T.C. Mem o. 2 01 4- 20 4

UNITED STAT ES TAX COURT

GERALD WAYNE WHEELE R, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 97 79 -1 2. Fi le d Oct ob er 6 , 20 14
.
Geral d Wayne Whe el er, p ro se. G. C. Bart on an d H. Eli zab eth H. Do wns , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION NEGA, Jud ge : Re sp on de ntde te rm in edde fic ie nc ie s an d a dd it io ns to tax wit h re sp ectto pe ti ti on er as fol lo ws: 1

Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 Rev enue Co de in effe ctforth e y ears at i ss ue . All m on et ary am ou nt s ar e ro un de d to th e n eare stdo ll ar.- 2 -

[* 2] Add it io ns to tax Year Defi ci en cy Sec. 6 65 1( a)(1 ) Sec. 6 65 1( a)(2 ) Sec. 6 65 4( a) 20 03 $1 13 ,92 5 $2 5,6 33 $2 8,4 81 $2 ,93 9 20 04 32 ,09 3 7,2 21 8,0 23 92 0 Afte r co nc es si on s, the is su es forde ci si on are: (1) whet he r pe ti ti on er re cei ve d ta xabl e in co m e o f $8 0,7 98 fro m Cab in etDoo r Sh op for

tax y ear 2 00 3; (2) whet he r RCC Cap it al Group s ho ul d b e d is reg ard edas a n e nt it y sep arat e fro m

pe ti ti on er fo r Fed eral tax pu rp os es an d i ts ne t i nc om e at tri bu te d t o p et it io ne r fo r th e y ears at is su e; an d (3 ) whe th er p et it io ne r is li ab le forad di ti on s t o t ax forth e y ears at i ss ue . FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io n o f fact s an d t he att ach edex hi bi ts are i nc or po rat edhe rei n b y

th is refe ren ce. Pet it io ne r res id edin Arka ns as when th e p et it io n was fil ed
. Pet it io ne r in co rp or at edSp eci fic Ent erp ris es , an S co rp or at io n, i n t he lat e 19 80 s an d c on du ct eda cab in etdo orsh op bu si ne ss us in g t hi s en ti ty unt il 20 02 whe n i t was li qu id at edan d d is so lv ed . Thro ug ho utth is ti m e, th e co rp or at io n op erat edit s b us in es s i n afact ory bu il di ng own edby pet it io ne r an d i ts ass et s co ns is te d p rimaril y

of e qu ip m en t an d i nv en to ry . After t he co rp or at io n d is so lv ed in 20 02 , th e b us in es s co nt in ue d i n t he same loc at io n t hr ou gh a se pa rat e en ti ty,- 3 -

[* 3] Cab in etDoo r Sh op , LLC (Cab in etDoo r Sh op )--aco m pa ny m an ag edby one of pe ti ti on er’s d au gh te rs . Peti ti on er re cei ve d t he co rp or at io n’s equi pm en t an d in ve nt ory in li qu id at io n. On Dec em

be r 3, 2 00 2, an en ti ty call edRCC C ap it al Group (R CC) was 2 fo rm edth atpu rp orte d t o b e a “ PRIVATE, NON-STATUTO RY, NONASSOCIATED, CONTRACTUAL PURE TRUST (CPT)”. The tru stwas c reat ed 3 by Jos ep h N. Swee t, the “ Crea to r”. BradR. Sco tt , th e “ Exc hang er”, t ran sf erre d 4 $2 1 t o t he tru stin ex ch an ge for10 0 c ap it al un it s i n t he tru st . The “ Fi rs t Tru st ee”, 5

