T.C. M em o . 2 0 2 0 -1 4 3

UNITED STATES TAX COURT

SHELLEY J OU W IENKE, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t E VERGROWINVESTM ENTS, INC., Pet i ti o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 1 5 7 0 8 -1 7 , 1 5 70 9 -1 7
. 1 Fi l edOct o b er 1 4 , 2 0 2 0
.

Sh el ley J o uW i en ke, p ro s e i nd o ck etNo . 1 5 7 0 8 -1 7
. Sh el ley J o uW i en ke (an o ffi cer), fo r p et i t i o n er i nd o ck etNo . 1 5 7 0 9 -1 7
. Ni ch o l as R. Ro s ad o, fo r res p o n d en t
.

1 OnJ u n e 4 , 2 01 9 , we co n s o l i d at edth es e cas es fo r t ri al , b ri efi n g , an d o p i n i o n .- 2
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[* 2 ] M EM O RANDUM FINDINGS OF FACT AND OPINION PUGH, Ju d g e: In thes e co n s ol i d at edcas es res p o n den td et erm i n ed th e fo l l o w i n g d efi ci en ci es , ad d i t i o n s t o t ax , an d p en al t i es i n n o t i ces o f d efi ci en cy i s su edt o M s . W i en k e an dEv erg ro w In v es t m en t s , In c. (Ev erg ro w), o nM ay 1 0 , 2 0 1 7 : 2 Do ck etNo . 1 57 0 8 -1 7 (M s . W i en k e) Year Defi ci en cy Ad d i t i o nt o t ax s ec. 6 6 5 1(a)(1 ) Pen al ty

s ec. 6 6 6 2 2 01 2 $9 8 ,3 2 3 $ 2 4,5 8 1 $ 1 9 ,6 6 5 2 01 3 5 ,6 1 0 1 ,4 0 3 1 ,1 2 2
Do ck etNo . 1 5 70 9 -1 7 (Ev erg ro w) Year Defi ci en cy Ad d i t i o nt o t ax s ec. 6 6 5 1(a)(1 ) Pen al ty

s ec. 6 6 6 2 2 01 2 $1 3 ,7 8 8 $ 3 ,4 47 $2 ,7 5 8 2 01 3 1 7 ,6 0 3 7 ,7 11 3 ,5 2 1 2 01 4 1 1 2 ,1 6 9 3 0 ,8 0 5 22 ,4 3 4 2 01 5 1 ,0 9 6 2 ,0 9 1 2 1 9

2 Un l es s o th erwi s e i n d i cat ed , al l s ect i o nreferen ces are t o th e In t ern al Rev enu e Co de o f 1 98 6 , as am en d edan di neffect atal l rel ev an tt i m es . Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. Al l m o net ary am ou n t s are ro u n dedt o t h e n eares td o l l ar.- 3
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[* 3 ] Aft er res p o n d en tco n ced edth atp et i t i o n ers are n o tl i ab l e fo r accu racy rel at ed p en al t i es u n der s ect i o n 6 6 6 2 , th e i s su es fo r d eci s i o nare wh eth er: (1 ) M s . W i en k e p ro p erl y al l o cat edren t al p ro p ert y i n co m e b et ween h er an d h er h us b an d (co l l ect i v el y , W i en k es ) u nd er Cal i fo rn i a co m m u n i ty p ro p ert y l aw fo r 2 0 1 2 an d 2 0 1 3 ; (2 ) M s . W i en k e m

u s t i n cl u d e i n h er g ro s s i n co m e can cel l at i o n o f i n d eb t ed n es s o f $ 1 4 4 ,5 1 6 an d$ 3 9 ,6 1 3 fo r 2 0 1 2 an d2 0 1 3, res p ect iv el y ; (3 ) M s . W i en k e recei v edco n st ru ct iv e d i v i d en d s o f $ 9 ,7 0 7 an d $ 1 4 ,5 9 3 fo r 2 0 12 an d2 0 1 3,
res p ect i vel y ; 3 (4 ) M s . W i en k e i s en t i t l edt o d ep reci at i o n d edu ct io n s s h e cl ai m edo n h er Sch edu l es E, Sup p l em en t al In co m e an dLo s s, i nam o u n t s g reat er th an th o s e
res p o n d en t al l owedfo r 2 0 1 2 an d2 0 1 3; (5 ) res p o n den tab u s edh is d i s cret i o ni n ch an gi n g M s. W i en k e’ s m et h o do f acco u n t i n g an dm ak i ng a s ect i o n 4 8 1 (a) ad ju s t m en tt o i n cl u d e $ 2 4 3 , 4 0 5 i nh er 2 0 1 2 g ro s s i n co m e; (6 ) Ev erg ro w fai l ed t o rep o rti n co m e o f $ 5 0 ,5 7 2 fo r 2 0 1 4 ; (7 ) Ev erg ro w i s en t i t l ed t o d edu cti t s b u s i n es s
ex p en s es an d o ffs eti ts g ro s s recei p t s wi th co s to f g o o d s s ol d (COGS) i nam o u n t s g reat er t h an th o s e res p o n d en tal l o wedfo r t h e y ears i n i ss u e; an d(8 ) p et i t i o n ers are l i ab l e fo r ad d i t i o n s t o t ax u n d er s ect io n6 6 5 1 (a)(1 ) fo r fai l u re t o fi l e t i m el y retu rn s .

3 Res p o n d en tco n ten d s th atM s . W i en ke recei v edqu al i fi edd iv id en d s . Sec. 1 (h )(1 1 ) p ro vi d es p referen t i al t ax rat es fo r “ qu al i fi edd i v i d en di n co m e” i f a t ax p ay er recei v edth e d i v i d en dfro m a d o m es t i c co rp o rat io n .- 4
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[* 4 ] FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at ed fact s are i n co rp o rat edi no u r fi nd i n g s b y th i s referen ce. M s . W ien k e was a
res i den t o f Cal i fo rn i a wh en s h e t i m el y fi l edh er p et i t i o n. Ev erg ro w ’ s p ri n ci p al p l ace o f b u s i nes s was in Cal i fo rn i a wh en i tt i m el y fi l edi t s p et i t i o n. I. Back gro u n d A. Th e W i en k es Th e W i en k es m arri edi n1 9 9 4 an d l i ved i nCal i fo rn ia atal l rel ev an tt i m es . 4 Fro m 1 99 4 t h ro u g h 2 0 0 8 t h e W i en k es jo i n t l y acq ui red2 8 res i d en t i al ren t al p ro p ert i es i nareas aro u n dCl ear Lak e, Cal i fo rn ia. 5 Th ey o wn ed al l 2 8 p ro p ert i es

4 Th e W i en kes were m arri eddu ri n g th e y ears i n i s s u e, b u tM s . W i en k e fi l ed fo r a t em p o raryres trai n i n g o rd er i n2 0 1 5 o nth e g ro u n d s o f d om es t i c v i o l en ce. Th ey h av e s in ce s ep arat edan d fi l edfo r d i v o rce, b u t th e d i vo rce was s t i l l p en d i n g as o f t h e t ri al
.

