121 T.C. No. 19

UNITED STATES TAX COURT

FORTUNATO J. MENDES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16032-95. Filed December 11, 2003.

P has been continuously incarcerated since June 17,

1988. For P’s 1988 taxable year, R (1) determined a tax

deficiency based upon amounts reported on information

returns as having been paid to P during that year, (2)

imposed the 10-percent additional tax under sec. 72(t)(1),

I.R.C., and (3) determined that P was subject to additions

to tax under secs. 6651(a)(1), 6653(a)(1), and 6654, I.R.C. 

More than 2 years after R issued the notice of deficiency, P

filed a 1988 return in which he reported the income from the

1988 information returns and listed deductions and

dependency exemptions, which, in total, exceeded the

reported income, thereby resulting in a zero tax liability

for 1988. P now denies (1) receipt of a portion of the

income reported on his 1988 return and (2) liability for the

10-percent additional tax under sec. 72(t)(1), I.R.C. R

denies that P is entitled to any of the claimed deductions

and dependency exemptions.
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1. Held: R’s adjustments to income and disallowance

of deductions and dependency exemptions claimed by P are

sustained.

2. Held, further, R’s imposition of the 10-percent

additional tax under sec. 72(t)(1), I.R.C., is sustained.

3. Held, further, R’s imposition of additions to tax

under secs. 6651(a)(1), 6653(a)(1), and 6654, I.R.C., are

sustained. P’s 1988 return, filed more than 2 years after

R’s issuance of the notice of deficiency, is disregarded for

purposes of computing the “required annual payment” under

sec. 6654(d)(1)(B)(i), I.R.C.

Fortunato J. Mendes, pro se.

Wilton A. Baker, for respondent.

HALPERN, Judge: By notice of deficiency dated May 3, 1995

(the notice), respondent determined a deficiency in and additions

to petitioner’s Federal income tax for calendar year 1988

(sometimes, the audit year) as follows:

 Additions to Tax 

Deficiency Sec. 6651(a)(1) Sec. 6653(a)(1) Sec. 6654

 $8,487 $2,122 $424 $484

The adjustments giving rise to the deficiency are

respondent’s inclusion in income of amounts reported on

information returns as having been paid to petitioner during 1988

(sometimes, the income items), and his imposition of the 

10-percent additional tax on early distributions from qualified

retirement plans, offset by his allowance of the standard

deduction and one personal exemption. In addition, respondent
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denies petitioner’s claim, raised at trial, to deductions,

losses, and additional personal exemptions on a 1988 Form 1040,

U.S. Individual Income Tax Return (the 1988 return), that

petitioner filed on or about May 14, 1997, more than 2 years

after the notice was issued. 

The issues for decision are whether, for the audit year,

petitioner: (1) must include in gross income $40,347, consisting

of dividends, interest, capital gains, and a distribution from a

retirement account; (2) is entitled to itemized deductions of

$11,850; (3) sustained a deductible loss of $6,724 in connection

with his law practice; (4) sustained deductible losses totaling

$29,455 in connection with the management of certain rental real

property; (5) is entitled to dependency exemptions for three

children (the dependency exemptions); (6) is liable for the

10-percent additional tax on early distributions from qualified

retirement plans under section 72(t); and (7) is liable for

additions to tax under (A) section 6651(a)(1) for failure to

timely file the 1988 return, (B) section 6653(a)(1) for

negligence, and (C) section 6654 for failure to pay estimated

income tax.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year at issue, and

all Rule references are to the Tax Court Rules of Practice and 
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1 Sec. 7491, which, under certain circumstances, shifts the

burden of proof to the Commissioner, is inapplicable because the

examination in this case began before July 22, 1998, the

effective date of that section. See Internal Revenue Service

Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.

3001(c), 112 Stat. 727.

2 Petitioner has failed to set forth objections to

respondent’s proposed findings of fact. Accordingly, we conclude

that petitioner concedes that respondent’s proposed findings of

fact are correct except to the extent that petitioner’s findings

of fact are clearly inconsistent therewith. See Jonson v.

Commissioner, 118 T.C. 106, 108 n.4 (2002).

3 Petitioner had previously been tried for and convicted of

distribution of cocaine and carrying a pistol without a license. 

Procedure. All dollar amounts have been rounded to the nearest

dollar. Petitioner bears the burden of proof. Rule 142(a)(1).1

FINDINGS OF FACT2

Some facts are stipulated and are so found. The stipulation

of facts, with accompanying exhibits, is incorporated herein by

this reference.

At the time the petition was filed, petitioner was

incarcerated at the Maryland House of Corrections in Jessup,

Maryland.

Petitioner has been continuously incarcerated since June 17,

1988, the date upon which he was arrested for the murder of an

individual who was scheduled to testify against him regarding a

cocaine trafficking charge. He was ultimately tried for and

convicted of first degree murder and sentenced to life

imprisonment with no chance of parole.3
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Petitioner was a lawyer for 20 years. He was disbarred on

October 23, 1991, as a result of his convictions.

Petitioner paid no taxes and filed no return for the audit

year before the issuance of the notice. The additions to gross

income set forth in the notice were reported on information

returns (Forms 1099 or, in the case of Merrill Lynch Pierce

Fenner & Smith, Inc. (Merrill Lynch), an equivalent tax reporting

statement) as follows:

 Payor Classification Amount

Merrill Lynch Short-term capital gain1 $27,573

Bank of New York Short-term capital gain1 2,802 

First Investors Tax Interest 259

 Exempt Fund

Sovran Bank, NA Interest 138

Commonwealth Savings Interest 5

 & Loan

Merrill Lynch Dividends 540

Raytheon Co. Dividends 8

National Bank of Gross distribution from 9,022 

 Washington retirement account 

 Total 40,347 

1 The $27,573 was reported by Merrill Lynch as “gross

proceeds from dispositions of securities”. Although the

information return from Bank of New York is not in evidence, we

assume it does the same with respect to the $2,802. On the 1988

return, petitioner reported both amounts as short-term capital

gain; i.e., he failed to report other than a zero basis for

either the IBM stock sold by Merrill Lynch or the security sold

by Bank of New York.

On or about May 14, 1997, more than 2 years after the notice

was issued, petitioner filed the 1988 return. On Schedules B, 
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4 In fact, petitioner double counted certain of the income

items. Respondent has not sought to add the duplicated income to

his proposed adjustment.

Interest and Dividend Income, and D, Capital Gains and Losses, he

listed all of the income items contained in the notice.4

On Schedule A, Itemized Deductions, of the 1988 return,

petitioner listed the following itemized deductions:

Real estate taxes $1,420

Deductible points (interest) 10,430

 Total 11,850

On Schedule C, Profit or Loss From Business, petitioner

listed his principal business as “Lawyer”, and, on a cash basis

of accounting, showed zero gross receipts and total deductions of

$6,724, for a net loss of $6,724.

On Schedule E, Supplemental Income (plus attachments),

petitioner listed nine separate rental properties. He reported a

loss on each of the properties and, on four of the properties, he

reported zero rental income. He reported a total loss of $29,455

with respect to said properties.

Petitioner also claimed four personal exemptions: one for

himself and one for each of three children.

The combination of personal exemptions, itemized deductions,

and losses resulted in petitioner’s reporting zero taxable income

and zero tax due.

In the notice, respondent allowed petitioner one personal

exemption of $1,950 and the $3,000 standard deduction appropriate
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for his filing status, married filing separately. In addition,

respondent treated the $9,022 distribution from the National Bank

of Washington as a premature distribution from a qualified

retirement plan and imposed the 10-percent additional tax ($902)

applicable to such distributions under section 72(t). Respondent

also imposed additions to tax under sections 6651(a), 6653(a)(1),

and 6654. 