“ Exe cu ti ve Secr et ary”, and“ Gen eral Man ag er” o f th e trus t was
RCC st oo d fo r Ro bi n, Ci nd y , andCathy--pe ti ti on er’s d au gh te rs . 2 Arti cl e 1 4 o f th e trus t co nt ract , ti tl ed“ TAXATION IMM UNITY”, im pl ie s 3 th atth e en ti ty w as os te ns ib ly int en de d t o c om po rt wi th sec . 30 1.7 70 1- 4( b) , Pro ced . & Adm in . Reg s., fo r “ Bu si ne ss Trus t[s ]” andth at“bu si ne ss tru st s” are n ot wit hi n t he sco pe of t he “ Res ta te m en t o f th e Law of Trus ts , 2d ”. Incit in g the Res ta te m en t, the tru stco nt ractst at es th at“ [t]he bu si ne ss tru stis a sp eci al ki ndof bu si ne ss ass oc ia ti on an d c anbe stbe de al t wi th in co nn ect io n wi th othe r bu si ne ss as so ci at io ns .” Mr. Swee t was lat er fo un d g ui lt y of c on sp ira cy

to de frau d the Uni te d S ta te s 4 an d c orruptin te rfer en ce wi th in te rn al rev enue laws un de r 18 U.S.C. sec . 37 1 (2 00 0) an d 2 6 U.S.C. s ec. 7 21 2( a) (2 00 0) , res pe ct iv el y . The reco rdin di cat es th atMr. Swee t an d M r. Sco ttwere n otin vo lv edin any 5 adm in is tra ti on of t he tru stbe si de s s ig ni ng th e tr us t co nt ract , app oi nt in g atru st ee, an d d ire ct in g the cap it al un it s t o p et it io ne r’s rel at iv es . Alth ou gh pe ti ti on er m et wit h M r. Sweetto in it ia te th e trus t, p et it io ne r ne ve r m etwith M r. Sco ttan d d idno t kn ow h im

pe rs on al ly.- 4 -

[* 4] Jo hn Henry

Fo st er-- a lo ng ti m e fam il y fri en d o f pe ti ti on er an d a cco un ta ntfor pe ti ti on er, Sp eci fic Ent erp ris es , andCab in etDoo r Sh op . Purs uantto th e trus t
co nt ractBradR. Sco ttdi rect edth e m ajor it y of t he in it ia l i ss ua nc e o f hi s 1 00 cap it al un it s t o p et it io ne r’s th ree d au gh te rs . The remaini ng cap it al un it s wer e di rect edto ot he r rel at iv es of p et it io ne r. The tru stco nt ractan d re co rd s wer e k ep t in a sa fe o n t he pre m is es of C ab in etDoo r Sh op . On J anua ry

2, 2 00 3, p et it io ne r an d R CC en te redin to an“ Ass etPurch as e Opt io n C on tra ct ” (draft edby pet it io ne r) wh ere p et it io ne r pu rp orte d t o g ran t RC C op ti on s t o p ur ch as e p et it io ne r’s fact ory bu il di ng , th e la ndup on whi ch itwas lo cat ed , andequi pm en t. The ex erci se pri ce fo r th e co ntractwas $ 1,6 50 ,00 0, an d pe ti ti on er ac cep te d $ 21 (pr es um ab ly the same $2 1 c on ve y edto RCC b y BradR. Sco tt ) pl us two pro m is so ry no te s v al ue d a t $ 70 0,0 00 an d $ 95 0,0 00 in ful l
co ns id erat io n o f th e d eal . The co nt ractwas a ls o c on ti ng en t upo n asep arat e ren ta l
co nt ract , th e “ Faci li ty Produc ti on Co ntract ”, be twee n R CC an d C ab in etDoo r Sh op fo r Cab in etDoo r Sh op ’s us e o f th e fac to ry bu il di ng , lan d, an d e qu ip m en t. Pet it io ne r dr aft edth e ren ta l co nt ractan d d et erm in edth e le as e p ric e. The c on tra ct pr ov id edforanin it ia l t erm of t wo years e nd in g o n Dec em be r 31 , 20 04 . The
co nt ractals o p ro vi de d fo r rem ed ie s i n t he ev en t o f de fau ltby Cabi ne t Do orSh op orRCC. Nei th er re pr es en ta ti ve s o f Cab in etDoo r Sh op no r rep res en ta ti ve s o f- 5 -

