T.C. Memo. 1999-5

UNITED STATES TAX COURT

RODNEY W. & LYNNELL R. FRAZIER, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12644-97. Filed January 14, 1999.

Rodney W. and Lynnell R. Frazier, pro sese.

Alan Friday, for respondent.

MEMORANDUM OPINION

THORNTON, Judge: By separate notices of deficiency,

respondent determined the following deficiencies and penalties

with respect to petitioner husband’s 1993 Federal income taxes

and petitioners’ joint 1994 and 1995 Federal income taxes:
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Accuracy-related 

Years Deficiency Penalty Sec. 6662

1993 $6,412 $1,282

1994 9,140 1,828

1995 4,420 884 

All section references are to the Internal Revenue Code in

effect in the years in issue. All Rule references are to the Tax

Court Rules of Practice and Procedure. All dollar amounts are

rounded. 

Some of the facts have been stipulated and are so found and

incorporated by this reference.

At the time the petition was filed, petitioners were married

and living in Hueytown, Alabama. 

During the years at issue, petitioner husband operated a

business known as Pro TV & VCR Repair. In 1993, petitioner

husband filed a Federal income tax return with a filing status of

single. 

In 1994, petitioners were married. During the years at

issue, petitioner wife was employed at the Alabama Power Co. In

1994 and 1995, petitioners filed joint Federal income tax

returns.

Petitioner husband’s tax return for 1993, and petitioners’

joint tax returns for 1994 and 1995, reported income as follows:
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 Amount of

Year Source of Income Income Reported

1993 Schedule C income $715 

Interest income 20

1994 Wages 29,097

Dividend income 134

Schedule C income 670

1995 Wages 38,433

Interest 29

Dividends 141

Schedule C loss (3,534)

In 1993, petitioner husband purchased a house, which he sold

in 1994, resulting in a capital gain of $2,340.

Respondent determined that for taxable year 1993 petitioner

husband had unreported income in the amount of $28,933, and that

for taxable years 1994 and 1995, petitioners had unreported

income of $31,607, and $17,828, respectively. Respondent also

determined that petitioners had unreported capital gain of $2,340

in taxable year 1994. 

In their petition, petitioners alleged that they did not

engage in any taxable activities during the years at issue.

Discussion

Generally, the Commissioner’s determinations are presumed

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

determinations are erroneous. Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933). In certain circumstances involving

unreported income, respondent must make some minimal evidentiary
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showing linking the taxpayer to an income-producing activity

before the presumption in favor of respondent’s determination

attaches. Blohm v. Commissioner, 994 F.2d 1542, 1548-1549 (11th

Cir. 1993), affg. T.C. Memo. 1991-636. In the case at hand,

ample evidence supports respondent’s determinations.

Respondent used the cash expenditures method to reconstruct

petitioners’ income. This method is based on the assumption

that, absent some explanation by the taxpayer, the excess of a

taxpayer’s expenditures over reported income in a taxable year

constitutes taxable income. Petzoldt v. Commissioner, 92 T.C.

661, 695 (1989). 

Petitioners have stipulated copies of bank records

disclosing deposits and disbursements from their bank accounts

and schedules prepared by respondent summarizing all of the

transactions, deposits, and disbursements. For each of the years

in issue, these documents show that petitioners made substantial

expenditures in excess of amounts reported as income on their

Federal income tax returns. Our review of the record indicates

that respondent complied with the requirements set forth in

Holland v. United States, 348 U.S. 121 (1954), by adequately

accounting for opening cash balances and for nontaxable receipts

such as loans, see Petzoldt v. Commissioner, supra at 695, and

that respondent has properly reconstructed petitioners’ income

for the years in issue.

 Petitioners bear the burden of showing that respondent’s

application of the cash expenditures method was unfair or
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inaccurate. See Price v. United States, 335 F.2d 671, 677 (5th

Cir. 1964); Goe v. Commissioner, 198 F.2d 851 (3d Cir. 1952);

Tokarski v. Commissioner, 87 T.C. 74, 76-77 (1986); Alvarez v.

Commissioner, T.C. Memo. 1995-414. Petitioners chose to present

no substantive evidence and to call no witnesses. At trial,

petitioner husband sought to read from a prepared statement

contending that the Federal income tax is an indirect tax under

Article 1, Section 8, Clause 1 of the Constitution, and that

petitioners did not engage in any “excise taxable activities”. 

Petitioners’ trial memorandum advances similar arguments.

Petitioners’ arguments are without merit and have long been

rejected. In Abrams v. Commissioner, 82 T.C. 403, 406-407

(1984), for instance, this Court stated:

Since the ratification of the Sixteenth Amendment,

it is immaterial with respect to income taxes, whether

the tax is a direct or indirect tax. The whole purpose

of the Sixteenth Amendment was to relieve all income

taxes when imposed from apportionment and from a

consideration of the source whence the income was

derived.

See also Ficalora v. Commissioner, 751 F.2d 85 (2d Cir. 1984);

Sickler v. Commissioner, T.C. Memo. 1994-462; Boyce v.

Commissioner, T.C. Memo. 1990-555. Respondent’s determinations

of unreported income for each of the years in issue are

sustained.

Petitioners have stipulated that the sale in 1994 of

the house that petitioner husband purchased in 1993 resulted in

capital gain of $2,340. We conclude that this capital gain
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1 In the notices of deficiency for each of the years at

issue, respondent determined that petitioners were liable for

civil fraud penalties pursuant to sec. 6663, or in the

alternative, accuracy-related penalties pursuant to sec. 6662. 

At trial, respondent abandoned the imposition of civil fraud

penalties.

constitutes taxable income. Respondent’s determination on this

issue is sustained.

Respondent determined that petitioners are liable for

accuracy-related penalties pursuant to section 6662(a) for

negligence or disregard of rules or regulations.1 In their

petition, petitioners assigned no error to that determination,

nor did they assert either in their trial memorandum or at trial

that the section 6662 penalties are in dispute. Petitioners

failed to offer any evidence that their underpayments were not

due to negligence or that they did not disregard rules or

regulations. Respondent’s determination of penalties under

section 6662(a) is sustained.

The Tax Court is authorized under section 6673(a)(1) to

require the taxpayer to pay to the United States a penalty not in

excess of $25,000 when it appears to the Court that the

taxpayer’s position in the proceeding is frivolous or groundless. 

Petitioners’ position, based on stale and meritless contentions,

is manifestly frivolous and groundless, and their action has

resulted in the waste of limited judicial and administrative

resources. Previously, on its own motion, this Court has awarded

damages to the United States under section 6673 where the

taxpayer advanced frivolous and groundless contentions similar to
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those advanced by petitioners. See Abrams v. Commissioner, supra

at 408-413. Although we do not now impose a penalty under

section 6673(a)(1), we caution petitioners that if they continue

to advance such arguments to this Court, they will invite such

penalties in the future.

To reflect the foregoing and a concession by the respondent,

Decision will be entered

under Rule 155.