OPINION

I. Amounts Included in Gross Income

A. Identical Amounts Reported as Income by Petitioner

On the 1988 return, petitioner included in income all of the

items that are contained in the notice’s adjustment for

additional income. During the trial, however, petitioner stated

that he was contesting all but one of the income items: the $138

of interest from Sovran Bank.

It has been held repeatedly that positions taken in a tax

return signed by a taxpayer may be treated as admissions. See

Waring v. Commissioner, 412 F.2d 800, 801 (3d Cir. 1969), affg.

T.C. Memo. 1968-126; Lare v. Commissioner, 62 T.C. 739, 750

(1974), affd. without published opinion 521 F.2d 1399 (3d Cir.

1975); Kaltreider v. Commissioner, 28 T.C. 121, 125-126 (1957),

affd. 255 F.2d 833 (3d Cir. 1958). As we recently stated in

Crigler v. Commissioner, T.C. Memo. 2003-93 (citing the foregoing

authorities): “petitioner * * * cannot * * * disavow * * *
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5 During the trial, petitioner admitted that the $9,022

received from the National Bank of Washington constituted a

premature distribution from a qualified retirement account. On

brief, he challenges only the imposition of the sec. 72(t)

10-percent additional tax on that distribution.

returns [prepared by him] without cogent proof that they are

incorrect.” As discussed infra in Section I.B. and C.,

petitioner has failed to furnish such proof.

B. Failure To Challenge Income Adjustments on Brief

Other than making a vague assertion that he “was requires 

[sic] to and fully complied with the filing of * * * [the 1988

return] consistent with the 1099 information” (which suggests a

mistaken belief that such reporting was required even though

petitioner disputed the information), on brief, petitioner

challenges only one of the income items: the short-term capital

gain from the sale of 240 shares of IBM (the IBM stock).5 If an

argument is not pursued on brief, we may conclude that it has

been abandoned. See Clajon Gas Co. v. Commissioner, 119 T.C.

197, 213 n.17 (2002); Davis v. Commissioner, 119 T.C. 1 n.1

(2002); Nicklaus v. Commissioner, 117 T.C. 117, 120 n.4 (2001);

Rybak v. Commissioner, 91 T.C. 524, 566 n.19 (1988).

C. Sale of the IBM Stock--Alleged Theft of Sale Proceeds

Petitioner argues that there is no proof that Merrill Lynch

sold the IBM stock at petitioner’s request or that petitioner

received the proceeds of that sale. During the trial, petitioner

acknowledged that the Merrill Lynch tax reporting statement for
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1988, together with the monthly statements for 1988 (all of which

were placed in evidence during the trial) (the Merrill Lynch

statements) constitute a copy of his 1988 account activity with

Merrill Lynch. The monthly statement for June 1988 shows that,

on June 17, 1988 (the date of petitioner’s arrest and

incarceration), petitioner’s account was credited with $27,573

representing the proceeds from the sale of the IBM stock (the IBM

sale proceeds). It further shows that, after the sale, on June

21, 1988, a check for $22,960 was written on the account and

identified as a “withdrawal” from the account. 

Whether or not Merrill Lynch sold the IBM stock at

petitioner’s request, there is no dispute that the stock was in

fact sold and that the IBM sale proceeds were credited to

petitioner’s Merrill Lynch account. 

Pursuant to section 61(a)(3), gross income includes “[g]ains

derived from dealings in property”. Section 1.446-1(c)(1)(i),

Income Tax Regs., requires that, “under the cash receipts and

disbursements method in the computation of taxable income, all

items which constitute gross income * * * are to be included for

the taxable year in which actually or constructively received.” 

Section 1.451-2(a), Income Tax Regs., provides that income is

constructively received by a taxpayer “in the taxable year during

which it is credited to his account, set apart for him, or

otherwise made available so that he may draw upon it at any
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time”. Pursuant to that regulation, the IBM sale proceeds were

constructively received by petitioner on June 17, 1988, when they

were credited to his Merrill Lynch account. Moreover, because

petitioner has failed to offer any evidence as to his holding

period for or basis in the IBM stock, the entire $27,573 is

includable in petitioner’s 1988 income as short-term capital

gain.

Petitioner’s primary argument for omitting the IBM sale

proceeds from his 1988 gross income is that he never received the

money. In essence, he alleges that the IBM sale proceeds were

taken from his account by a Merrill Lynch employee. By alleging

nonreceipt of the IBM sale proceeds, including the portion that

may have been represented by the $22,960 “withdrawal” from his

Merrill Lynch account, petitioner is, in effect, claiming a 1988

theft loss of the IBM sale proceeds rather than their

noninclusion in income.

Thomas P. McDonnell, a Merrill Lynch employee for 22 years,

who (at the time of the trial) was a Merrill Lynch vice president

and administrative manager responsible for certain “back office”

operations that occur in an office, testified that, pursuant to

Merrill Lynch’s normal practice, the IBM stock would have been

sold upon the placement of an order to sell (either by telephone

or in writing) by the legal or beneficial owner of the stock;

i.e., petitioner. Thereafter, the sale of the stock would have
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6 Mr. McDonnell testified that, because Merrill Lynch was

required to retain records of customer transactions for only 7

years, he was unable to produce copies of the transaction

confirmation slip, the canceled check, or any other records

specifically related to the 1988 sale of petitioner’s 240 shares

of IBM. In fact, he was “amazed” that the 1988 Merrill Lynch

statements pertaining to petitioner’s account were still

available in Merrill Lynch’s microfiche library.

been verified with petitioner by telephone, and a confirmation of

the sale would have been mailed to him. Mr. McDonnell further

testified that, in accordance with standard brokerage industry

policy and standard Merrill Lynch firm policy (and absent

specific instructions to the contrary), if petitioner had

requested payment of the sale proceeds from a sale of securities,

a check would have been made payable to him as the owner of

record on the statement.6 He stated that such checks are sent by

regular, first class U.S. mail and that, if the check “expires”

(i.e., it is not cashed within a certain period of time), the

amount of the check is redeposited to the customer’s account.

Section 165 allows an individual taxpayer to deduct a theft

loss in the year during which the taxpayer discovers such loss. 

See sec. 165(a), (c)(1), (e). Petitioner bears the burden of

proving that a theft (and not, for instance, merely a mysterious

disappearance of the property) has occurred and that the

requirements of section 165 have been met. See Rule 142(a);

Jacobson v. Commissioner, 73 T.C. 610, 613 (1979); Allen v.

Commissioner, 16 T.C. 163, 166 (1951) (absent positive proof, a
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taxpayer must present evidence that reasonably leads the trier of

fact to conclude that the property was stolen). In this case,

petitioner has failed to establish even the reasonable likelihood

that the IBM sale proceeds were stolen by a Merrill Lynch

employee or, indeed, by anyone. His argument is premised solely

on respondent’s inability to prove that the IBM sale proceeds

were mailed to him or that someone at Merrill Lynch did not steal

those proceeds. Respondent bears no such burden. Petitioner

offers only his own testimony that he never received the IBM sale

proceeds coupled with his sheer speculation that, because of what

he perceives as Merrill Lynch’s inadequate internal procedures

for verifying the transmission to and receipt of money by its

customers, those sale proceeds must have been stolen. Such

speculation does not convince us that the IBM sale proceeds were,

in fact, stolen. Petitioner has offered no evidence that the

Merrill Lynch procedures described by Mr. McDonnell for handling

stock trades and the proceeds from those trades were not followed

in connection with the 1988 sale of petitioner’s IBM stock. As a

result, we conclude that petitioner has failed to carry his

burden of proving that he sustained a 1988 theft loss within the

meaning of section 165. Nor has he shown that any portion of the

IBM sale proceeds is otherwise deductible for that year as a loss

under that section.
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D. Conclusion

We sustain respondent’s determination to include $40,347 in

petitioner’s gross income for the audit year, and we hold that

petitioner is not entitled to a deduction for loss of the IBM

sale proceeds of $27,573 as an offset to that income inclusion.