5 Th e W i en kes al s o b o th m an ag edeach o f t he ren tal p ro p ert ies an dh el d th em s el v es o u tas real es t at e p ro fes s i o n al s du ri n g 2 01 2 an d2 0 1 3. Th ey d i dn o t k eep tracko f t h e t i m e t h ey s pen tm an ag i n g th e p ro p ert i es o r ret ai n i nv o i ces o r recei p t s fo r an y

o f t h ei r m an ag em en t ex p en s es . Th e reco rdi n cl u des a h an dwri t t en d o cu m en tth atM s . W i en k e creat eds o m e t i m e b efo re t ri al wh i ch l i s t s rep ai rs an d p ro ject s rel at edt o m an ag in g s o m e o f t h e ren t al p ro p ert i es (e.g
. , cl ean i n g , s h o wi n g a p ro p erty

t o p o ten t i al ren t ers ). Th e d o cu m en ti n cl u d es s ev eral n o t at i o ns fo r “ t o t al co s t s ”, b u tn o th i n g i nth e d ocu m en tco n n ect s th e co s t s t o an y p art icu l ar d at e o r i t em o nth e l i s t . M u ch o f t h e t ri al fo cu s edo n M s. W i en ke’ s “ real es t at e p ro fes s i on al ” arg um en t s , b u tres p o n d en t d i dn o tad ju stan y o f th e d edu ct i o n s rel at ed t o the ren t al p ro p ert i es o th er t h an d ep reci at i o n .- 5
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[* 5 ] du ri n g 2 0 1 2 an d2 0 1 3. Th e reco rdi n cl u d es s ev eral i nv o i ces fro m Pi ed m o n t Lu m b er s h owi n g th atM r. W i en k e p u rch as edm at eri al s fo r p ro pert y ren o vat i o n s du ri n g th e y ears i n i s s u e, 6 b u t th e i n v o i ces d o n o ti n di cat e an y p art i cu l ar p ro p ert y
o r ren o v at i o n . In 2 0 0 7 M s . W i en k e refi n an cedth e m o rt g ag e fo r o n e o f t h e ren t al p ro p ert i es i nKel s eyv i l l e, Cal i fo rn i a (Kel s eyv i l l e p ro p ert y ). In2 0 13 th e l en der, Set eru s , In c. (Set eru s), fo recl o s edo n th e m o rt g ag e an dd i s ch arg edth e Kel s eyv i l le p ro p ert y ’ s
o u t s t an d i n g d eb t . Set eru s i ss u eda Fo rm 1 0 9 9 -C, Can cel lat i o no f Deb t, t o M s . W i en k e i n2 0 1 3 fo r $ 7 9 ,2 2 6. Set eru s ch eck edth e b o x o nthe fo rm i n d i cat in g th at
s h e was p ers o nal l y

l i ab l e fo r rep aym en to f th e d eb t
. Th e W i en k es jo i n tl y

o wnedtwo o th er n o n ren tal p ro p ert ies , o n e i n Cl earl ak e, Cal ifo rn i a (Cl earl ak e p ro p ert y ), an dth e o th er i n Up p er Lak e, Cal i fo rn i a (Up per Lak e p ro p erty ), wh i ch th ey acq u i redi n2 0 0 4 . In2 0 0 7 M r. W i en k e refi n an ced th e m o rt g ag e fo r t h e Cl earl ak e p ro p ert y wi th th e Fed eral Nat i o nal M o rt g ag e As s o ci at i o n (Fan n i e M ae) an d th e m o rt gag e fo r t he Up p er Lak e p ro p ert y wi th th e Fed eral Ho m e Lo an M o rt g ag e Co rp o rat io n (Fred d i e M ac). In 2 0 1 2 Fan ni e M ae an dFred d i e M ac fo recl o s edo nth ei r res p ect iv e m o rt g ag es an d d i s ch arg edeach p ro pert y ’ s o u t s t an d in g d eb t , i ss u i n g Fo rm s 1 0 9 9-C fo r 2 0 1 2

6 M s . W i en k e d i dn o tp ro v i d e t h es e d o cu m en t s t o res po n d en tu n t i l tri al
.- 6
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[* 6 ] refl ect i n g d i s ch arg ed am o u n t s o f $ 1 5 5 ,4 7 7 an d$ 1 3 3 ,5 54 , res pect i v el y . Th e b o x i n di cat i n g M r. W i en k e was p ers o n al l y l i ab l e fo r rep aym en to f th e d eb twas ch eck edo neach Fo rm

1 0 9 9 -C as wel l
. B. Ev erg ro w Th e W i en k es al s o o wn edEv erg ro w, a Cal i fo rn ia co rp o rat i on o rg an i zedi n 2 0 0 7 . Ev erg ro w o p erat eda g ro cerym ark etan d p i zza s t o re i nSan Fran ci sco , Cal i fo rn i a. M r. an dM s . W i en k e each o wn eda 5 0 % i n t eres ti nEv erg ro w du ri n g 2 0 1 2 an d2 0 1 3 , an dM s . W i en k e s erv edas i ts p res i d en tdu ri n g th e y ears i ni s s u e. Ev erg ro w ’ s b o o k s fo r t h e y ears i ni s s u e refl ect edp u rch as es o f $ 90 8 ,3 6 3 , $ 1 ,0 8 1 ,7 1 4 , $ 1 ,0 4 2 ,5 1 5 , an d $ 1 ,0 4 9 ,6 6 9 , res p ect i v el y . Th e W i en kes “ co ns u m ed ” ap p ro x i m at el y $ 7 5 t o $ 1 0 0 o f t h o s e p u rch as es p er weekfo r t h ei r p ers o nal u s e. Ev erg ro w’ s b o o k s fo r 2 0 1 3 an d 2 0 1 4 al s o refl ect edi rreg u l ar p aym en t s t o th e W i en k es i nth e fo rm s o f draws an dp aym en t s o f th ei r p ers o n al ex p en s es th at t o t al ed$ 2 5 ,3 46 an d$ 2 6 ,6 3 8 , res p ect i vel y . Ev erg ro w d i dn o tfi l e em p l o ym en tt ax retu rn s o r i s s ue Fo rm s W -2 , W ag e an dTax St at em en t , wi th res p ectt o an y o f t h o s e p aym en t s.- 7
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[* 7 ] II. Pet i t i o n ers ’ Tax Retu rn s A. M s . W i en k e M s . W i en k e fi l edt ax retu rn s s ep arat el y fro m h er h u s ban d fo r each y ear i n i s su e, el ect i n g t h e “ m arri edfi l i n g s ep arat el y ” o p t io n . Sh e u nt i m el y fi l edFo rm s 1 0 4 0 , U.S. In d i v i du al In co m e Tax Retu rn , fo r 2 0 1 2 an d 2 0 1 3 o nM arch 2 4 , 2 0 1 4 , an d Feb ru ary

2 , 2 01 5 , res p ect i v el y . M s . W i en k e rep ort ed1 8 ren t al p ro p ert ies o nh er 2 0 1 2 retu rn an d 1 7 ren t al p ro p ert i es o n h er 2 0 1 3 return ; M r. W i en k e rep o rt edth e rem ai n i n g p ro p ert ies o n h i s return s . 7 Th e W i en k es rep o rt edt o t al ren t s recei v edo f $ 3 36 ,3 1 2 an d$ 2 5 1 ,4 9 5 fo r 2 0 1 2 an d 2 0 1 3, res p ect iv el y . Th ey al s o cl ai m edren t al ex p en s e d educt i o n s o f $ 3 2 2 ,9 3 4 an d$ 3 3 5 ,8 9 3 fo r 2 0 1 2 an d 2 01 3 , res p ect i v el y , wi th $ 7 6 , 8 36 an d $ 6 7 ,4 4 5 o f t h o se ex p en s e d edu ct i o n s o nM s . W i en k e’ s retu rn s cl ai m edas d ep reci at i o nd edu ct i o n s . M s . W i en k e d i dn o trep o rtan y wag e i n co m e o nei th er retu rn .

