2008, respondent’s determinations of unreported

income in the notices of deficiency are entitled to a presumption of correctness.

We also find that, because the record contains no evidence that petitioners

maintained books and records to establish the amounts of their income, respondent

acted reasonably in reconstructing petitioners’ income. We address each disputed

income item in turn.

      A.     Unreported Nonemployee Compensation

      Respondent introduced a copy of Mr. Lamb’s account transcript showing

that respondent received the Forms 1099-MISC from Wholesale Granite

Countertops and WLC showing payment of nonemployee compensation to Mr.

Lamb during 2008. Mr. Lamb testified that during 2008 he provided services to

Wholesale Granite Countertops and WLC and that he subsequently received the
                                        - 15 -

[*15] Forms 1099-MISC from both businesses. However, he contends that the

income reported on the Forms 1099-MISC was income of Gary Lamb

Construction rather than his personal income.

      Mr. Lamb testified that the Forms 1099-MISC erroneously were issued to

him and that the Forms 1099-MISC should have been issued to Gary Lamb

Construction, the entity that purportedly received the income. Mr. Lamb further

testified that Gary Lamb Construction had filed returns for previous years and that

he did not know whether Gary Lamb Construction had filed a return for 2008 but

that he believed that Gary Lamb Construction had filed an amended return for

2008. However, Mr. Lamb also testified that Gary Lamb Construction reported

the income shown on the Forms 1099-MISC on its return for 2008.

      Although petitioners introduced copies of their bank account statements for

their business bank accounts, the bank account statements do not show any

deposits that match the amounts reported on the Forms 1099-MISC. Petitioners’

bank account records do not include copies of the checks deposited into either

account. Petitioners did not introduce copies of their personal bank account

statements for 2008.

      Despite the Court’s instructions at the conclusion of trial, petitioners failed

to provide to respondent’s counsel a copy of the 2008 return for Gary Lamb
                                       - 16 -

[*16] Construction, the Schedule K-1 issued to Mr. Lamb, or any books and

records relating to Gary Lamb Construction. In addition, petitioners offered no

explanation as to why both Wholesale Granite Countertops and WLC issued

Forms 1099-MISC to Mr. Lamb individually rather than to Gary Lamb

Construction. Petitioners have failed to prove that the nonemployee compensation

reported on the Forms 1099-MISC was taxable income of Gary Lamb

Construction and that Gary Lamb Construction reported that compensation as

income on its 2008 return. Accordingly, petitioners must include in income the

amounts reported on the Forms 1099-MISC. See, e.g., Zaklama v. Commissioner,

T.C. Memo. 2012-346, at *59-*60; Brodsky v. Commissioner, T.C. Memo. 2001-

240, slip op. at 106-116.

      B.     Additional Income From Gary Lamb Construction

      In the amendments to answers, respondent asserts that petitioners received

additional income attributable to ATM cash withdrawals from their business bank

accounts. Respondent further asserts that petitioners used the cash for personal

gambling purposes. Under Rule 142(a)(1), respondent bears the burden of proof

with respect to the issue of whether petitioners received additional unreported

taxable income when they withdrew cash from their business bank accounts to use

for personal gambling purposes.
                                        - 17 -

[*17] Although petitioners both testified that they regularly withdrew cash from

the business bank accounts for personal gambling purposes, respondent has failed

to show that these withdrawals constituted taxable income to them. Respondent

failed to introduce any evidence regarding the financial status of Gary Lamb

Construction or whether Gary Lamb Construction earned any taxable business

income during the year in issue. More importantly, respondent failed to introduce

any evidence to show that the withdrawals represented taxable income to

petitioners during the year in issue, rather than, for example, a nontaxable return of

capital or a loan repayment. Accordingly, we are unable to find that petitioners

received additional unreported taxable income attributable to their cash

withdrawals from the business bank accounts during the year in issue.

III.   Petitioners’ Claimed Deductions

       Deductions are a matter of legislative grace, and ordinarily a taxpayer must

prove that he is entitled to the deductions he claims. INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992). A taxpayer must maintain records to

substantiate claimed deductions and to establish the taxpayer’s correct tax liability.

Higbee v. Commissioner, 116 T.C. at 440; see also sec. 6001. The taxpayer must

produce such records upon the Secretary’s request. Sec. 7602(a); see also sec.