II. Schedule A Itemized Deductions

We must decide whether petitioner is entitled to Schedule A

itemized deductions for the audit year consisting of real estate

taxes of $1,420 and “deductible points” (mortgage interest) of

$10,430. The 1988 return indicates that those amounts relate to

what was, before his incarceration, petitioner’s personal

residence in Fairfax, Virginia. 

Petitioner has failed to substantiate his payment, during

1988, of any real property taxes with respect to his personal

residence; and, except for an undated, handwritten listing of

mortgage payments due with respect to various properties,

including his personal residence, and a computer printout which

appears to list mortgage payments due on that residence for

March, April, and May 1992, petitioner has failed to produce any

receipts or other evidence to corroborate his return position

that he made a 1988 payment of “deductible points”. Petitioner

did not claim a deduction for mortgage interest on what he claims
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7 We have received into evidence a copy of the 1987 Form

1040. That document is not signed by petitioner, but it is

signed by a return preparer (petitioner’s attorney) under what

appears to be a date of Aug. 2, 1990. It carries the annotation

“client copy”. We shall use that document for limited purposes,

as described below. We make no finding that the original of that

document was ever filed by petitioner. 

is his 1987 return (the 1987 Form 1040),7 which indicates that

the property was not subject to a mortgage during that year; and,

although petitioner’s classification of the alleged $10,430

payment as “deductible points” may indicate that the property was

mortgaged in 1988, petitioner has failed to offer any evidence,

in the form of closing documents, canceled checks, etc., of the

mortgage or of the payment of “points” during 1988. Moreover,

petitioner has failed to provide even the minimal substantiation

of the payment of either points or real estate taxes that would

permit us to estimate allowable deductions as permitted under

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). Even

under Cohan, there must be sufficient evidence in the record to

provide a basis upon which an estimate may be made. Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985). Here, there is none. 

Cf. Estate of Dickerson v. Commissioner, T.C. Memo. 1997-165

(taxpayer’s Schedule A deduction for mortgage interest sustained

on the basis of Cohan). Therefore, we reject petitioner’s claim,

raised at trial, to Schedule A itemized deductions.
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8 Petitioner’s reporting of zero gross receipts from his

law practice during the audit year (the first 5-1/2 months of

which preceded his incarceration) indicates that the loss may be

disallowed on the alternative ground that, during that year,

petitioner did not conduct his law practice with a bona fide

intention of making a profit and may, in fact, have either

abandoned or at least temporarily discontinued the practice after

1987 when, according to the 1987 Form 1040, he earned a small

($1,698) profit on very low ($2,884) gross receipts. As

discussed more fully infra in section IV, losses incurred by an

individual in connection with a purported trade or business are

not allowable in the absence of a bona fide profit motive. 

III. Schedule C Loss From Petitioner’s Law Practice

 Next, we turn to the issue of whether petitioner sustained

a 1988 deductible loss of $6,724 associated with his law

practice. 

Here, as in the case of petitioner’s Schedule A itemized

deductions, petitioner has offered no evidence to substantiate

the items (mortgage interest, utilities, telephone, depreciation,

laundry and cleaning, and bar membership dues) that constitute

the alleged deductible expenses. Here, too, petitioner has

failed to provide the minimal substantiation of the alleged

expenses that would permit us to estimate the allowable

deductions pursuant to Cohan v. Commissioner, supra. Therefore,

we reject petitioner’s claim, raised at trial, to a Schedule C.

loss.8

IV. Schedule E Losses From Real Property Rentals

Petitioner’s 1988 Schedule E indicates that, during the

audit year, petitioner owned nine rental properties, each of
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9 SEC. 165. LOSSES. 

 (a) General Rule.--There shall be allowed as a 

 deduction any loss sustained during the taxable year and 

 not compensated for by insurance or otherwise.

 * * * * * * *

 (c) Limitation on Losses of Individuals.--In the case 

 of an individual, the deduction under subsection (a) shall 

 be limited to--

(1) losses incurred in a trade or business;

which generated a loss for the year. Four of those properties

generated zero rental income, including the property with the

greatest loss and the most expenses. The Schedule E attached to

the 1987 Form 1040 indicates that four of the properties that

generated losses in 1988 also generated losses in 1987 and that

two of the properties that produced zero rental income in 1988

did the same in 1987.

The holding of real property for rental purposes normally

constitutes the use of the property in a trade or business. See

Lagreide v. Commissioner, 23 T.C. 508, 512 (1954). Losses

incurred by an individual in conducting a trade or business are,

subject to certain restrictions not here relevant, deductible

pursuant to section 165(a) and (c)(1).9 Losses are not

considered to have been incurred in a trade or business unless it

is shown that the activity in question was undertaken with the

primary motive or intention of making a profit. Lamont v.
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Commissioner, 339 F.2d 377, 380 (2d Cir. 1964), affg. T.C. Memo.

1964-2; Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd.

without opinion 702 F.2d 1205 (D.C. Cir. 1983); Jasionowski v.

Commissioner, 66 T.C. 312, 319 (1976); sec. 1.183-2(a), Income

Tax Regs. Although a taxpayer’s expectation of profit need not

be reasonable, there must be a good faith objective of making a

profit. See Dreicer v. Commissioner, supra.

There is no evidence in the record that any of the

properties listed in the 1988 return has ever generated a profit,

or that petitioner expected that they would ever become

profitable, either individually or as a group. To the contrary,

petitioner, on brief, indicates that he never believed that his

rental properties would become profitable. For example, in

defense of his nonpayment of estimated taxes for the audit year,

petitioner states in his opening brief: 

Petitioner cannot be held liable for failing

to file an estimated tax return because the

Petitioner did not owe any taxes and has

never owed any taxes to the Internal Revenue

Service in the more than 50 years he has been

filing income taxes. The deductions

Petitioner has used for this tax year and all

other tax years have always [been] in excess

of the income he has earned and therefore

Petitioner * * * had not [sic] duty to file

any estimated income tax. [Emphasis added.] 

 

Similarly, in his reply brief, petitioner states:

There was not [sic] need to pay estimated tax

since I have never owed the IRS an estimated

tax in 20 years of practicing law and renting

properties.
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The foregoing statements are tantamount to an admission

that, regardless of the amount of (1) dividends, interest and/or

capital gains attributable to his Merrill Lynch account and/or

other sources and (2) profits from his law practice (for which

petitioner did report a small profit for 1987), petitioner always

anticipated that losses generated by his rental activities would

be sufficient to offset such income, thereby resulting in no tax

liability to petitioner. Moreover, for the audit year, the

reported expenses attributable to petitioner’s rental properties

were almost 250 percent greater than the reported rental income. 

That disparity between expense and income further supports the

conclusion that petitioner operated his rental properties without

a good faith objective of generating a profit. Therefore, we

reject petitioner’s claim, raised at trial, to Schedule E losses. 

V. The Dependency Exemptions

Section 151(a) and (c)(1) allows deductions for exemptions

for dependents. In order to be entitled to dependency exemptions

for three of his children, petitioner must show that each child

meets the statutory definition of “dependent”, which, under

section 152(a)(1), includes a son or daughter over half of whose

support, for the taxable year, is provided by the taxpayer. 

Under section 151(c)(1)(B), each child must be either under 19

years of age or a student under 24 years of age, at yearend. 

Petitioner offered no evidence that the foregoing statutory
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requirements were satisfied for the audit year. Therefore, we 

reject petitioner’s claim, raised at trial, to deductions for

three dependency exemptions.

VI. Respondent’s Section 72(t) Determination

Section 72(t) provides, in pertinent part, as follows: 

SEC. 72(t). 10-Percent Additional Tax on Early

Distributions From Qualified Retirement Plans.--

(1) Imposition of additional tax.--If any

taxpayer receives any amount from a qualified

retirement plan * * *, the taxpayer’s tax * * *

for the taxable year in which such amount is

received shall be increased by an amount equal to

10-percent of the portion of such amount which is

includable in gross income.