7 Th e reco rdi s s il en tas t o h ow th e W i en k es d i vi d edren t al i n co m e an d d educt i o n s fo r each ren t al p ro p ert y b efo re t h e y ears i n i s s u e.- 8
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[* 8 ] B. Ev erg ro w Fo r t h e y ears i n i s su e Ev erg ro w fi l edFo rm s 1 1 2 0, U.S. Co rp o rat i o nIn co m e Tax Retu rn , o na fi scal y ear b as i s (en d i n g M arch 3 1). M s . W ien k e was
res p o n s i b l e fo r Ev erg ro w’ s t ax rep o rt i n g an ds i g n edi t s t ax retu rn s .

1
. 2 0 1 2 Ev erg ro wu n t i m el y

fi l edi t s Fo rm

1 1 2 0 fo r 2 01 2 o n M ay

2 , 2 0 1 3 . It rep o rt ed$ 1 ,3 0 3 ,0 65 o f g ro ss recei p t s an d $ 9 3 4 ,9 28 o f COGS fo r a g ro s s p ro fi to f $ 3 6 8 ,1 3 7 . It o ffs etth i s p ro fi ti np artwi th b u s in es s ex p en s e d edu ct i o n s o f $ 3 3 ,8 8 9 fo r t ax es an dl icen ses an d $ 2 3 , 7 5 0 fo r i n t eres t an do th er b u s i n es s ex p en s e d educt i o n s . 2
. 2 0 1 3 Ev erg ro wu n t i m el y

fi l edi t s Fo rm

1 1 2 0 fo r 2 01 3 o n Decem b er 2 9 , 2 0 1 5 . It rep o rt ed$ 1 ,6 1 2 ,0 96 o f g ro ss recei p t s an d $ 1 ,0 8 7 , 5 3 9 o f COGS fo r a g ro s s p ro fi t
o f $ 5 24 ,5 5 7 . Ito ffs etth i s p ro fi twi th d edu ct i on s fo r o ffi cers ’ co m p en s at i o n t o t al i n g $ 2 5 ,3 4 6 an do th er b u si n es s ex p en s e d educt i o n s .

3
. 2 0 1 4 Ev erg ro wu n t i m el y

fi l edi t s Fo rm

1 1 2 0 fo r 2 01 4 o n Decem b er 2 9 , 2 0 1 5 . It rep o rt ed$ 1 ,9 1 7 ,3 86 o f g ro ss recei p t s an d $ 1 ,0 8 1 , 9 3 5 o f COGS fo r a g ro s s p ro fi t
o f $ 8 35 ,4 5 1 . Ito ffs etth i s p ro fi ti np artwi th d edu ct io n s fo r o ffi cers ’ co m p en s at i o n- 9
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[* 9 ] t o t al i n g $ 2 4 2 ,6 3 8 . Of th i s am o u n tEv erg ro w d i d n o tp ay $ 2 1 6 ,0 0 0 . M s . W i en k e i n cl u d eda d edu ct i o n fo r t h e en ti re am ou n twh en s h e p rep aredEv erg ro w’ s Fo rm 1 1 2 0 t o refl ecth er v i ew o f Ev erg ro w’ s 2 0 14 earn i n g s . 4
. 2 0 1 5 Ev erg ro wu n t i m el y

fi l edi t s Fo rm

1 1 2 0 fo r 2 01 5 o n J anu ary 2 1 , 2 0 1 6 . It rep o rt ed$ 1 ,4 9 2 ,7 10 o f g ro ss recei p t s an d $ 1 ,0 5 5 , 5 9 8 o f COGS fo r a g ro s s p ro fi t
o f $ 4 37 ,1 1 2
. III. Pet i t io n ers ’ Au d i t A. M s . W i en k e Res p o n d en td et erm i n edth at th e W i en k es h ad i nco rrect l y rep o rt edi n co m e fro m th e ren tal p ro pert ies o nth ei r retu rn s . He cal cu l at edth e W i en kes ’ t o t al i n co m e an d ex pen s es fo r al l 2 8 p ro pert i es an dreal l o cat edh al f o f t h e i n co m e an d
ex p en s es t o M s . W i en k e. He d i dn o t m ak e an y ad ju st m en t s t o th e ren t al i n co m e rep o rt edo r ex pen s e d educt i o n s cl ai m edo th er t h an th e d ep reci at io nd edu ct i o n s . He u s edco u n ty

p ro pert y t ax reco rd s t o cal cu l at e each ren t al p ro p ert y ’ s co s tb as i s
s t art i n g wh en i t was p l aced i ns erv i ce an dth en d et erm i nedth e p ro p er d ep reci at i o n d educt i o ns ch edu le fo r each p ro p ert y . Res p on d en tredu cedM s . W i en k e’ s
co l l ect i v e d ep reci at i o nd edu ct i o n s b y $ 5 6 ,5 5 8 an d$ 39 ,8 0 3 fo r 2 0 1 2 an d2 0 1 3 , res p ect i vel y , o nth e b as is o f th es e s ch edu l es .- 1 0 -

[* 1 0 ] Res p o n d en tfu rth er d et erm i n edth atth e W i en k es h adt o g et her cl ai m ed $ 1 ,0 2 6 ,7 4 6 o f d ep reci at i o nd edu ct i o n s fo r t h e ren t al p ro pert i es fro m 1 9 9 4 t o 2 0 1 1 b u twere en t i t l ed to o n ly

$ 5 3 9 ,9 3 5 . He m ad e a s ect io n4 81 (a) ad j u s tm en tt o th e W i en k es ’ t o t al 2 0 1 2 i n co m e t o i n cl u d e t h e $ 4 8 6 ,8 1 1 o f d i s al l o wedd ep reci at i o n d educt i o n s fo r al l 2 8 ren t al p ro p ert i es fo r t h os e p ri o r y ears an dal l ocat edh al f o f th atam o u n t($ 2 4 3,4 0 5 ) t o M s . W i en k e. Res p o n d en tal s o d et erm in edthatM s . W i en ke fai l edt o rep o rt i n co m e fro m
s ev eral s o u rces . Fi rs t , s h e fai l edt o rep orth er s h are o f can cel l at i o n o f d eb t i n co m e, wh i ch t ot al ed $ 1 4 4 ,5 1 6 an d$ 3 9 ,6 12 fo r 2 0 1 2 an d 2 0 1 3 , res p ect i v el y . Seco n d , res p o nd en tch aract eri zedEv erg ro w’ s o ffi cers ’ co m p en s at i o nas
co n st ru ct i v e d iv i d en ds an dd et erm i n edthatM s . W i en k e fai l edt o rep o rtas i n co m e h er p o rt i o n , wh i ch to t al ed $ 9 ,7 0 7 an d$ 1 4,5 9 3 fo r 2 0 1 2 an d2 0 1 3 , res p ect i v el y . B. Ev erg ro w Res p o n d en tal s o au di t edEv erg ro w’ s Fo rm s 1 1 2 0 fo r t h e y ears i n i s s u e. Ev erg ro w was u n ab l e t o p ro v i d e t h e ex am in i ng ag en twi th an i n co m e s u m m ary fo r th e p i zza s to re fo r Sep t em b er 2 0 1 3. To d et erm i ne t h atm o n th’ s g ro s s recei p t s , res p o n d en t av erag edthe p i zza s t o re’ s Au g us tan d Oct ob er 2 0 1 3 g ro s s recei p t s . Pet i t io n ers d i dn o to bjectt o th i s m et h o d o f reco n s tru ct i ng th e m is si n g recei p t s- 1 1 -