[* 5] RCC ne go ti at edth e te rm s o f th e ren ta l co ntract , andRCC’s t ru st ee n ev er t oo k act io n t o e nf

or ce the co nt ractbe cau se itwas afam il y m at te r. At th e b eh es t o f pe ti ti on er, RCC di d n otfil e in co m e ta x re turn s. Pu rs uantto th e “ Faci li ty Produc ti on Co nt ract ”, da te d J anua ry 3, 2 00 3, Cab in etDoo r Sh op m ad e to ta l re nt al pa ym en ts of $ 27 3,0 00 an d $ 12 6,0 00 to RCC fo r 20 03 an d 2 00 4, re sp ect iv el y , alt ho ug h R CC d idno t ex erci se th e o pt io n t o pu rch as e th e fac to ry

bu il di ng , lan d, an d e qu ip m en t fr om pe ti ti on er u nt il so m e ti m e aro un d M arch 10 , 20 04 . After r ecei vi ng th es e ren ta l p aym en ts RCC m ad e to ta l pa ym en ts to pe ti ti on er i n t he ex actsame am ou nt s: $2 73 ,00 0 i n 2 00 3 a nd $1 26 ,00 0 i n 2 00 4. In20 03 as p artof asep arat e tr an sa ct io n C ab in etDoo r Sh op m ad e m on th ly in st al lm en t p aym en ts to pe ti ti on er t ot al in g $ 80 ,79 8 fo r th e sa le of i nv en to ry . Cab in etDoo r Sh op st op pe d m ak in g re nt al paym en ts to RCC i n J un e 2 00 4,
an d R CC, i n turn, s to pp edm ak in g p aym en ts to pe ti ti on er. Pet it io ne r te st ifi edth at 6 th e rem ai ni ng pa ym en ts owedto hi m un de r th e “ Ass etPurch as e Opt io n C on tra ct ”
The on ly inc om e g en erat edby RCC was fro m th e as se ts itacqui redth ro ug h 6 th e “ Ass etPurch as e Opt io n C on tra ct ”. Fo st er, act in g a s ex ecu ti ve tru st ee o f RCC , te st ifi edth athe ha d ave ry li m it edrol e as m an ag er o f th e trus t, s ta ti ng th at“ th e tru stwasn ’t setup with alo t o f la ti tu de . The tru stwas s etup sp eci fic al ly to ad dr es s t he equi pm en t p ur ch as e, th e b ui ld in g p ur ch as e, ho lditin th e trus t an d le as e itto th e Cab in etDoo r Sh op .”- 6 -

[* 6] were a g iftto RCC. Cabi ne t Do orSh op co nt in ue s t o u se th e sa m e equi pm en t, fact ory bu il di ng , andlan d a ss oc ia te d wi th th e “ Faci li ty Produc ti on Co nt ract ” to th is da y . Pet it io ne r fai le d t o fi le tax returns for 20 03 an d 2 00 4, an d re sp on de nt pr ep aredsubs ti tu te s fo r returns (SFRs ) fo r th es e y ears pu rs ua ntto sec ti on 60 20 (b ). Pet it io ne r di d n otpa y

tax es or e st im at edtax es forth e y ears at i ss ue .

OPINION I. Pet it io ne r’s Tax Li ab il it y Pet it io ne r arg ue s t ha t h e o wes no tax fro m th e sa le of a ss et s t o C ab in etDoo r Sh op an d R CC i n 2 00 3 a nd20 04 , res pe ct iv el y , bec au se hi s co stba se s i n t he ass et s of fs etth e p ro ceed s fr om

th e sa le s. Re sp on de ntco nt en ds th atth e en ti re am ou nt real iz edup on th e sa le of i nv en to ry to Cab in etDoo r Sh op in 20 03 sh ou ldbe
reco gn iz edas t ax ab le in co m e to pe ti ti on er. Res po nd en t al so co nt en ds th at pe ti ti on er’s s al e o f th e fac to ry bu il di ng , lan d, an d e qu ip m en t t o R CC i n 2 00 4 sh ou ldbe di sr eg ard edbe cau se RCC was a sh am en ti ty andth atlea se pa ym en ts fro m Cab in etDoo r Sh op to RCC f orth es e as se ts were m erel y lea se pa ym en ts to pe ti ti on er. W e ex am in e th e two tra ns act io ns sep arat el y st art in g wi thth e sa le of in ve nt ory to Cab in etDoo r Sh op in 20 03
.- 7 -