Petitioner admits receipt of $9,022 from the National Bank

of Washington during the audit year, and he further admits that

the money was distributed from “a 401 or some type of retirement

account”, indicating his acknowledgment that the distribution is

subject to section 72(t)(1). Petitioner argues, however, that

the $9,022 constituted a net distribution and that the bank

withheld the 10-percent tax from the gross amount of the

withdrawal. Petitioner further alleges that it is common

practice for banks to collect the 10-percent additional tax on

early distributions from qualified retirement plans.

Once again, other than his self-serving testimony,

petitioner has offered no evidence in support of his position, no

bank statements or other evidence that would corroborate his

assertion that the tax was withheld or that it is common practice
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10 There is no evidence that petitioner timely sought to

extend the Apr. 17 due date.

(and was common practice during the audit year) for banks to

withhold the tax. This Court is not bound to accept a taxpayer’s

self-serving, unverified, and undocumented testimony. Shea v.

Commissioner, 112 T.C. 183, 189 (1999). Therefore, we sustain

respondent’s imposition of the 10-percent additional tax on early

distributions from qualified retirement plans. 

VII. Additions to Tax

A. Respondent’s Section 6651(a)(1) Determination

Section 6651(a)(1) provides for an addition to tax in the

event a taxpayer fails to file a timely return (determined with

regard to any extension of time for filing), unless it is shown

that such failure is due to reasonable cause and not due to

willful neglect. The amount of the addition is equal to 5

percent of the amount required to be shown as tax on the

delinquent return for each month or fraction thereof during which

the return remains delinquent, up to a maximum addition of 25

percent for returns more than 4 months delinquent.

The 1988 return was not filed until on or about May 14,

1997, more than 8 years after the April 17, 1989, due date. See

sec. 6072(a).10 Petitioner argues that, because he believed in

good faith that his attorney had timely filed a 1988 return for

him, the failure to timely file the return was due to reasonable
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cause. Petitioner points to a letter from his attorney dated

June 14, 1990, in which she states that she is in the process of

preparing returns for 1984, 1985, and 1987, and that, upon

completion of those returns, she “will go back and finish 1983 *

* *, 1986, 1988 and 1989.” Both petitioner’s attorney and the

Internal Revenue Service (IRS) Philadelphia Service Center later

confirmed that she never filed a 1988 return for petitioner. 

There is no record as to when petitioner might have given

his attorney the records needed to prepare his 1988 return. The

fact that, as of June 14, 1990, she had not even begun to prepare

the return indicates that petitioner could not have believed in

good faith that it would be timely filed by April 17, 1989. 

Moreover, even if we were able to find such good faith reliance

by petitioner, it would not constitute “reasonable cause” for

purposes of section 6651(a). “The failure to make a timely

filing of a tax return is not excused by the taxpayer’s reliance

on an agent, and such reliance is not ‘reasonable cause’ for a

late filing under § 6651(a)(1).” United States v. Boyle, 469

U.S. 241, 252 (1985). Nor did the mere fact of petitioner’s

incarceration at the time his 1988 return was due constitute

reasonable cause for his failure to file the return. See

Llorente v. Commissioner, 74 T.C. 260, 268-269 (1980), affd. in

part and revd. in part on another issue 649 F.2d 152 (2d Cir.

1981). Therefore, we sustain respondent’s imposition of a
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25-percent addition to tax under section 6651(a). 

B. Respondent’s Section 6653(a)(1) Determination

Section 6653(a)(1) imposes an addition to tax equal to 5

percent of the entire underpayment if any portion of such

underpayment is due to negligence or intentional disregard of

rules or regulations (without distinction, negligence). An

underpayment, for purposes of section 6653(a), is the amount by

which the tax liability exceeds the tax shown on a timely filed

return. Secs. 6653(c)(1), 6211(a). Inasmuch as the 1988 return

was not timely filed, the amount shown on a timely filed return

is zero, and the underpayment equals the entire tax liability. 

Emmons v. Commissioner, 92 T.C. 342, 348-349 (1989), affd. on

another issue 898 F.2d 50 (5th Cir. 1990). When an underpayment

is caused by the taxpayer’s failure to timely file an income tax

return, the underpayment is due to negligence if the taxpayer

lacks reasonable cause for the failure. See id. at 349-350.

Because we find that petitioner lacked reasonable cause for his

failure to timely file the 1988 return, it follows, and we find,

that his underpayment was due to negligence. Id.

Moreover, we reach the same result even if we view the issue

to be whether petitioner had a reasonable basis for the

underpayment itself. Section 6653(g) provides that any portion

of an underpayment that is attributable to a taxpayer’s failure

to report income shown on an information return shall be treated
- 23 -

11 Income from several of the same investments was listed

on the 1987 Form 1040. 

as due to negligence in the absence of clear and convincing

evidence to the contrary. Petitioner argues that he “could not

have filed a tax * * * [return] on 1099 forms he never received

due to his incarceration.” He also implies that, because he

never paid taxes (on account of the excess of his rental property

and other allegedly deductible expenses and exemptions over his

total income), he had a reasonable basis for believing that he

did not owe tax for the audit year. Even if we accept as fact

that petitioner did not receive the 1988 information returns

mailed to him, he must have known of the investments that gave

rise to them.11 Therefore, he should have been aware of all or a

portion of the income generated by those investments and of the

probability that information returns had been issued with respect

to those investments. There is no evidence that he could not

have arranged for the information returns to be sent to him in

prison. In addition, petitioner’s consistent adherence to an

improper reporting position for prior years with respect to the

deductibility of losses from his rental properties (discussed

supra in Section IV) does not constitute a reasonable basis for

believing that there was no tax due for the audit year. As a

result, petitioner has failed to rebut the presumption of

negligence, under section 6653(g), arising out of his failure to 
- 24 -

12 Under sec. 6654(g)(1), wage withholding credits are

treated as payments of estimated tax.

report the income listed on the 1988 information returns mailed

to him.

We sustain respondent’s determination under section

6653(a)(1).

C. Respondent’s Section 6654 Determination

1. Introduction

Section 6654 provides for an addition to tax in the event of

an underpayment of a required installment of individual estimated

tax. Sec. 6654(a) and (b). As relevant to this case, each

required installment of estimated tax is equal to 25 percent of

the “required annual payment”, which in turn is equal to the

lesser of (1) 90 percent of the tax shown on the individual’s

return for that year (or, if no return is filed, 90 percent of

his or her tax for such year), or (2) if the individual filed a

return for the immediately preceding taxable year, 100 percent of

the tax shown on that return. Sec. 6654(d)(1)(A), (B)(i) and

(ii). The due dates of the required installments for a calendar

taxable year are April 15, June 15, and September 15 of that year

and January 15 of the following year. Sec. 6654(c)(2). For

purposes of section 6654, an individual’s tax consists of income

tax and self-employment tax and is determined before the

application of any wage withholding credit12 (but after the
- 25 -

13 Effective for taxable years beginning after Dec. 31,

1997, the threshold amount is $1,000. Taxpayer Relief Act of

1997, Pub. L. 105-34, sec. 1202(a), 111 Stat. 994.

application of other allowable credits). Sec. 6654(f); see sec.

31. Except in very limited circumstances not applicable to this

case, see sec. 6654(e)(3)(B), section 6654 provides no exception

for reasonable cause or lack of willful neglect. 

There are two mechanical exceptions to the applicability of

the section 6654 addition to tax. First, as relevant to this

case, the addition is not applicable if the tax shown on the

individual’s return for the year in question (or, if no return is

filed, the individual’s tax for that year), reduced for these

purposes by any allowable credit for wage withholding, is less

than $500.13 Sec. 6654(e)(1). Second, the addition is not

applicable if the individual’s tax for the preceding taxable year

was zero. Sec. 6654(e)(2).