[* 1 1 ] du ri n g th e au d it . Res p o n d en td et erm i n edth atEv erg ro wfai l edt o rep o rt g ro s s recei p ts o f $ 5 0 ,5 72 fro m Sep tem b er 2 01 3 as i n co m e. Res p o n d en tad

ju s tedEv erg ro w’ s COGS fo r t h e y ears i n i s s ue b y $ 2 8 ,7 7 5 , $ 2 3 ,7 2 6 , $ 5 , 0 0 0 , an d$ 5 , 0 0 0 , res p ect i v el y , t o refl ectd is crep an ci es b et ween th e COGS l is t edo nEv erg ro w’ s Fo rm s 1 1 2 0 an di t s b o o k s an dth e W i en k es ’
co n su m p t i o no f a p ort io n o f Ev erg ro w’ s p u rch as es fo r t h ei r p ers on al u s e. He al s o redu ced E v erg ro w’ s 2 0 1 2 b u s i n es s ex p en s e d edu ct io n s b y $ 2 7 ,3 4 5 an dd i sal l o wed
en t i rel y Ev erg ro w ’ s o ffi cers ’ co m p en s at i o nd edu ct i on s fo r 2 0 13 an d2 0 1 4
. OPINION I. Bu rd en o f Pro o f Ord i n ari l y , th e b u rd en o f p ro o f i ncas es b efo re t h e Co u rt i s o nth e t ax p ay er. Ru l e 1 4 2 (a); W el ch v . Hel veri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 93 3 ). Un d er s ect i o n 7 4 9 1 (a)(1 ), “ [i ] f, i nan y co u rtp ro ceed i n g , a t ax p ay er i n tro du ces cred i b l e ev i d en ce wi th res p ect t o an y fact u al i s su e rel ev an tt o as cert ai n i n g the l i ab i l i ty o f t h e t ax p ay er fo r an y

t ax i m po sed b y s ub t i t le A o r B, th e Secret ary s h al l h av e t h e b u rd eno f p ro of wi th res p ectt o s u ch i s s u e.” See Hi g b ee v . Co m m i s s io n er, 1 1 6 T.C. 4 3 8 , 4 4 2 (2 0 0 1 ). Pet i t i on ers h av e n ei th er cl ai m edn o r s h o wnth at th ey h av e p res en t edcred i bl e ev i den ce s u ffi ci en tt o s h i ftth e b u rd en o f p ro o f t o res po n d en tas t o an y rel ev an t fact u al i s s u e un d er s ect i on 7 4 9 1(a).- 1 2 -

[* 1 2 ] In cas es i n v o l v i ng fai l u re t o rep orti n co m e, t he U.S. Co u rto f Ap p eal s fo r th e Ni n th Ci rcu i t , t o wh ich an y ap p eal i nthes e cas es wo u l d o rd i n ari l y l i e, s ee s ec. 7 4 8 2 (b )(1 )(A) an d(B), h as h el dth atth e Co m m i s s i o ner m

u s ti n tro du ce s o m e
ev i d en ce l i n k i ng th e t ax pay er wi th an al l eg edi n co m e-p ro du ci n g act i v i ty o r d em o n s trat e t h atth e t ax p ay er act u al l y recei vedu n rep o rt edi n co m e b efo re t h e p res u m p t i o no f co rrect n es s at t ach es t o t he d efi ci en cy d et erm i n at i o n , Rap p v . Co m m i s s i o n er, 7 7 4 F.2 d9 3 2 , 9 3 5 (9 th Ci r. 1 9 8 5 ); Edward s v . Co m m i s s i o ner, 6 8 0 F.2 d1 2 6 8 , 1 2 7 0 -1 2 7 1 (9 th Ci r. 1 9 8 2). Th e req u i si t e ev i den t i ary fo u n d at i o ni s
m i n i m al an dn eedn o ti n cl u de d i rect ev i d en ce. See W ei m ers k i rch v . Co m m i s s i o n er, 5 9 6 F.2 d3 5 8 , 3 6 0 -3 6 2 (9 th Ci r. 1 97 9 ), rev ’ g 6 7 T.C. 6 7 2 (1 9 7 7). On ce t h e Co m

m i s s io n er h as es t ab l i s h edth i s fo u nd at i o n , th e b u rd en o f p ro o f s h i ft s t o the t ax p ay er t o p ro v e b y a p rep o n d eran ce o f t h e ev i d en ce th atthe Co m m i s s i o n er’ s d et erm in at i o n s were arb it rary o r erro n eo u s . See Hard y v . Co m m i s s i o n er, 1 8 1 F.3 d1 0 0 2 , 1 0 0 4 -1 0 0 5 (9 th Ci r. 1 9 99 ), aff’ g T.C. M em o . 1 9 9 7 -9 7 . As d i s cu s s edb el ow, res p o n d en th as es t ab li sh eda s u ffi ci en tev i d en t i ary fo u n dat i o nt o s at i s fy

an y th res h o l db u rd enas i t rel at es t o h i s d et erm i n at i o ns o f
u n rep o rt edi n co m e fro m

p et i ti o n ers ’ v ari o u s act i v i t i es .- 1 3 -

[* 1 3 ] II. Un rep o rt edIn co m e Sect io n6 1 (a) p ro v i des th atg ro s s i n co m e m ean s “ al l i n co m e fro m wh at ev er
s o u rce d eri v ed ”. See Co m m i s s i o n er v . Gl en s h aw Gl as s Co ., 3 4 8 U.S. 4 26 (1 9 5 5 ). Tax pay ers are res p on s i b le fo r m ai n t ai n in g ad equ at e b o o k s an d reco rd s s u ffi ci en t t o es t ab l i s h th ei r i n co m e. See s ec. 6 0 0 1 ; Di Leo v . Co m m i s s io n er, 9 6 T.C. 8 5 8 , 8 6 7 (1 99 1 ), aff’ d, 9 5 9 F.2 d1 6 (2 dCi r. 1 9 9 2 ). As s t at edab o v e, t h e Co m m i s s i o n er
m u stb as e h i s d et erm i n at i o nth atth e t ax p ay er recei v edu n rep o rt edi nco m e o n

“ s o m e s ub s t an t i v e ev i d en ce” fo r t h e p res u m p t i o no f co rrect n es s t o at tach . Hardy
v . Co m m i s s i o n er, 1 8 1 F.3 dat1 0 0 4 -1 0 0 5 (h o l d i n g th atth i rd -p art y i n fo rm at i o n retu rn s were en o u g h t o s at is fy th e Co m m i s s i o n er’ s th res ho l db u rd en ). A. M s . W i en k e 1
. Co m m u n i ty Pro p ert y In co m e Gen eral ly , co m

m u n i ty p ro p ert y i n co m e i s i n cl u d edi n a t ax p ay er’ s g ro s s i n co m e. Sec. 6 1 (a); s ee Bern al v . Co m m i s s i o n er, 1 20 T.C. 1 0 2 , 1 0 5 -1 0 6 (2 0 0 3 ) (ci t i n g Un i t ed St at es v . M i t ch el l , 4 0 3 U.S. 1 9 0, 1 9 6 -1 9 7 (1 97 1 )). M arri ed i n d i v i du al s i na co m

m u n i ty p ro p ert y St at e l i k e Cal i fo rn ia wh o d o n o t fi l e a jo i n t t ax return g en eral l y

m u s trep o rth al f o f t h e t o t al co m m u ni ty p ro p ert y i n co m e t h e
s p o u ses earn eddu ri n g th e t ax ab l e y ear. Sec. 1 .6 6 -1 (a), In co m e Tax Reg s .; s ee al s o Un i tedSt at es v . M al co l m , 2 8 2 U.S. 7 9 2 , 7 9 4 (1 9 3 1 ).- 1 4 -