[* 7] A. Sal e o f In ve nt ory to Cab in etDoo r Sh op in 20 03 Pet it io ne r as se rts th athi s b as is in th e in ve nt ory so ldto Cab in etDoo r Sh op of fs et s t he pro ceed s fr om

th atsal e. Fo r th e rea so ns setforth be lo w, we con cl ud e th atpe ti ti on er h as fai le d t o s at is fy hi s b ur de n o f pr oo f on th e is su e. A tax pa y er m

us t es tabl is h h is co stor a dju st edba si s fo r th e p ur po se of de te rm in in g g ai n o r lo ss th athe m us t re co gn iz e o n asal e o f pr op erty . O’ Neil l v
. Co m m is si on er, 2 71 F.2d44 , 50 (9t h C ir. 1 95 9) , aff’g T.C. Mem o. 1 95 7- 19 3; Bro ds ky v. Co m

m is si on er, T.C. Mem o. 2 00 1- 24 0; Sch aeff er v . Comm is si on er, T.C. Mem o. 1 99 4- 20 6. Pro of of t he co stor a dju st edba si s i s n eces sary be cau se reco ve ry of a n a m ou ntin ex ces s o f co stco ns ti tu te s i nc om e. Cu ll in s v . Co m m is si on er, 2 4 T.C. 3 22 , 32 8 (1 95 5) . In ce rta in cir cu m st an ces , we m ay us e th e Co ha n ru le to est im at e a t ax pa y er’s b as is in anass etat t he ti m e o f tr an sf er. Co ha n v. Co m m is si on er, 3 9 F .2d54 0 (2 d C ir. 1 93 0) ; Grp . Adm in . Prem iu m Serv s., In c. v. Co m m is si on er, T.C. Mem o. 1 99 6- 45 1. In ord er fo r th e Co urt t o e st im at e b as is , th e ta xp ay er m

us t p ro vi de so m e “ reas on ab le ev id en ti ary ba si s” forth e es ti m at e. Grp . Adm in . Prem iu m

Serv s., In c. v. Co m

m is si on er, T.C. Mem o. 1 99 6- 45 1 (c it in g Po lyak v . Comm is si on er, 9 4 T.C. 3 37 , 34 5- 34 6 (1 99 0) , andVani cekv. Co m m is si on er, 8 5 T.C. 7 31 , 74 3 (1 98 5) ).- 8 -

[* 8] Pet it io ne r ha s n otpro vi de d a ny facts or d et ai ls th atpe rm ita reas on ab le
es ti m at e o f hi s b as is in th e in ve nt ory . Alth ou gh pe ti ti on er p ro vi de d re sp on de nt wit h h is pe rs on al tax returns an d t ax returns forSp eci fic Ent erp ris es on e d ay be fo re tria l, the se returns are m ere a dm is si on s; an d we a re u nwi ll in g t o a tt ach si gn ifi can ce t o t he m

inth e ab se nc e o f co rro bo rat in g e vi de nc e as to pe ti ti on er’s ba si s i n h is ass et s. Th e rec or d d oe s n otest ab li sh th e co stba si s o f th e in ve nt ory . The reco rdin di cat es on ly tha t Cabi ne t Do orSh op pa id$8 0,7 98 to pe ti ti on er fo r th e in ve nt ory . Whe th er thi s amoun t was ful l p aym en t fo r th e in ve nt ory or o nl y a pa rti al pa ym en t ca nn otbe de te rm in ed . The Co han ru le is in ap pl ic ab le when th e ta xp ay er p res en ts “ no ev id en ce atall th atwou ldpe rm itanin fo rm edest im at e o f” ba si s. Est at e o f Rei nk e v . Comm is si on er, 4 6 F .3d76 0, 7 64 (8t h C ir. 1 99 5) , aff’g T.C. Mem o. 1 99 3- 19 7. Be cau se pe ti ti on er h as no t p ro vi de d a ny pert in en t in fo rm at io n t ha t wo ul d h el p u s es ti m at e h is ba si s i n t he in ve nt ory , th e Co ha n ru le do es no t ap pl y . Con se qu en tl y , th e en ti re am ou ntpa idby Cabi ne t Do or Sh op for pe ti ti on er’s i nv en to ry

is in cl ud ab le inpe ti ti on er’s g ro ss in co m e fo r th e 2 00 3 ta xabl e y ear. B. Sal e o f Fac to ry