Petitioner argues that he “cannot be held liable for failing

to file an estimated tax return because the Petitioner did not

owe any taxes”. Respondent’s deficiency determination for the

audit year, which we sustain in full herein, shows that, contrary

to petitioner’s argument, petitioner did, in fact, owe taxes for

the audit year. That does not dispose of the matter, however. 

There remains the issue of whether petitioner may rely on having

satisfied the requirement of section 6654(d)(1)(A) and (B) that

the amount of each of his estimated tax installments for the
- 26 -

audit year (in this case, zero) was equal to 25 percent of the

lesser of (1) 90 percent of the tax shown on his return for that

year or, alternatively, (2) 100 percent of the tax shown on his

return for the prior year, 1987.

2. Satisfaction of Section 6654(d)(1)(B)(i)

The 1988 return, filed on or about May 14, 1997, shows a

zero tax liability for that year. If the 1988 return constitutes

a valid return for purposes of section 6654(d)(1)(B)(i), there

can be no underpayment of a required installment of estimated tax

since there are no required installments due when there is no tax

liability shown on the return as filed; i.e., 25 percent of zero

equals zero.

We have repeatedly held that a taxpayer’s estimated tax

liability is based upon the taxpayer’s tax liability as stated on

the original tax return as filed, and not upon the notice of

deficiency amount or the ultimate tax liability (here, one and

the same and referred to, for convenience, as the ultimate tax

liability). See Gleason v. Commissioner, T.C. Memo. 1990-110;

Warda v. Commissioner, T.C. Memo. 1988-572; Sampson v.

Commissioner, T.C. Memo. 1986-231; see also Weir v. Commissioner,

T.C. Memo. 2001-184. Moreover, the sufficiency of estimated tax

payments has been determined with respect to the tax liability

shown on the taxpayer’s return for the preceding taxable year

pursuant to section 6654(d)(1)(B)(ii), rather than with respect
- 27 -

14 There is no inconsistency between our treating

petitioner’s reporting of the amounts listed on Schedules B and D

of the 1988 return as an admission that those amounts are

includable in 1988 gross income, see the discussion supra in

Section I.A., and our finding herein that the 1988 return is not

a “return” for purposes of sec. 6654(d)(1)(B)(i). The former

conclusion is based upon caselaw which treats a taxpayer’s return

position as an admission by the taxpayer that that position is

correct. That characterization of a taxpayer’s return position

is not contingent upon a finding that the return itself

constitutes a valid return for purposes of various provisions of

the Internal Revenue Code (e.g., secs. 6501(a), 6651(a)(1),

(continued...)

to the ultimate tax liability for the taxable year in issue, even

when the return for the preceding year was held to have

fraudulently understated income, Schwarzkopf v. Commissioner, 246

F.2d 731, 734-735 (3d Cir. 1957), affg. on other issues and

remanding on that issue T.C. Memo. 1956-155, or when such return

was not filed until after the due date, Rev. Rul. 2003-23, 2003-8

I.R.B. 511; see also Rev. Rul. 80-355, 1980-2 C.B. 374 (“return

for the taxable year” is joint return filed after due date as

replacement for separate returns filed before due date).

None of the above-cited authorities address circumstances in

which the taxpayer’s original return was filed after a notice of

deficiency had been issued. In this case, the 1988 return was

filed more than 2 years after issuance of the notice (May 14,

1997, versus May 3, 1995) and almost 22 months after the filing

of the petition on July 17, 1995. Under those circumstances we

will disregard the 1988 return as we do not consider it to be a

“return” for purposes of section 6654(d)(1)(B)(i).14 To hold
- 28 -

14(...continued)

6654(d)(1)(B)) with respect to which the filing of a valid return

gives rise to (or limits) specific rights or actions of either

the taxpayer or the Government.

otherwise would, in effect, negate the application of the portion

of section 6654(d)(1)(B)(i) that defines the term “required

annual payment” “if no return is filed” as “90 percent of the tax

for * * * [the taxable] year”. As regards any taxable year for

which the taxpayer failed to file a return and received a

deficiency notice that included a proposed section 6654 addition

to tax, the taxpayer would be able to negate the addition to tax

simply by filing a return for that year that showed a tax

liability less than the quarterly estimated payments actually

made or, if none had been made, that showed a zero tax liability. 

Such a result is inconsistent with both the purpose and function

of section 6654(d)(1)(B)(i).

In Evans Cooperage Co. v. United States, 712 F.2d 199 (5th

Cir. 1983), the Court of Appeals for the Fifth Circuit

characterized as a “safe harbor” the provision of the corporate

estimated tax that shields a corporation from an addition to tax

if the estimated tax paid during the year is at least equal to

the amount of tax shown on the return of the corporation for the

preceding taxable year (section 6655(d)(1), during 1976 and 1977,

the audit years in that case). Id. at 201. The Court of Appeals

described and commented on the legislative purpose of the
- 29 -

preceding-year-return safe harbor as follows:

This objective of the safe harbor provision -- to

provide a predictable escape from any possible penalty

liability -- would be defeated if penalties for

underpayment of estimated taxes during the year were

based, not on the easily determinable amount reflected

on the preceding year’s return, but instead upon the

ultimate tax liability, possibly determined by adverse

tax audit, a year or so after the tax year for * * *

which the estimated tax installments were paid. * * *

[Id. at 204.]

“Safe harbor” also is an apt description of the identical

preceding-year-return rule applicable to individuals, sec.

6654(d)(1)(B)(ii), and it is an apt description of the rule,

applicable to both corporations and individuals, limiting the

required annual payment of estimated tax to the tax shown on the

return (if one is filed) for the taxable year in question, secs.

6654(d)(1)(B)(i) and 6655(d)(1)(B)(i). 

Our decision is consistent with the “objective of the safe

harbor provision” referred to by the Court of Appeals in Evans

Cooperage. Petitioner’s failure to file a return prior to

respondent’s issuance of the notice presents us with a situation

that is the exact opposite of that referred to in Evans

Cooperage, where the filing of returns preceded the audit. Here,

upon issuance of the notice, it is the tax liability determined

by respondent that is the “easily determinable amount” and it is

the return amount that is “possibly determined” in some later

year. In effect, petitioner, by not filing the 1988 return prior

to issuance of the notice, has waived his right to the
- 30 -

15 In full, sec. 6665 provides:

Sec. 6665. APPLICABLE RULES

(a) Additions Treated As Tax.– Except as otherwise

provided in this title – 

(1) the additions to the tax, additional amounts,

and penalties provided by this chapter shall be paid

upon notice and demand and shall be assessed,

collected, and paid in the same manner as taxes; and

(2) any reference in this title to “tax” imposed

by this title shall be deemed also to refer to the

additions to the tax, additional amounts, and penalties

provided by this chapter.

(b) Procedure For Assessing Certain Additions To Tax.–

For purposes of subchapter B of chapter 63 (relating to

deficiency procedures for income, estate, gift, and certain

excise taxes), subsection (a) shall not apply to any

addition to tax under section 6651, 6654, 6655; except that

it shall apply– 

(continued...)

“predictable escape from any possible penalty liability” that

would have been afforded by that return.