1.6001-1(e), Income Tax Regs. Adequate substantiation must establish the nature,
                                       - 18 -

[*18] amount, and purpose of a claimed deduction. Higbee v. Commissioner, 116

T.C. at 440; see also Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d

per curiam, 540 F.2d 821 (5th Cir. 1976). In deciding whether a taxpayer

adequately substantiated a claimed deduction, we are not required to accept the

taxpayer’s “self-serving, unverified, and undocumented testimony.” Shea v.

Commissioner, 112 T.C. 183, 189 (1999).

      When a taxpayer establishes that he paid or incurred a deductible expense

but does not establish the amount of the expense, we may estimate the amount of

the deductible expense. Cohan v. Commissioner, 39 F.2d 540, 542-544 (2d Cir.

1930). However, we cannot estimate the amount unless the taxpayer introduces

evidence that he paid or incurred the expense and the evidence is sufficient for us

to develop a reasonable estimate. Williams v. United States, 245 F.2d 559, 560

(5th Cir. 1957). In estimating the amount, we bear heavily upon the taxpayer who

failed to maintain and produce the required records. See Cohan v. Commissioner,

39 F.2d at 544.

      A.     Schedule A Deductions

      The only itemized deduction remaining at issue is petitioners’ claimed

deduction of $45,634 attributable to their gambling losses. A taxpayer in the trade

or business of gambling may deduct wagering losses as ordinary and necessary
                                       - 19 -

[*19] business expenses. See secs. 62, 162(a); Calvao v. Commissioner, T.C.

Memo. 2007-57. A taxpayer who is not in the trade or business of gambling may

deduct wagering losses as an itemized deduction. See sec. 165(d); Jackson v.

Commissioner, T.C. Memo. 2007-373. In either instance, “[l]osses from wagering

transactions shall be allowed only to the extent of the gains from such

transactions.” Sec. 165(d). Whether a taxpayer has sustained gambling losses and

the amount thereof is a question of fact to be resolved upon consideration of the

taxpayer’s evidence and credibility. Norgaard v. Commissioner, 939 F.2d 874,

878 (9th Cir. 1991), aff’g in part, rev’g in part T.C. Memo. 1989-390; see also

Szkircsak v. Commissioner, T.C. Memo. 1980-129 (noting that the Court relied on

copies of canceled checks and the credible testimony of the taxpayer to estimate

the amount of gambling losses).

      Mrs. Lamb testified that petitioners regularly withdrew cash at casino ATMs

to use for gambling purposes. Mrs. Lamb testified that all ATM withdrawals

identified with the address 25230 East Highway were withdrawals that petitioners

made at ATMs at the Kickapoo Casino.6 The address Mrs. Lamb identified

      6
       Mrs. Lamb identified a number of cash withdrawals on the bank account
statements for account No. 6821 and one such withdrawal on the bank account
statement for account No. 9194. Mrs. Lamb further testified that petitioners could
withdraw only $250 with respect to each of their ATM cards and that they often
                                                                      (continued...)
                                       - 20 -

[*20] matches the address Kickapoo Casino used on the information returns it

issued with respect to Mr. Lamb. Accordingly, we find Mrs. Lamb’s testimony to

be credible.

      Our review of petitioners’ bank account statements shows that during 2008

petitioners withdrew the following amounts from ATMs at the Kickapoo Casino:

(1) petitioners withdrew $23,317 from account No. 6821; and (2) petitioners

withdrew $163 from account No. 9194.7

      Petitioners regularly withdrew cash from casino ATMs and used this cash

for gambling purposes. Petitioners both testified that they used the ATM

withdrawals on their bank account statements to calculate the amount of gambling

losses claimed on their return. Mr. Lamb testified that petitioners’ gambling

winnings and losses were approximately the same, while Mrs. Lamb testified that

their gambling losses exceeded their winnings.