Bu il di ng , Land , andEqu ip m en t t o R CC Res po nd en t ar gu es th atpe ti ti on er i s t he tru e earne r of th e in co m e rec ei ve d by RCC. W e ag ree.- 9 -

[* 9] Sect io n 6 1( a) d efi ne s g ro ss in co m e as “ al l i nc om e fro m what ev er s ou rce de riv ed ”. A fun da m en ta l p rin ci pl e o f in co m e ta xa ti onis th atin co m e is tax ab le to th e p ers on who earn s i t. Luc as v. Earl , 28 1 U.S. 1 11 , 11 4- 11 5 (1 93 0) . The “ tru e earn er” o f in co m e is th e p ers onor e nt it y who co nt ro ls th e earni ng th atsu ch in co m e, an d n otne ces sa ril y th e p ers on or e nt it y

who rece iv es th e in co m e. Barm es v. Co m m is si on er, T.C. Mem o. 2 00 1- 15 5. “ ‘T he cru ci al qu es ti on * * * [i s] whet he r th e as si gn orret ai ns su ffi ci en t p owe r an d c on tro l o ve r th e as si gn edpro pe rty or
ov er re cei ptof t he in co m e to m ak e itreas on ab le to tre athi m as t he reci pi en t o f th e in co m e fo r ta x p ur

po se s.’” Id. (quo ti ng Co m m is si on er v . Sun ne n, 3 33 U.S. 59 1, 60 4 (1 94 8) ). An an ti ci pa to ry ass ig nm en t o f in co m e fro m a true in co m e earne r to
an ot he r en ti ty by

m ean s o f a co nt ractua l arran ge m en t d oe s n otrel ie ve th e true in co m e earne r fro m

tax an d i s n oteffe ct iv e fo r Fed eral in co m e ta x p ur po se s reg ard le ss of wh ethe r th e co nt ractis va li d u nd er St at e la w. See Verci o v . Co m m is si on er, 7 3 T.C. 1 24 6, 1 25 3 (1 98 0) . A tax pa y er h as th e le ga l ri gh t t o
m in im iz e h is tax es or a vo idth em to ta ll y by any m ean s wh ic h t he law p erm it s, b ut th is rig htdo es no t b es to w up on th e ta xp ay er the rig htto st ru ctur e a p ap er en ti ty to
av oi d t ax when th aten ti ty doe s n otst an d o n t he so li d fo un da ti on of e co no m ic real ity . Zm

ud a v . Comm is si on er, 7 9 T.C. 7 14 , 71 9 (1 98 2) , aff’d, 7 31 F.2d14 17 (9 th Cir . 19 84 ).- 10 -

[* 10 ] Pet it io ne r is th e true earn er o f th e ren ta l i nc om e p ai d fr om Cab in etDoo r Sh op to RCC u nd er the Faci li ty Produc ti on Co nt ractfor th ree r eas on s. Fi rs t, pe ti ti on er o wne d t he ass et s t ha t RC C le as edto Cab in etDoo r Sh op un de r th e co nt ractth ro ug ho utth e y ears at i ss ue up un ti l M arch 15 , 20 04 , when he de ed ed th e as se ts to RCC. Th eref or e, ata m in im

um , Cab in etDoo r Sh op ’s 20 03 ren ta l pa ym en ts an d i ts fir stfew 2 00 4 re nt al pa ym en ts were p ro pe rly all oc ab le to pe ti ti on er as th e o wne r of th atpro pe rty. Seco nd , RCC ac te d a s a m ere c on du itforth e fl ow o f in co m e fro m Cab in et Doo r Sh op to pe ti ti on er. RCC rece iv edin co m e at tri bu tabl e to pe ti ti on er’s as se ts
an d s ub se qu en tl y