Our decision is also consistent with Congress’s evident plan

for the application of section 6654. Rules governing the

assessment, collection, and payment of the section 6654 addition

are found in section 6665. In pertinent part, section 6665(a)

provides that (1) the section 6654 addition is to be paid upon

notice and demand and is to be assessed, collected, and paid in

the same manner as taxes, and (2) references in the Internal

Revenue Code to “tax” imposed shall be deemed also to refer to

the addition to tax.15 Section 6665(b)(2), however, makes the
- 31 -

15(...continued)

(1) in the case of an addition described in

section 6651, to that portion of such addition which is

attributable to a deficiency in tax described in

section 6211; or

(2) to an addition described in section 6654 or

6655, if no return is filed for the taxable year. 

deficiency procedures, found in sections 6211 through 6216 (the

deficiency procedures), inapplicable to the section 6654 addition

except in one instance. In effect, section 6665(b)(2) makes the

deficiency procedures inapplicable to the addition if the

taxpayer has filed a return for the year in question. The

Commissioner is thus free to assess and collect any section 6654

addition based upon the tax shown on the taxpayer’s return as

filed without the need first to issue a notice of deficiency. 

The one instance in which the deficiency procedures do apply to

the addition is where the taxpayer has failed to file a return

for the year in question. Sec. 6665(b)(2).

The deficiency procedures prescribe a comprehensive set of

rules that, with limited exceptions, the Commissioner must follow

before he is free to assess and collect certain taxes, including

the income tax. The term “deficiency” is defined in section

6211(a)(1)(A). Generally, a deficiency is the excess of “the tax

imposed” over the tax shown on the taxpayer’s return if the

taxpayer makes a return showing an amount of tax. Id.

Obviously, the “return” referred to in that definition must be a
- 32 -

16 See sec. 301.6211-1(a), Proced. & Admin. Regs., which

provides in pertinent part that “[i]f no return is made * * * for

the purpose of the definition ‘the amount shown as the tax by the

taxpayer upon his return’ shall be considered as zero.”

return made before the Commissioner determines a deficiency based

upon that return. If he determines that there is a deficiency,

the Commissioner is authorized by section 6212(a) to mail notice

thereof to the taxpayer by certified or registered mail. If the

taxpayer has made no return by the time the Commissioner mails

him notice of a deficiency, then, for purposes of determining the

tax shown on his return, the taxpayer is deemed to have made a

return showing zero tax.16 Also, if the taxpayer has made no

return by that time, then, by virtue of section 6665(a)(2) and

(b)(2), the term “tax imposed” is deemed to include the section

6654 addition to tax, and the addition is part of the deficiency. 

Pursuant to section 6213(a), unless there is substantial doubt as

to the collectibility of the deficiency, such as to justify a

jeopardy assessment under section 6861, no assessment of the

deficiency (including the section 6654 addition) may be made

until the expiration of 90 (or, in certain cases, 150) days after

the Commissioner has mailed notice of the deficiency to the

taxpayer or, if a petition is filed with this Court, until the

decision of this Court has become final.

In short, the term “deficiency” includes the section 6654

addition in a no-return situation, and, once the Commissioner has
- 33 -

17 We recognize that, in this case, the 1988 return showed

a loss. Therefore, based upon that return, petitioner had no

obligation to pay estimated taxes, and any issue concerning the

Commissioner’s inability immediately to assess a sec. 6654

addition to tax by virtue of sec. 6213(a) would be moot. 

Nonetheless, not every post-notice return will foreclose a

section 6654 addition, which addition, in the absence of sec.

6213(a), would immediately be assessable.

determined that there is a deficiency and has mailed notice

thereof to the taxpayer, the deficiency procedures limit the

Commissioner’s authority to assess and collect both the

underlying tax and the addition. If we were to treat a postnotice original return (post-notice return) as a return for

purposes of the section 6654(d)(1)(B)(i) safe harbor, then

sections 6665(b)(2) and 6213(a) would be in conflict. If a postnotice return were a return for purposes of the safe harbor, then

section 6665(b)(2) would allow the Commissioner to disregard the

deficiency procedures and immediately assess and collect any

unpaid section 6654 addition. Section 6213(a) prohibits the

Commissioner from immediately assessing and collecting the

section 6654 addition in a post-notice return situation, however,

because section 6665(b)(2) indisputably makes the deficiency

procedures applicable to the section 6654 addition if the

taxpayer has made no return when the Commissioner issues a notice

of deficiency.17 If we disregard the post-notice return for

purposes of both sections 6654(d)(1)(B)(i) and 6665(b)(2), we are

able to avoid a conflict and interpret sections 6213, 6654, and
- 34 -

18 We also disregard the 1988 return for purposes of sec.

6654(e)(1), and, because petitioner’s 1988 ultimate tax liability

exceeds $500, the exception provided by that paragraph if no

return is filed is inapplicable.

19 Also, because petitioner’s 1987 tax was more than zero

(the 1987 Form 1040 showed a tax due of $206 and a notice of

deficiency issued for 1987 showed a tax deficiency of $2,331),

the exception provided by sec. 6654(e)(2) is inapplicable.

6665 in a way that makes sense.

We shall disregard the 1988 return for purposes of

determining whether petitioner satisfies the return-filed safe

harbor of section 6654(d)(1)(B)(i).

Because petitioner made no estimated tax payments for the

audit year, he necessarily failed the alternative safe harbor of

section 6654(d)(1)(B)(i) to make estimated tax payments equal to

“90 percent of the tax” (i.e., his ultimate tax

liability) for the audit year.18

3. Satisfaction of Section 6654(d)(1)(B)(ii)

As noted supra in Section II, the trial record does not

establish that petitioner ever filed a return for 1987. Because

there is no return “for the preceding taxable year”, petitioner

may not rely on the safe harbor provided by section

6654(d)(1)(B)(ii).19
- 35 -

4. Conclusion

We sustain respondent’s determination under section 6654.

Decision will be entered

for respondent. 

Reviewed by the Court.

WELLS, COHEN, GERBER, CHIECHI, GALE, THORNTON, HAINES,

GOEKE, WHERRY, KROUPA, and HOLMES, JJ., agree with this majority

opinion.

SWIFT, J., concurs.
- 36 -

1 See, e.g., ICI Pension Fund v. Commissioner, 112 T.C. 83,

88-89 (1999); Joseph v. Commissioner, T.C. Memo. 1996-77. 

2 See, e.g., Cabirac v. Commissioner, 120 T.C. 163, 168-170

(continued...)

VASQUEZ, J., concurring: I concur with the result reached

by the majority that petitioner is liable for the addition to tax

pursuant to section 6654. I write separately, however, to

emphasize that our well-established precedent enunciated in Beard

v. Commissioner, 82 T.C. 766, 777 (1984), affd. per curiam 793

F.2d 139 (6th Cir. 1986), resolves this issue. 

The Internal Revenue Code does not define the term “return”. 

See sec. 6011; Swanson v. Commissioner, 121 T.C. 111, 122-123

(2003). Based on the Supreme Court’s precedent in Zellerbach

Paper Co. v. Helvering, 293 U.S. 172, 180 (1934), and Florsheim

Bros. Drygoods Co. v. United States, 280 U.S. 453, 464 (1930),

this Court has established a four-part test to determine whether

a document submitted by the taxpayer is a valid return. In order

to qualify as a return, the document must meet the following

requirements:

First, there must be sufficient data to calculate tax

liability; second, the document must purport to be a

return; third, there must be an honest and reasonable

attempt to satisfy the requirements of the tax law; and

fourth, the taxpayer must execute the return under

penalties of perjury.

Beard v. Commissioner, supra at 777. We apply this test to

“returns” for purposes of section 6501,1 section 6651(a)(1),2
- 37 -

2(...continued)

(2003); Janpol v. Commissioner, 102 T.C. 499, 503, 505 (1994);

Beard v. Commissioner, 82 T.C. 766, 780 (1984), affd. per curiam

793 F.2d 139 (6th Cir. 1986); Unroe v. Commissioner, T.C. Memo.

1985-149; Counts v. Commissioner, T.C. Memo. 1984-561, affd. 774

F.2d 426 (11th Cir. 1985). 

3 See, e.g., Cavanaugh v. Commissioner, T.C. Memo. 1991-

407, affd. without published opinion 986 F.2d 1426 (10th Cir.