      6
      (...continued)
would withdraw $200 during one transaction and then withdraw another $40 in a
second transaction. The amounts of the withdrawals made at the Kickapoo Casino
ATMs are consistent with Mrs. Lamb’s testimony.
      7
        Although petitioners’ bank statements show a number of other significant
ATM withdrawals during 2008, petitioners did not introduce any evidence to show
that these withdrawals occurred at a casino or that they made the withdrawals for
personal gambling purposes.
                                         - 21 -

[*21] At the conclusion of trial the Court directed petitioners and petitioners’

counsel to provide to respondent copies of petitioners’ bank statements with

notations indicating which ATM withdrawals were attributable to gambling

expenses. Petitioners failed to do so. On the record before us, we find that

petitioners regularly withdrew cash from ATMs at Kickapoo Casino and used the

entire amounts of those withdrawals, totaling $23,480, for gambling purposes.

Consequently, we will allow petitioners a Schedule A deduction for gambling

losses of $23,480.

      B.     Schedule C and E Deductions

      Generally, a taxpayer is entitled to deduct ordinary and necessary expenses

paid or incurred in carrying on a trade or business. Sec. 162(a); Am. Stores Co. v.

Commissioner, 114 T.C. 458, 468 (2000). An expense is ordinary if it is

customary or usual within the particular trade, business, or industry or if it relates

to a transaction “of common or frequent occurrence in the type of business

involved.” Deputy v. du Pont, 308 U.S. 488, 495 (1940). An expense is necessary

if it is appropriate and helpful for the development of the business. See

Commissioner v. Heininger, 320 U.S. 467, 471 (1943). Personal, living, or family

expenses generally are not deductible. See sec. 262(a).
                                         - 22 -

[*22]         1.     Schedule C Deductions

        On a Schedule C attached to their untimely filed return, petitioners reported

a net loss with respect to Gene’s Muffler. Mr. Lamb testified that Gene’s Muffler

was a business owned and operated by his father and that Mr. Lamb was

responsible only for any unpaid bills or building maintenance costs with respect to

the muffler shop.

        Petitioners failed to prove that they were engaged in a trade or business

during 2008, and they did not introduce any substantiation of the expenses claimed

on the Schedule C.8 Accordingly, petitioners have failed to prove that they are

entitled to a deduction for their claimed Schedule C loss.9

              2.     Schedule E Deductions

        On a Schedule E attached to their untimely filed return petitioners claimed a

nonpassive loss of $5,759 attributable to their ownership of Gary Lamb

Construction. Petitioners, however, did not introduce any credible evidence


        8
        At trial petitioners attempted to introduce various documents purportedly
relating to Gene’s Muffler. We declined to admit petitioners’ proffered evidence
given their failure to comply with the Court’s standing pretrial order.
        9
       Although petitioners reported gross receipts of $44,462 on their Schedule
C, respondent did not include this amount in calculating the increased deficiency
asserted in respondent’s amendments to answers. Accordingly, we do not consider
whether petitioners had additional income attributable to the gross receipts
reported on their Schedule C.
                                         - 23 -

[*23] regarding the income, expenses, and loss allegedly generated by Gary Lamb

Construction. Accordingly, petitioners have failed to prove that they are entitled

to deduct the claimed nonpassive loss attributable to Gary Lamb Construction.

IV.   Additions to Tax

      Under section 7491(c), the Commissioner bears the burden of producing

evidence with respect to the liability of the taxpayer for any penalty, addition to

tax, or additional amount. See Higbee v. Commissioner, 116 T.C. at 446-447. To

meet his burden of production, the Commissioner must come forward with

sufficient evidence that it is appropriate to impose the addition to tax. Id. Once

the Commissioner meets his burden, the taxpayer must come forward with

evidence sufficient to persuade this Court that the determination is incorrect. Id.

      Respondent determined that petitioners are liable under section 6651(a)(1)

for additions to tax for failure to timely file a valid return for 2008. Section

6651(a)(1) authorizes the imposition of an addition to tax for failure to timely file

a return, unless it is shown that such failure is due to reasonable cause and not due

to willful neglect. See United States v. Boyle, 469 U.S. 241, 245 (1985); United

States v. Nordbrock, 38 F.3d 440, 444 (9th Cir. 1994). A failure to file a timely

Federal income tax return is due to reasonable cause if the taxpayer exercised

ordinary business care and prudence but nevertheless was unable to file the return
                                         - 24 -

[*24] within the prescribed time. See sec. 301.6651-1(c)(1), Proced. & Admin.