[* 1 4 ] A St at e’ s co m

m u ni ty p ro p ert y l aws d et erm i n e th e o wn ers h i p o f co m m u n i ty p ro p erty i n co m e, wh il e Fed eral l aw d et erm i nes th e Fed eral t ax at i o no f t hat i n co m e. See M i t ch el l v . Co m m i s si o n er, 1 3 1 T.C. 2 1 5 , 2 1 8 (2 0 08 ) (ci ti ng M i t ch el l, 4 0 3 U.S. 1 9 0 ). Un d er Cal i fo rn i a co m m u ni ty p ro p erty l aw, each s p o u se
o wn s a o n e-h al f i n t eres t i nth e co m m u n i ty es tat e, i n cl u d i n g i nco m e earn edb y b o th
s p o u ses du ri n g th ei r m arri ag e. See Cal . Fam
. Co d e. s ecs . 7 5 1 , 2 5 5 0 (W es t2 0 1 6 ). Th ey m ay el ectt o treat co m

m u n i ty p ro p erty i n co m e s ep arat el y

h o wev er. See, e.g ., Cal . Fam . Co d e s ecs . 1 5 0 0 (reg ard i n g p rem ari tal ag reem en t s ), 8 5 0 (reg ard i n g tran s m u t at i o no f co m

m u n i ty p ro p ert y

t o s ep arat e p ro p erty

b y ag reem en t o r tran s fer) (W es t2 0 1 6 ). Th e p art i es d o n o t d is p u t e t h atth e W i en k es jo i n tl y o wn edan dearn ed i n co m e fro m

th e ren t al p ro p ert i es du ri n g th e y ears i n i s s u e. M s. W i en ke s ub m i t t ed
n o ev i den ce t o es t ab li s h th at th ey el ect edt o treat an y

o f t h ei r co m

m u ni ty p ro p ert y , o r i n co m e fro m

th ei r p ro p ert y , s ep arat el y . Th e o n l y d o cu m en t s s h e d i d p ro v i d e
co n si s t edo f h er t ax retu rn s s h o wi n g t h e d i v is i on o f ren t al p ro p ert i es b et ween h ers el f an dM r. W i en k e. Bu tth es e ret u rn s are m erel y s t at em en t s o f h er cl ai m s an d
are n o tco n s i dered ev i d en ce o f t h e cl ai m s th em sel v es . See W i l k i n so n v . Co m m i s s i o n er, 7 1 T.C. 6 33 (1 9 7 9 ); Eh ren s perg er v . Co m m i s s io n er, T.C. M em o . 1 9 9 4 -2 7 9 , 1 9 9 4 W L 2 6 91 5 3 , at* 5 (“ Th e en tri es o nthe ret u rn s o f p et i t i o ner an d- 1 5 -

[* 1 5 ] h i s s p o us e are n otev id en ce t o es t ab l i s h th e tru th o f t h e m at t ers s etfo rt h th erei nb u tm erel y

a s t at em en to f t hei r cl ai m .”). W e t h erefo re s u s t ai n res p on d en t ’ s al l o cat i o no f o n e-h al f o f t h e ren t al p ro p ert y i n co m e t o M s . W i en k e as co m m u n i ty p ro p erty i n co m e. 2
. Can cel l at i o no f Deb tIn co m e Gen eral ly , a t ax pay er m

us ti n cl u d e i n co m e fro m

th e d i s ch arg e o f i n d eb t ed n es s . Sec. 6 1 (a)(1 2); s ec. 1 .6 1 -1 2 (a), In co m e Tax Reg s . Th e un d erl y i n g rat i o nal e fo r t he i n cl us i o no f d is ch arg edd eb t as i n co m e i s thatth e rel eas e fro m a d eb t frees up as set s p rev i ou s ly o ffs etb y th e o bl i g at i o nan di s an acces s i o nt o weal th , th ati s , i n co m e. J el le v . Co m m i s s i on er, 1 1 6 T.C. 6 3 , 6 7 (2 0 0 1 ) (ci ti n g Un i ted St at es v . Ki rb y

Lu m b er Co ., 2 8 4 U.S. 1 , 3 (1 9 3 1 )). So m e “ acces s i o n s t o weal th th atwo u ldo rd i n ari l y co n s t itu t e i n co m e m ay

b e
ex cl u d edb y

s t atu t e o r o th er o p erat i o no f l aw.” Co m m i s s i on er v . Dun k i n , 5 0 0 F.3 d 1 0 6 5 , 1 0 6 9 (9 th Ci r. 2 0 0 7 ), rev ’ g 1 2 4 T.C. 1 8 0 (2 00 5 ). Ev en s o , “ g i v enth e cl ear Co n g res s i o n al i n t en tt o ‘ ex ert. . . th e fu l l m eas u re o f i ts t ax i n g p o wer,’ * * *
ex cl u s i o n s fro m g ro s s i n co m e are co n s tru edn arro wl y i nfav or o f t ax at i on .” Id
. (qu o ti n g Co m

m is s i o n er v . Gl en s h aw Gl as s Co ., 3 4 8 U.S. at4 2 9 ) (ci t in g M erk el v . Co m m i s s i o n er, 1 9 2 F.3 d8 4 4 , 8 4 8 (9 th Ci r. 1 9 9 9 ), aff’ g 1 0 9 T.C. 4 6 3 (1 9 9 7 )).- 1 6 -

[* 1 6 ] M s . W i en k e cl ai m ed th ath er d eb twi th Set eru s an d M r. W ien k e’ s d eb t s wi th Fan ni e M ae an dFred d i e M ac were al l n o n reco u rs e d eb t s b ecau s e t h e l en d ers d i d
n o tp u rs u e ei th er o f t h em fo r t h e o u t s t an d i n g b al an ces aft er d i s ch arg i n g the d eb t s. Th erefo re, s h e arg u es , th es e can cel edd eb ts s ho u l db e ex cl u d edfro m h er i n co m e. In d eb t edn es s i s “ gen eral l y ch aract eri zedas ‘ n o nreco u rs e’ i f t h e cred i t o r’ s
rem ed ies are l i m i t edt o p art i cu l ar co l l at eral fo r t h e d eb tan das ‘ reco urs e’ i f t h e cred i t o r’ s rem ed i es ex t en dt o al l th e d eb t o r’ s as s et s .” GreatPl ai n s Gas ifi cat i o n As s ocs . v . Co m

m i s s i o n er, T.C. M em o . 2 00 6 -2 76 , 2 0 0 6 W L 3 80 4 6 2 2 , at* 2 4 (ci t i n g Rap h an v . Un i t edSt at es , 7 5 9 F.2 d8 7 9 , 8 8 5 (Fed . Ci r. 1 9 8 5 )). A d eb t o r’ s fo recl o s ure o f a p ro p ert y

s ub jectt o a “ no n reco u rs e l iab i l i ty i s t reat edas a s al e o r
o th er d i s p o s i t i o n of t h e p ro pert y , an dan y res u l t i n g i n co m e co n st i tu t es g ai no nth e d i s p o s i t i on o f p ro p ert y

rat h er t h an d i s ch arg e o f i n d eb ted n es s i n co m e.” See Co b u rn v . Co m

m is s i o n er, T.C. M em o . 2 0 05 -2 8 3 , 2 00 5 W L 3 29 8 8 7 7 , at * 3
. Th e fl aw i n M s . W i en k e’ s arg u m en ti s th atth e Fo rm s 1 0 9 9-C i ss u edfo r t h e
can cel edd eb t s i nd i cat edth atth e b o rro wer was p ers o n al ly l i ab l e fo r rep aym en t
. Wh en an i n fo rm at i on retu rn , s u ch as Fo rm 1 0 9 9 -C, i s t h e b as i s fo r t he d et erm i n at i o n o f a d efi ci en cy , th e b urd en o f p ro du ct i o nm ay s h i ftt o th e Co m m i s s i o n er. See s ec. 6 2 0 1 (d ); Del M o n ico v . Co m m i ss i o ner, T.C. M em o . 2 0 0 4 -9 2 , 2 0 0 4 W L 7 2 2 66 0 , at* 2 . If a t ax p ay er i n a Co u rtp ro ceed i ng as s ert s a- 1 7 -