pa idpe ti ti on er the same am ou nt s i t re cei ve d fr om Cab in etDoo r Sh op . Whe n C ab in etDoo r Sh op su sp en de d re nt al pa ym en ts to RCC i n m id -J un e 20 04 , RCC ce as edm ak in g p aym en ts to pe ti ti on er. RCC ’s so le tru st ee t es ti fie d t o hi s l im it edrol e as m an ag er o f th e trus t, s ta ti ng th atth e “ tru stwas s etup sp eci fic al ly to ad dr es s t he equi pm en t p ur ch as e, th e b ui ld in g p ur ch as e, ho lditin th e trus t an d l eas e itto th e Cab in etDoo r Sh op .” Fi na ll y , th ere was no sep arat io n o f trus t adm in is tra ti on fro m th e o pe rat io n o f Cab in etDoo r Sh op , andpe ti ti on er re ta in edsubs ta nt iv e co nt ro l o ve r RCC
. Pet it io ne r dr aft edth e co ntractbe twee n R CC an d C ab in etDoo r Sh op . Neithe r RCC no r Cab in etDoo r Sh op ne go ti at edth e te rm s o f th e co ntract , andpe ti ti on er- 11 -

[* 11 ] se t the pri ce fo r th e le as e. At the in si st en ce o f pe ti ti on er, RCC di d n otfil e in co m e ta x re tu rn s. WhenCab in etDoo r Sh op ceas edit s re nt al paym en ts , RCC di d n ottak e an y

act io n t o e nf

or ce the Faci li ty Produc ti on Co nt ractbe cau se th e tru st ee fe ltth atitwas a“ fam il y m at te r” an d h e co ul d n ottak e act io n. Si m il arl y , pe ti ti on er t es ti fie d tha t the rem ai ni ng pa ym en ts owedto hi m un de r th e Ass et Pu rch as e Opt io n C on tra ctwere a “ gi ft” to RCC. Pe ti ti on er fa il edto pro vi de pe rs ua si ve ev id en ce tha t the Ass etPurch as e Opt io n C on tra ctan d t he Faci li ty Pro du ct io n C on tra ctwere en te redin to in go odfai th an d tha t the pa rti es to th es e co nt ract s i nt en de d t o b e b ou ndby the ir r es pe ct iv e ag reem en ts an d e xp ect edto ha ve to ho no r th em . Ins te ad , we bel ie ve th atth e ag reem en ts are s ha m s. Bec au se pe ti ti on er h adsu ffi ci en t p owe r an d c on tro l o ve r RCC ’s recei ptof in co m e fro m

Cab in etDoo r Sh op , he i s t he tru e earne r of th is in co m e. As the pa ym en ts were re nt al pa y m en ts to pe ti ti on er i n s ub st an ce, p et it io ne r m ay no t u se th e al le ge d b as es he ha d i n t he ass et s t o o ffs etth is in co m e. Co ns eque nt ly, th e ren ta l i nc om e p ai d b y

Cab in etDoo r Sh op to RCC i s t ax ab le to pe ti ti on er i n i ts
en ti rety .- 12 -

[* 12 ] II. Add it io ns to Tax A. Fai lu re To Tim el y

Fil e a Tax Return Sect io n 6 65 1( a)(1 ) pr ov id es foranad di ti on to tax of 5 % of t he tax requi red to be sh ownon a return fo r eac h m on th , or fr act io n t he reo f, fo r whi ch th ere i s a fai lu re t o fi le th e return, n otto ex ceed25 % inth e ag gr eg at e. Res po nd en t’s in tro du ct io n i nt o e vi de nc e o f acc ou nttra ns cri pt s s ho win g t ha t p et it io ne r ha s n ot fil edtax returns forth e y ears at i ss ue is su ffi ci en t t o m eetres po nd en t’s b ur de n o f pr oduc ti on forth e se ct io n 6 65 1( a)(1 ) fai lu re t o t im el y fil e p en al ty. Hol m es v. Co m m is si on er, T.C. Mem o. 2 01 1- 31 . Res po nd en t p ro du cedIRS tran sc rip ts of pe ti ti on er’s acc ou ntsh owi ng th athe di d n otfil e returns for20 03 an d 2 00 4, an d pe ti ti on er t es ti fie d a t tria l tha t h e d idno t fi le tax returns forth es e y ears . Fu rth erm or e, pe ti ti on er p res en te d n o e vi de nc e su gg es ti ng th athi s fa il ur e to pa y was du e to reas on ab le cau se . See Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46
- 44 7 (2 00 1) . Accor di ng ly, we su st ai n re sp on de nt ’s det erm in at io n o f th e ad di ti on s to tax forfai lure t o fi le tax returns fortax y ears 20 03 an d 2 00 4. B. Fai lu re To Tim el y