Regs. Willful neglect means a conscious, intentional failure to file or reckless

indifference toward filing. Boyle, 469 U.S. at 245. The failure to timely file a

return is not excused by the taxpayer’s reliance on an agent to file the required

return. See id. at 252.

      Petitioners stipulated that they failed to timely file Federal income tax

returns for 2008. In addition respondent introduced copies of petitioners’ account

transcripts confirming that petitioners failed to timely file their returns for 2008.

Consequently, we conclude that respondent has satisfied his burden of production

under section 7491(c), and petitioners must come forward with evidence sufficient

to persuade the Court that respondent’s determinations are in error. Petitioners

appear to contend that their failure to timely file a return was due to reasonable

cause because they relied on Mr. O’Laughlin to prepare and file their return for

2008. Even if we were to accept Mrs. Lamb’s testimony regarding petitioners’

relationship and interactions with Mr. O’Laughlin as credible, petitioners’ reliance

on Mr. O’Laughlin does not excuse their failure to timely file their return.

Consequently, we sustain respondent’s determinations as to the section 6651(a)(1)

additions to tax.
                                        - 25 -

[*25] Respondent also determined that petitioners are liable under section

6651(a)(2) for additions to tax for failure to timely pay tax shown on a return.

Section 6651(a)(2) imposes an addition to tax for failure to pay the amount of tax

shown on a taxpayer’s Federal income tax return on or before the payment due

date, unless such failure is due to reasonable cause and not due to willful neglect.10

The section 6651(a)(2) addition to tax applies only when an amount of tax is

shown on a return filed by the taxpayer or prepared by the Secretary. Sec.

6651(a)(2), (g)(2); Cabirac v. Commissioner, 120 T.C. 163, 170 (2003). When a

taxpayer has not filed a return, the section 6651(a)(2) addition to tax may not be

imposed unless the Secretary has prepared a substitute for return that satisfies the

requirements of section 6020(b). See Wheeler v. Commissioner, 127 T.C. 200,

210 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008).

      Respondent introduced into evidence substitutes for returns that satisfy the

requirements of section 6020(b), as well as copies of petitioners’ account

transcript for 2008. The substitutes for returns and the account transcripts

establish that petitioners failed to pay the tax shown on the substitutes for returns.

Respondent has satisfied the burden of production under section 7491(c).

      10
        The sec. 6651(a)(2) addition to tax is 0.5% of the amount of tax shown on
the return, with an additional 0.5% per month during which the failure to pay
continues, up to a maximum of 25%.
                                         - 26 -

[*26] Petitioners did not introduce any evidence that they were unable to pay the

tax owed or that they would have suffered undue hardship if they had paid the tax

on the due date. See sec. 301.6651-1(c), Proced. & Admin. Regs. Accordingly,

we hold that petitioners are liable for the section 6651(a)(2) additions to tax.

      Respondent also determined that Mr. Lamb is liable for an addition to tax

for failure to pay estimated tax under section 6654. Section 6654 imposes an

addition to tax on an individual who underpays his estimated tax.11 The addition

to tax is calculated with reference to four required installment payments of the

taxpayer’s estimated tax liability. Sec. 6654(c) and (d). Each required installment

of estimated tax is equal to 25% of the “required annual payment”. Sec. 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 return for the immediately preceding

taxable year, 100% of the tax shown on that return. 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. at 212; see also Mendes v.

Commissioner, 121 T.C. 308, 324 (2003).

      11
        Unless a statutory exception applies, the sec. 6654(a) addition to tax is
mandatory. See sec. 6654(a), (e); Recklitis v. Commissioner, 91 T.C. 874, 913
(1988).
                                       - 27 -

[*27] Respondent introduced a copy of Mr. Lamb’s account transcript for 2008

which shows that he did not make any estimated tax payments. Respondent also

introduced evidence that Mr. Lamb failed to file a Federal income tax return for

2007. On the basis of this evidence as well as Mr. Lamb’s concessions and our

conclusions with respect to his income for 2008, we conclude that Mr. Lamb had a

required annual payment for 2008. Accordingly, we hold that Mr. Lamb is liable

for the section 6654(a) addition to tax for 2008.

      We have considered the parties’ remaining arguments, and to the extent not

discussed above, conclude those arguments are irrelevant, moot, or without merit.

      To reflect the foregoing,


                                                     Decisions will be entered under

                                                Rule 155.