[* 1 7 ] reas o n ab l e d i sp u t e wi th res p ectt o an y i t em o f i n co m e rep o rt edo nan i n fo rm at i o nretu rn an dh as co o p erat edfu l l y , th en th e Co m m i ss i o ner m

u s tp ro du ce
reas on ab l e an dp ro b at iv e i n fo rm at i o nco n cern i n g t h e d efi ci en cy i n ad d i t i o n t o th e i n fo rm at i o nretu rn . Sec. 6 2 0 1 (d ). Ev en i f we as s u m e M s . W i en k e h as fu l l y co o perat edwi th res po n den t , s h e h as n otrai seda reas o n ab l e d i s p u t e as t o th e accu racyo f an y o f t h e Fo rm s 1 0 9 9 -C. In p art i cu l ar s h e d i dn otp ro v i de an y d o cu m en t at i o n, s u ch as th e l o an ag reem en t s , t o s up p o rth er arg um en tth atth e d eb t s were n o n reco u rs e. An d s he ev en ad m i t t ed th atth e l en d ers co u l dh av e co l l ect edfro m h er an d M r. W i en k e. W e th erefo re h o l d th atM s . W i en k e fai l edt o s hi ftth e b u rd ent o res p o n d en t u n d er s ect i o n6 2 01 (d ). See, e.g
. , Carl s o nv . Co m m i s s i o n er, T.C. M em o . 2 0 1 2-7 6 , 2 01 2 W L 9 47 1 6 1 , at* 3 , aff’ d , 6 0 4 F. Ap p ’ x 6 2 8 (9 th Ci r. 2 0 1 5 ). Acco rd i n gl y , we h o l dth at th e d eb ts were al l reco u rs e d eb ts an ds u s t ai nres p o n den t ’ s i n cl u s i o n o f t h i s
can cel l at i o no f i nd eb t ed n es s as p arto f M s . W i en k e’ s g ro s s i n co m e fo r 2 0 1 2 an d 2 0 1 3 . See s ec. 6 1 (a)(1 2 ); s ec. 1 .6 1 -1 2 (a), In co m e Tax Reg s .

3
. Co n s tru ct i v e Di v i d en ds Wh en a co rp o rat i on d i st ri b u t es m o n ey o r p ro p ert y

t o a s h areh ol d er o u to f th e co rp o rat io n’ s earn i n g s an dp ro fi t s, th e am o u n t o f t h e d i st ri b u t i o nco n s t i tu t es a d i v i d en d th atm

u s tb e i n cl u d edi n th e s h areh o ld er’ s i n co m e. Secs
. 6 1 (a)(7 ), 6 3 ,- 1 8 -

[* 1 8 ] 3 0 1 (a), (c), 3 16 . Ch aract eri zat i o no f a d i s tri b u t i on as a d i v i den dd o es n o t d ep en do na fo rm al d i v i den dd ecl arat i o n; co u rt s h av e t reat ed as co n s tru ct i v e d i v i d en d s eco n o m i c b en efi t s co n ferred b y co rp o rat i o n s up o n s hareh o l d ers wi th o u t
a co rres p o n d i n g ex p ect at i o n o f rep aym en t. See Bo u l ware v . Un it edSt at es , 5 5 2 U.S. 4 2 1 , 4 2 9 -4 30 (2 0 0 8); H oo dv . Co m m i s s io n er, 1 1 5 T.C. 1 72 , 1 79 -1 8 0 (2 0 0 0 ); Tru es d el l v . Co m

m i s s i o n er, 8 9 T.C. 1 2 8 0 , 1 2 9 5 (1 9 87 ); s ee al s o No bl e v . Co m m i s s i o n er, 3 6 8 F.2 d4 3 9 , 4 4 2 (9 th Ci r. 1 9 6 6 ), aff’ g T.C. M em o . 1 9 6 5 -8 4
. Co rp o rat e fu n d s t h ata co n tro l l i n g s h areh o l d er d i v ert s t o p ers o n al u s e g en eral l y are ch aract eri zedfo r t ax p urp o ses as co n s tru ct i v e d i vi d en ds . See Eri ck s o nv . Co m m i s s i o n er, 5 9 8 F.2 d5 2 5 , 5 3 1 (9 th Ci r. 1 9 7 9 ), aff’ g i np art , rev ’ g i np artT.C. M em o. 1 9 7 6 -1 4 7 ; s ee al so M eri d i an W oo dPro d s . Co . v . Un i t edSt at es , 7 2 5 F.2 d 1 1 8 3 , 1 1 9 1 (9 th Ci r. 1 9 8 4 ) (t reat i n g as a co n s tru ct i v e d i v i d en da d i s tri b u t i o nt o a
co n tro l l in g s h areh o l d er t h atres u l t edi nan eco n o m ic b en efi t t o the s h areh o l d er an d
s erv edn o l eg i t i m at e co rp o rat e p u rp o s e). A d i s tri b ut i o n d o es n o tes cap e t ax at i o n
as a d i v i d en ds i m

p ly b ecau s e t h e s h areh ol d er d i dn o tp ers o nal l y recei ve t h e p ro p erty . See Sp ark s Nu g g et , In c. v . Co m m i s s i o n er, T.C. M em o . 1 9 7 0 -7 4 , 1 9 7 0 Tax Ct . M em o LEXIS 2 7 9 , at* 6 5 (h o l d i n g th ata s h areh o l d er d i v ert i n g co rp o rat e fu n d s “ t o a t h i rdp art y

fo r t h e b en efi t o f * * * [t h e] s h areh o l d er co n s t itu t es a
co n st ru ct i v e d iv i d en d”), aff’ d , 4 5 8 F.2 d6 3 1 (9 th Ci r. 1 9 7 2 ).- 1 9 -

[* 1 9 ] Th e W i en k es d i v ert edEv erg ro w’ s co rp o rat e fu n d s i n2 0 1 2 an d2 0 1 3 t o th em s el v es fo r p ers o nal u se an dt o th irdp art i es fo r t h ei r p ers on al b en efi t . M s . W i en k e arg u edth atth es e d is tri b u ti o n s were n o tt ax ab l e d i v i den d s b u trat h er retu rn s o f l o an s s he m ad e t o Ev erg ro w. A b o na fi de d eb t“ ari s es fro m a d eb to r-cred i t or rel at i o n s h i p b as edup o na v al i dan den fo rceab l e o b l ig at i o nt o p ay a fi xedo r d et erm i n ab l e s u m o f m o n ey .” Sec. 1
. 1 66 -1 (c), In co m e Tax Reg s .; s ee al s o Kean v . Co m