Pay Tax Sect io n 6 65 1( a)(2 ) pr ov id es foranad di ti on to tax when a ta xp ay er fa il s t o ti m el y pay th e ta x s ho wn o n areturn u nl es s t he tax pa y er p ro ve s t ha t the fai lu re was du e to reas on ab le cau se an d n otdu e to wil lfu l n eg le ct . Res po nd en t h as- 13 -

[* 13 ] sa ti sf

ie d h is bu rd enof p ro du ct io n wi thres pe ctto th e ad di ti on s t o t ax un de r se ct io n 6 65 1( a)(2 ). Res po nd en t p rep aredSFRs in acco rd an ce wi th sec ti on 60 20 (b ), an d p et it io ne r di d n otpa y th e am ou ntsh own as due . See Cabi rac v . Co m m is si on er, 1 20 T.C. 16 3, 1 70 -1 73 (20 03 ). As a re su lt , res po nd en t’s b ur de n o f pr oduc in g e vi de nc e th atsupp orts anad di ti on to tax un de r se ct io n 6 65 1( a)(2 ) fo r fai lu re t o t im el y

pa y tax du e is sat is fie d. Pe ti ti on er t es ti fie d t ha t h e d idno t m ak e an y tax pa ym en ts for20 03 an d 2 00 4. Pe ti ti on er p res en te d n o e vi de nc e su gg es ti ng th athi s fa il ur e to pa y

was due to reas on ab le cau se . See Hig be e v . Comm is si on er, 11 6 T.C. at44 6- 44 7. We acco rd in gl y su st ai n the sec ti on66 51 (a)( 2) ad di ti on s t o ta x. C. Fai lu re To Pay Est im at edTax Res po nd en t d et erm in edth atpe ti ti on er i s l iabl e fo r ad di ti on s t o t ax un de r se ct io n 6 65 4. In a pr oc eed in g b efo re thi s C ou rt, t he Co m m is si on er’s o bl ig at io n un de r se ct io n 7 49 1( c) i ni ti al ly to co m e fo rwardwith e vi de nc e th atitis ap pr op ria te to ap pl y a pa rti cu la r ad di ti onto tax ag ai ns t a t ax pa y er i s co nd it io ne d upo n the ta xp ay er’s as si gn in g e rro r to th e Co m m is si on er’s d et erm in at io n. Be cau se pe ti ti on er co nt es te d h is li ab il ity forth e ad di ti on s t o t ax in hi s p et it io n a nd
res po nd en t was pu t o n n ot ic e th atpe ti ti on er’s l iabi li ty for the ad di ti on s t o t ax un de r se ct io n 6 65 4 was anis su e, we co nc lu de th atpe ti ti on er as si gn ederro r to th e- 14 -

[* 14 ] ad di ti on s t o t ax un de r se ct io n 6 65 4. Se e Wheel er v . Comm is si on er, 1 27 T.C. 20 0, 2 07 (20 06 ), aff’d, 5 21 F.3d12 89 (10 th Cir . 20 08 ). Ther efo re, we m us t
rev ie w th e rec or d wi th res pe ctto th e ad di ti on s t o t ax un de r se ct io n 6 65 4 t o as cert ai n wh ethe r res po nd en t m ethi s b ur de n o f pr oduc ti on . Sect io n 6 65 4( a) an d (b ) pr ov id es foranad di ti on to tax in th e ev en t o f a ta xp ay er’s u nd erp aym en t o f a requi redin st al lm en t o f es ti m at edtax . As itrel at es to th is cas e, eac h re qu ire d i ns ta ll m en t o f es ti m at edtax is equa l t o 2 5% o f th e