1993); Unroe v. Commissioner, supra; Counts v. Commissioner,

supra. 

4 See Williams v. Commissioner, 114 T.C. 136, 140 (2000). 

5 See, e.g., Sloan v. Commissioner, 102 T.C. 137, 147

(1994), affd. 53 F.3d 799 (7th Cir. 1995); Hintenberger v.

Commissioner, T.C. Memo. 1990-36, affd. without published opinion

922 F.2d 848 (11th Cir. 1990); Britt v. Commissioner, T.C. Memo.

1988-419.

6 See, e.g., Martin Fireproofing Profit Sharing Plan &

Trust v. Commissioner, 92 T.C. 1173, 1193 (1989). 

7 See Dunham v. Commissioner, T.C. Memo. 1998-52. 

8 See Turco v. Commissioner, T.C. Memo. 1997-564.

9 See, e.g., Galuska v. Commissioner, 98 T.C. 661, 668-669

(1992), affd. 5 F.3d 195 (7th Cir. 1993); Beard v. Commissioner,

supra at 780.

10 See Beard v. Commissioner, supra at 780.

11 See id. at 773.

12 See Eckel v. Commissioner, T.C. Memo. 1990-174.

13 See, e.g., In re Hatton, 220 F.3d 1057, 1060 (9th Cir.

2000); In re Hindenlang, 164 F.3d 1029, 1033 (6th Cir. 1999). 

section 6653(a),3 section 6662,4 section 6013,5 section 6033,6

section 6651(f),7 section 6511,8 section 6011,9 section 6012,10

section 6072,11 and former section 6661,12 among others. Other

Federal courts rely on and apply this test to determine whether a

return is valid.13 Situations where we have not applied Beard

are when the particular Code section supplies a definition of
- 38 -

14 Sec. 6103(b)(1) provides:

(1) Return.--The term “Return” means any tax or

information return, declaration of estimated tax, or

claim for refund required by, or provided for or

permitted under, the provisions of this title which is

filed with the Secretary by, or on behalf of, or with

respect to any person, and any amendment or supplement

thereto, including supporting schedules, attachments,

or lists which are supplemental to, or part of, the

return so filed.

15 The majority makes no finding as to whether petitioner’s

1988 tax return is invalid, or whether it is valid but will

nonetheless be disregarded. 

16 See, e.g., Cabirac v. Commissioner, supra at 170; Howard

v. Commissioner, T.C. Memo. 2000-222; Sochia v. Commissioner,

T.C. Memo. 1998-294; Turco v. Commissioner, supra; Swaim v.

Commissioner, T.C. Memo. 1996-545; Sochia v. Commissioner, T.C.

Memo. 1995-475, affd. without published opinion 116 F.3d 478 (5th

Cir. 1997); Sickler v. Commissioner, T.C. Memo. 1994-462;

Cavanaugh v. Commissioner, supra. 

“return” for purposes of that code section only, such as in

section 6103(b)(1).14

Furthermore, whether a return constitutes a valid return15

for purposes of section 6654 is not a novel issue to the Court.

We have applied Beard in more than 35 cases involving section

6654.16

The document filed by petitioner contains sufficient data to

calculate a tax liability, purports to be a return, and is signed

under the penalty of perjury. The issue is whether it is an

honest and reasonable attempt to satisfy the requirements of the

tax law. 

In deciding whether the document filed is an “honest and

reasonable attempt to satisfy the requirements of the tax law”,

courts have analyzed whether the return filed can still serve a
- 39 -

17 It appears petitioner was put on notice that his 1988

tax return had not been filed as early as June 14, 1990, when he

received a letter from his attorney, who was preparing his tax

returns, which stated she had not yet filed a return for 1988. 

See majority op. p. 21.

purpose, or have any effect, under the Code. In re Hindenlang,

164 F.3d 1029, 1034 (6th Cir. 1999) (document filed postassessment not a valid return under Beard); In re Hatton, 220

F.3d 1057, 1061 (9th Cir. 2000) (“belated acceptance of

responsibility * * * does not constitute an honest and reasonable

attempt to comply with the requirements of the tax law” when

taxpayer filed a document purporting to be a return postassessment). This inquiry is proper under the third prong of the

Beard test.

Petitioner’s 1988 tax return was due on or before April 17,

1989. See secs. 6072(a), 7503. In this case, petitioner filed

his 1988 “return” on or about May 14, 1997, more than 8 years

after the due date. This was more than 2 years after he received

the May 3, 1995, notice of deficiency, which certainly put him on

notice that his 1988 return had not been filed.17 Further,

petitioner did not file his purported “return” until more than 21

months after he filed his petition with the Court on July 17,

1995. The adjustments in the notice of deficiency were

determined without the benefit of petitioner’s “return”. In

applying the facts as found by the majority opinion to the test

set forth in Beard, it is evident under the facts of this case

that petitioner’s filing of the purported “return” was not an

honest and reasonable attempt to comply with the tax laws. 
- 40 -

Petitioner made no estimated tax payments for 1988. There

is no record that petitioner filed a return for 1987. Petitioner

has not shown that he falls within any of the exceptions to the

6654(a) addition to tax. See sec. 6654(e); Grosshandler v.

Commissioner, 75 T.C. 1, 20-21 (1980). For these aforementioned

reasons, respondent’s additions to tax under section 6654(a)

should be sustained.
- 41 -

1See, e.g., Swanson v. Commissioner, 121 T.C. 111, 123-125

(2003) (whether a substitute for return constituted a return

within the meaning of 11 U.S.C. sec. 523(a)(1)(B) (2000)); 

Williams v. Commissioner, 114 T.C. 136, 140 (2000) (accuracyrelated penalty under section 6662(a)); ICI Pension Fund v.

Commissioner, 112 T.C. 83, 88 (1999) (period of limitations under

sec. 6501); Galuska v. Commissioner, 98 T.C. 661, 668-669 (1992)

(statutory limitations on time for filing claims for credit or

refund or limitations on any amount of any credit or refund

allowable for purposes of secs. 6011(a), 6511(b), and 6512(b)),

affd. 5 F.3d 195 (7th Cir. 1993); Martin Fireproofing v.

Commissioner, 92 T.C. 1173, 1192 (1989) (addition to tax for

failure to timely file under sec. 6651(a)(1) and filing of

information return under sec. 6033); Beard v. Commissioner, 82

T.C. 766, 780 (1984) (applying test for purposes of secs. 6011,

6012, 6072, and 6651(a)(1)), affd. per curiam 793 F.2d 139 (6th

Cir. 1986); Rodriguez v. Commissioner, T.C. Memo. 2003-153

(collection case under sec. 6330 where issue was whether returns

were filed for purposes of deciding whether respondent’s failure

to consider offer in compromise was an abuse of discretion);

Dunham v. Commissioner, T.C. Memo. 1998-52 (fraudulent failure to

file under sec. 6651(f)); Eckel v. Commissioner, T.C. Memo. 1990-

174 (addition to tax for substantial underpayment under former

sec. 6661); Hintenberger v. Commissioner, T.C. Memo. 1990-36

(return status under sec. 6013), affd. without published opinion

922 F.2d 848 (11th Cir. 1990); Counts v. Commissioner, T.C. Memo.

1984-561 (addition to tax for negligence under former sec.

6653(a)), affd. 774 F.2d 426 (11th Cir. 1985).

GOEKE, J., concurring: I agree with the reasoning and the

result reached by the majority. I write regarding the

application of section 6654 only to clarify why the approach used

in this case is consistent with our normal practice of applying

the return test set forth in Beard v. Commissioner, 82 T.C. 766

(1984), affd. per curiam 793 F.2d 139 (6th Cir. 1986).