m i s s i o n er, 9 1 T.C. 5 7 5, 5 9 4 (1 9 8 8). Wh et h er a co rp o rat e p aym en t i s fo r a b o na fi d e d eb to r eq u i ty i s a qu es ti o no f fact . See A.R. Lan t z Co
. v . Un i t edSt at es , 4 2 4 F.2 d1 3 3 0 (9 th Ci r. 1 97 0 ); Di x i e Dai ri es Co rp . v . Co m m i s s i o n er, 7 4 T.C. 4 76 , 4 9 3 (1 9 8 0 ). Th e k ey t o t h i s d et erm i n at i o ni s th e t ax p ay er’ s actu al i n t en t . Bau er v . Co m m i ss i o n er, 7 4 8 F.2 d1 3 65 , 1 3 6 7 -1 3 6 8 (9 th Ci r. 1 9 84 ), rev ’ g T.C. M em o . 1 9 8 3-1 2 0 ; A.R. Lan t z Co ., 4 2 4 F.2 dat 1 3 33 -1 3 3 4
. M s . W i en k e d i dn otp ro v i d e an y cred i b l e ev i d en ce t h at s he i n t en dedt o
m ak e an y l o an s t o Ev erg ro w o r t h atEv erg ro w t o o k an y act i o n s s u g ges t i n g th e
ex i s t en ce o f a l o an (s u ch as p ay i n g atreg u lar i n t erv al s o r d edu ct i n g i nt eres t p aym en t s). Her t es ti m o n y was v ag u e an dg en eral an dwas n o ts up p o rt edb y an y d o cu m en t at i o n . W e th erefo re h o l dth atM s . W i en k e’ s actu al an dco n s tru ct i v e recei p t o f Ev erg ro w’ s co rp o rat e fu n ds were n otl o an rep aym en t s b u ti n s t eadwere
u n rep o rt edco n s tru ct iv e d iv i d en d s . Acco rd i ng l y , we s u s t ai nres p o n d en t ’ s- 2 0 -

[* 2 0 ] i n cl u s i o no f $ 9 ,7 0 7 an d$ 1 4,5 9 3 fo r 2 0 1 2 an d2 0 1 3 , res p ect i v el y , i nM s . W i en k e’ s g ro s s i n co m e. B. Ev erg ro w Wh ere a t ax pay er fai l s t o k eep ad equat e b o o k s an dreco rd s , th e Co m m i s s i o n er i s au th o ri zedt o co m p u t e t h e t ax p ay er’ s i n co m e b y an y m eth o dth at cl earl y , i nth e Co m

m i s s i o n er’ s o p i n i o n , refl ect s i n co m e. Sec. 4 4 6 (b ); s ee al s o Ch o i v . Co m

m is s i o n er, 3 7 9 F.3 d6 3 8 , 6 3 9 (9 th Ci r. 2 0 0 4 ), aff’ g T.C. M em o . 2 0 0 2
- 1 8 3 ; Pet zo l d tv . Co m

m i ss i o n er, 9 2 T.C. 6 6 1 , 6 9 3 (1 9 8 9 ); s ec. 1
. 4 4 6 -1 (b )(1 ), In co m e Tax Reg s . Th e Co m m i s s i o ner m ay

u s e i nd i rect m et h o d s t o reco n s tru ct i n co m e. Ho l l an d v . Un i t ed St at es , 3 4 8 U.S. 1 2 1 (1 9 5 4 ); Ch oi v . Co m m i ss i o n er, 3 7 9 F.3 dat6 4 0 . Th e reco n s tru ct i on n eedo n l y b e reas on ab l e an db as edo n“ s o m e
s ub s t an t i ve ev id en ce” i nth e l i gh to f al l s u rro u n d i n g fact s an d ci rcu m s tan ces . See Hard y v. Co m

m i s s io ner, 1 8 1 F.3 dat1 0 0 4 -1 0 0 5 ; Pet zo l d t v . Co m m i s s i on er, 9 2 T.C. at6 8 7 ; Gi d di o v . Co m m i s s i o n er, 5 4 T.C. 1 5 30 , 1 53 3 (1 97 0 ). Ev erg ro wm ai n t ai n edreco rd s o f t h e p i zza s t o re’ s g ro s s recei p t s fo r ev ery
m o nt h fo r t h e y ears i n i s s u e ex cep tfo r Sep t em ber 2 0 13 . Th e ex am i n i n g ag en t
reco n s tru ct edEv erg ro w’ s i nco m e fo r t h atm o n th b y u s i n g th e p ro

ject i o n m et h o d , wh i ch “ has recei v edwi d es p readju d ici al ap p ro v al .” See J ack s o n v . Co m m i s s i o n er, 7 3 T.C. 3 94 , 4 0 3 (1 9 7 9 ). Ing en eral th e p ro ject i o nm et h o d- 2 1 -

[* 2 1 ] ex trap ol at es i nco m e fo r a t ax ab l e p eri odfro m reco rd s o f i n co m e p ro du ced b y th e act i v i ty

o ver s om e s h o rt er o r d ifferen tp eri o d
. See, e.g ., Un it edSt at es v . J an i s , 4 2 8 U.S. 4 3 3 , 4 3 7 (1 9 76 ) (uph o l d i n g p ro ject i o no f 7 7 d ay s ’ i n co m e o nth e b as i s o f 5 d ay s ’ g ro s s p ro ceed s as i n d i cat edi nwag eri ng reco rd s ); Nel s o nv . Co m m i s s i o n er, T.C. M em o . 1 9 8 7 -3 6 9
. W e co ncl u d e t h at i twas reas o n ab l e fo r res p o n d en tt o ex trap o l at e Ev erg ro w’ s g ro ss recei p ts fo r th e y ear fro m i t s recei p t s b efo re an daft er Sep t em b er 2 0 1 3 . See Pal m er v . Un it edSt at es , 1 1 6 F.3 d1 30 9 , 1 3 1 3 (9 th Ci r. 1 9 9 7 ) (h o l d i n g th ati twas reas o n ab l e t o i n fer t h e t ax p ay er h ad i n co m e t o s up p o rth im sel f fo r
s h o rt er p eri o d s wh ere n o in co m e was rep ort ed ); cf. Th ro wer v . Co m m i s si on er, T.C. M em o . 2 00 3 -1 3 9 , 2 0 0 3 W L 2 1 1 0 7 67 5 , at* 4 -* 5 (h o l d i n g thatth e Co m m i s s i o n er “ u n rel i ab l y

d eri v ed ” a t ax p ay er’ s recei p t s u s i n g t h e p ro ject i o n
m et h o d wi th u n rel i ab l e reco rd s o f i n co m e). Acco rd i n g l y , we s u s t ai n res p on d en t ’ s i n cl u s i o no f $ 5 0 ,5 7 2 i n Ev erg ro w’ s 2 01 3 g ro s s i n co m e. 8

8 Attri al M s. W ien k e req u es t edthatwe ab at e t he s t atu t o ry i nt eres t res p o n d en t d et erm i nedi n th e n o t i ces o f d efi ci en cy . Our ju ri s d i ct i on t o red et erm i n e a t ax d efi ci en cy i s i n d ep en d en to f o u r juri s d i ct i on t o rev i ew o r ab at e s t atu to ry i n t eres t ; the l at ter i s n o ttri g g eredu n ti l th e t ax p ay er fi rs t ex h au s t s h er o th erwi s e av ai l ab le ad m in i s trat i v e rem ed i es . Sec. 6 4 0 4 (h ); Ru l e 2 8 0 ; Bo u rek i s v . Co m m i s s i o n er, 1 1 0 T.C. 2 0 , 2 6 (1 9 9 8 ); Rai fm an v . Co m m i ss i o n er, T.C. M em o . 2 0 1 8 -1 0 1 , at* 3 n .3 ; cf. Ben n et tv . Co m m is s i o n er, T.C. M em o . 2 0 1 7-2 4 3 , at* 6
- * 9 . Gen eral l y , a t ax p ay er m ay s eekju di ci al rev i ew o nl y aft er s h e fi l es a Fo rm