“ requi redan nu al pa ym en t” , whi ch in tu rnis equa l t o the les se r of (1) 90 % of t he ta x s ho wn o n t he tax pa y er’s return fo r th aty ear ( or , if n o re tu rnis fil ed , 90 % of h is
orhe r ta x fo r su ch y ear) , or (2 ) 10 0% o f th e ta x s ho wn o n t he tax pa y er’s return fo r th e imm ed ia te ly prece di ng tax ab le y ear. Se c. 66 54 (d )(1 )(A) an d (B ). Res po nd en t i nt ro du cedev id en ce t o p ro ve th atpe ti ti on er was requi redto fil e Fed eral in co m e ta x re tu rn s fo r 20 03 an d 2 00 4, t ha t p et it io ne r di d n otfil e returns fo r 20 03 an d 2 00 4, an d t ha t p et it io ne r di d n otm ak e es ti m at edtax pa y m en ts for 20 03 an d 2 00 4. Ho wev er, res po nd en t d idno t i nt ro du ce ev id en ce s uf fic ie ntto pr ov e th atpe ti ti on er h adanob li ga ti on to m ak e an y est im at edtax pa ym en ts for 20 03 . See Wheel er v . Comm is si on er, 1 27 T.C. at 2 11 . Spe ci fic al ly, res po nd en t’s bu rd enof p ro du ct io n u nd er s ect io n 7 49 1( c) re qu ire d h im to pro du ce s uf

fic ie nt- 15 -

[* 15 ] ev id en ce tha t p et it io ne r ha d arequi redan nu al pa ym en t fo r 20 03 un de r se ct io n 6 65 4( d) , andres po nd en t fa il edto do so . In st ead , res po nd en t p ro du ceda do cu m en t at ta ch edto pe ti ti on er’s n ot ic e o f de fic ie nc y

ti tl ed“ EXPLANATION OF THE ESTIMATED T AX PENALT Y”. Am on g o th er thi ng s, i t s ho wedth at : (1 ) pe ti ti on er’s 2 00 3 t ax li ab il it y was $1 13 ,92 5, (2 ) 90 % of t ha t am ou ntwas $ 10 2,5 33 , and(3) pe ti ti on er’s p rio r y ear (2 00 2) tax li ab il it y

was z ero . The d oc um en t the n d et erm in edth atth e smalle r of (2 ) an d (3 ) “ (as ad

jus te d) ” was $1 02 ,53 3. No ex pl an at io n was gi ve n o f an y ad jus tm en t tha t wo ul d a cco un t fo r th atco nc lu si on . W e can on ly infe r th at
res po nd en t m ad e anad

jus tm en t b ecau se pe ti ti on er fa il edto fil e a return fo r 20 02
. Howev er, p et it io ne r’s acco un t tran sc rip t fo r ta x year 20 02 (of fere d i nt o e vi de nc e by resp on de nt ) in di cat es ot he rwis e. Sp eci fic al ly, th e acc ou nttrans cri ptin di cat es th atpe ti ti on er fi le d alat e return fo r 20 02 . Neverth el es s, p et it io ne r fi le d areturn fo r 20 02 , bef

or e res po nd en t i ss ue d ano ti ce o f de fic ie nc y , andth e requi redan nu al pa ym en t fo r 20 03 is li m it edto 10 0% o f th e ta x s ho wn o n t he 20 02 return, i .e., zero . See Me nd es v. Co m m is si on er, 1 21 T.C. 30 8, 3 24 (20 03 ). Acco rd in gl y , pe ti ti on er i s n otli ab le foranad di ti on to tax un de r se ct io n 6 65 4 fo r 20 03
. Pet it io ne r di d n otfil e a return fo r th e 2 00 4 t ax y ear o r fo r th e 2 00 3 t ax y ear (th e imm ed ia te ly prece di ng y ear) , andhe di d n otpa y est im at edtax in th os e y ears .- 16 -

[* 16 ] Ther efo re, p et it io ne r is li ab le for th e ad di ti on to tax un de r se ct io n 6 65 4 fo r 20 04 cal cu la te d wi th res pe ctto th e requi redan nu al pa ym en t-- 90 % of t he tax du e fo r th aty ear. To re fle ctth e fo reg oi ng , An ap pr op ria te de ci si on wil l b e en te red
.