We have applied the Beard test in many different contexts.1

We have even relied on Beard in determining whether a return was

filed and the taxpayers were liable for the addition to tax under
- 42 -

section 6654 where the document purporting to be a return was

filed before the notice of deficiency was issued. See, e.g.,

Turco v. Commissioner, T.C. Memo. 1997-564; Morgan v.

Commissioner, T.C. Memo. 1987-184, affd. without published

opinion 869 F.2d 1495 (7th Cir. 1989). However, the Beard test

has not been applied in some circumstances where the statutory

scheme directs a different inquiry. Cabirac v. Commissioner, 120

T.C. 163, 170 (2003) (a return prepared by the Secretary under

section 6020(b) treated as a return filed by the taxpayer for

purposes of determining the addition to tax under section

6651(a)(2)); Spurlock v. Commissioner, T.C. Memo. 2003-124

(same); Janpol v. Commissioner, 102 T.C. 499, 501-502 (1994)

(Beard does not apply in determining period of limitations for

purposes of the tax imposed by section 4975 because section

6501(l)(1) specifically references a return that does not require

all the information mandated under Beard), supplementing 101 T.C.

518 (1993); see also sec. 6103(b) (definition of return for

purposes of confidentiality and disclosure of returns and return

information). 

As explained by the majority, the statutory scheme mandates

that a document filed after a notice of deficiency has been

issued is not a return for purposes of section 6654. In future

cases where the statutory scheme does not provide the appropriate

inquiry to be used to determine whether a return was filed, we
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should continue to adhere to our well-established practice of

applying the Beard test to answer the question.

WHERRY and KROUPA, JJ., agree with this concurring opinion.
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FOLEY, J., dissenting: Petitioner’s valid return, which

should be the basis for calculating the section 6654 penalty, is

disregarded by the majority and “not [considered] * * * to be a

‘return’ for purposes of section 6654(d)(1)(B)(i).” Majority op.

p. 27. There is no authority for the majority’s holding, and it

is contrary to the unambiguous terms of the statute. 

Section 6654 provides for an addition to tax if the taxpayer

fails to make the “required annual payment”. Sec. 6654(a) and

(b). The “required annual payment” is:

the lesser of (i) 90 percent of the tax shown on the

return for the taxable year (or, if no return is filed,

90 percent of the tax for such year), or (ii) 100

percent of the tax shown on the return of the

individual for the preceding taxable year. [Sec.

6654(d)(1)(B)(i) and (ii); emphasis added.] 

The majority recognizes that these are “mechanical rules”, yet,

presumably acknowledging that the terms of the statute are

satisfied, states that “the issue [is] * * * whether petitioner

may rely on having satisfied the requirement of section

6654(d)(1)(A) and (B)”. Majority op. p. 25. The statute is

unambiguous, and the taxpayer may certainly “rely” on having met

its terms. The statute does not refer to a return filed prior to

an Internal Revenue Service audit or a return filed prior to the

issuance of a notice of deficiency. A valid return will suffice-

–without regard to when it is filed. 

We need not, however, adhere to a literal application of a
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statute if such adherence produces an outcome that is

“demonstrably at odds” with clearly expressed congressional

intent to the contrary, Griffin v. Oceanic Contractors, Inc.,

458 U.S. 564, 571 (1982), Peaden v. Commissioner, 113 T.C. 116,

122 (1999), or results in an outcome so absurd “as to shock the

general moral or common sense”, Tele-Communications, Inc. v.

Commissioner, 95 T.C. 495, 507 (1990). The majority does not set

forth a convincing case that either of these exceptions to the

plain language doctrine are applicable. Instead, the majority

disregards petitioner’s valid return “to avoid a conflict and

interpret sections 6213, 6654 and 6665 in a way that makes

sense.” Majority op. pp. 33-34. The purported conflict (i.e.,

regarding respondent’s ability to assess the penalty while we

have jurisdiction) has already been addressed and resolved by

Powerstein v. Commissioner, 99 T.C. 466, 472-473 (1992). In

Powerstein, the taxpayers filed amended returns subsequent to

filing their petition, and we held that after we obtain

jurisdiction respondent may be enjoined, pursuant to section

6213(a), from making an assessment. See Naftel v. Commissioner,

85 T.C. 527, 529-530 (1985) (stating that after we obtain

jurisdiction we do not lose it). 

The majority provides that Schwarzkopf v. Commissioner, 246

F.2d 731 (3d Cir. 1957), and Rev. Rul. 2003-23, 2003-8 I.R.B.

511, do not “address circumstances in which the taxpayer’s
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original return was filed after a notice of deficiency had been

issued.” Majority op. p. 27. I agree. These authorities,

however, support the proposition that we should follow the 

statute and let the chips fall where they may. Schwarzkopf v.

Commissioner, supra at 734-735 (stating that a taxpayer may rely

on the tax shown on a return from the preceding year even when

the return is held to have fraudulently understated income); Rev.

Rul. 2003-23, 2003-8 I.R.B. 511 (stating that a taxpayer may rely

on the tax shown on an untimely return for purposes of

determining estimated tax payments).

In a further attempt to justify its holding, the majority

expresses concern that taxpayers “would be able to negate the

addition to tax simply by filing a return for that year that

showed a tax liability less than the quarterly estimated payments

actually made or, if none had been made, that showed a zero tax

liability.” Majority op. p. 28. As Judge Vasquez’s concurring

opinion emphasizes, long-standing precedent authorizes us to find

that a return is invalid if the taxpayer does not make an honest

and reasonable attempt to satisfy the requirements of the tax

law. Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 180

(1934); Florsheim Bros. Drygoods Co. v. United States, 280 U.S.

453, 462 (1930); Beard v. Commissioner, 82 T.C. 766, 777 (1984),

affd. 793 F.2d 139 (6th Cir. 1986). Thus, if the majority found

that petitioner’s return was filed with the intent to avoid the
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estimated tax penalty, it could conclude that the return is

invalid. Yet, the majority does not make such a finding. 

Undeterred by an unambiguous statute and a valid return, and

citing Evans Cooperage Co. v. United States, 712 F.2d 199, 204

(5th Cir. 1983), a readily distinguishable case, the majority

summarily reasons that its “decision is consistent with the

‘objective of the safe harbor provision’”. Majority op. p. 29.

In Evans Cooperage, the taxpayer contended that the

calculation of the estimated tax penalty should be based on its

amended return, rather than its timely filed original return. 

The court held that the phrase “return of the corporation for the

preceding taxable year”, in section 6655(d)(1), refers to the

timely filed return for that year and not any subsequently filed

amended return. Id. at 204. We are not faced, however, with a

question of which return should be taken into account because

petitioner did not file an amended return. We simply must

determine whether to accept or disregard petitioner’s valid

return.

The majority acknowledges that petitioner’s case is the

“exact opposite of that referred to in Evans Cooperage”. 

Majority op. p. 29 (emphasis added). I agree. In Evans

Cooperage, the court required the taxpayer to use its original

return to calculate the penalty. The majority, on the other

hand, states that petitioner “waived his right” relating to the
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only return he filed and is prohibited from using such return to

calculate the penalty. Majority op. p. 29. 

If Evans Cooperage is to be cited for anything, it should be

cited for the proposition that the Court is obligated to follow

the statute. Indeed, in response to one of petitioner’s

contentions, the court stated:

It may be inequitable * * * to assess a penalty for

underpayment of estimated tax, that is based upon the

originally mistaken figure of income for the year,

rather than upon the actual income for the year as

ultimately determined. However, Congress unambiguously

has provided otherwise, and the provision, if indeed

inequitable, is for Congress to amend, not the courts. 

[Evans Cooperage Co. v. United States, supra at 205;

fn. ref. omitted and emphasis added.] 

Similarly, we are required to follow statutory mandates and

address, rather, than “disregard”, salient facts. If there is a

perceived problem with the statute, Congress must address the

matter.

LARO and MARVEL, JJ., agree with this dissenting opinion.