8 4 3, (co n ti n u ed ...)- 2 2 -

[* 2 2 ] III. Deduct i o n s A t ax p ay er m

u s t p ro v e h er en t i tl em en t t o an y d edu ct i o n s an dcred i t s cl ai m ed . INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2 ); New Co l o n i al Ice Co . v . Hel v eri n g , 2 9 2 U.S. 4 3 5 , 4 4 0 (1 93 4 ). Tax p ay ers b ear t h e b u rd en o f
s ub s t an t i at i n g th ei r cl ai m edd edu ct io n s b y k eep i n g an dp ro du ci n g reco rd s
s u ffi ci en tt o en ab l e t he Co m m is s i o n er t o d et erm i ne t h e co rrect t ax l i ab i l it y . Sec. 6 0 0 1 ; INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. at8 4 ; s ec. 1 .6 00 1 -1 (a), (e), In co m e Tax Reg s . Sect io n1 6 2 al l o w s a t ax p ay er t o d edu ctal l o rd in ary an dn eces s ary ex p en s es p ai do r i n cu rred du ri n g th e t ax ab l e y ear i n carry i n g o na t rad e o r b u s i n es s . Sec. 1 6 2 (a); s ec. 1 .1 6 2 -1 (a), In co m e Tax Reg s . Anex p en s e i s “ o rd i nary ” i f i ti s

“ n o rm al , u s u al , o r cu s t o m ary ” i nth e t ax p ay er’ s trad e o r b u s in es s o r i t ari s es fro m a tran s act io n“ o f co m

m o no r freq u en to ccu rren ce i nthe t y p e o f b u s i n es s i n v o l v ed .”

8 (...co n t in u ed ) Cl ai m fo r Refu n d an dReq u es t fo r Ab at em en t , i nres p o n s e t o a n o ti ce o f as s es s m en to f i n t eres tan dei th er t h e Co m m i s si o n er i s s u es a fi n al d et erm i n at i o n n o tt o ab at e i n t eres to r t he cl ai m h as b een p en d i n g 1 8 0 d ay s . Sec. 6 4 0 4 (h ); s ee Bo u rek i s v . Co m

m i s s i on er, 1 1 0 T.C. at2 6 ; Ben n et tv . Co m m i s s i o ner, at * 7 ; s ec. 3 0 1 .6 4 0 4 -1 (c), Pro ced . & Adm i n . Reg s . M s . W i en k e h o w ev er h as n o tal l eg ed recei p t o f, n o r en tered i n t o ev id en ce, a fi n al d et erm in at i o nth ats h o ws res po n d en t reject edh er i n teres tab at em en treq u es t o r ev en a n o t i ce o f as s es s m en to f i n t eres t th atwo u l dcau s e h er t o fi l e a Fo rm 8 4 3 . Her requ es tth erefo re i s p rem atu re. See Ro g ers v . Co m

m i s s i on er, T.C. M em o . 2 0 0 9 -1 1 1 , 2 0 0 9 W L 1 4 0 60 2 4, at* 5
.- 2 3 -

[* 2 3 ] Dep u ty

v . du Po n t , 3 0 8 U.S. 4 8 8 , 4 9 5 (1 9 4 0 ). Anex p en s e i s “ neces s ary ” i f i t is “ ap p ro p ri at e an dh el p fu l ” t o th e t ax p ay er’ s b u s in es s , b u t i t n eedn o t b e ab s o lu t el y

es s en t i al . Co m

m i ss i o n er v . Tel li er, 3 8 3 U.S. 6 87 , 6 8 9 (1 9 6 6 ) (qu o t i n g W el ch v . Hel v eri n g , 2 9 0 U.S. at1 1 3 ). In co n tras t , a t ax p ay er m ay n o t d edu ct p ers o n al , l iv i ng , o r fam i l y ex p en s es u n l es s th e l aw ex p res sl y p ro v i d es o th erwi s e. Sec. 2 6 2(a). Th e d et erm i nat i o no f wh et h er an ex p en s e s at i s fi es th e req u i rem en t s
o f s ect i o n1 6 2 i s a qu es t i o no f fact . Cl o u dv . Co m m is s i o n er, 9 7 T.C. 6 1 3 , 6 1 8 (1 9 9 1) (ci t i n g Co m

m i s s i o n er v . Hei n i n g er, 3 2 0 U.S. 4 6 7 , 4 7 3 -4 75 (1 9 43 )). Fed eral i n co m e t ax l aw d i s t i n g u is h es b etween a p aym en tth at a t ax p ay er can d eductcu rren t ly

as an ex p en s e an da p aym en tth ats h e m u s ttreat as a cap i t al
ex p en d i tu re. See INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. at8 3 -8 4. Th e d i s t i n ct i o nb et ween a cu rren tex p en s e an da cap it al ex p en d i ture i s i m p o rt an ti n th at

“ b u s i n es s ex p en s es are cu rren t l y d edu ct i bl e, * * * [wh il e] a cap i t al ex p en di tu re
u s u al l y i s am o rt i zedan dd ep reci at edo ver t h e l i fe o f t h e rel ev an tas s et , o r, wh ere
n o s p eci fi c as seto r u s efu l l i fe can b e as cert ai n ed , i s d educt edup on d i ss o l ut i o n o f th e en t erp ri s e.” Id .; s ee al s o Sm i th v . Co m m i s s io n er, 3 0 0 F.3 d1 0 2 3, 1 0 2 8 -1 0 2 9 (9 th Ci r. 2 0 0 2 ), aff’ g Van al co , In c. v . Co m m is s i o n er, T.C. M em o . 1 9 9 9-2 6 5 ; Ly ch u k v . Co m

m i s s i on er, 1 1 6 T.C. 3 7 4 , 4 10 (2 0 0 1 ).- 2 4 -

[* 2 4 ] A. M s . W i en k e Sect io n1 6 7 g en eral l y

al l o ws a d edu ct i o nfo r t he ex h au s ti o n an d wear an d t ear o f p ro p ert y

u s edi na t rad e o r b us i nes s o r fo r t h e p ro du ct i o n o f i n co m e. To d et erm i n e t h e an n ual d ep reci at i o nd edu ct io n fo r t he p ro p ert y , t ax p ay ers are req u i redt o u se t h e m od i fi edaccel erat ed co s treco very s y s tem (M ACRS) o u t l i n ed i ns ect io n1 6 8 . See Tax Refo rm Acto f 1 9 8 6 , Pub . L. No . 9 9-5 1 4 , s ecs . 2 0 1 , 2 0 3 , 1 0 0 St at . at2 1 2 1 , 2 1 4 3. M ACRS d i ct at es th e ap pl i cab l e d ep reci at i on m eth o d , reco v ery p eri o d , an d co nv en t i on t o u s e i ncal cu l at i n g a d ep reci at i o nd edu ct i o n . Sec. 1 6 8(a). Fo r res i d en t ial ren t al p ro p ert y M A CRS s p eci fi cal l y

d i ct at es th att ax p ay ers
u s e t h e s trai g h t -l i n e m et h o dan da reco v ery p eri o do f 2 7
. 5 y ears . 9 See s ec. 1 6 8 (b )(3 )(B), (c). Lan dg en eral l y i s n o t d ep reci ab l e, b u ti m p ro vem en t s o r p h y s i cal d ev el o pm en t s ad d edt o l an dm ay b e d ep reci ab l e. Sec. 1 .1 6 7(a)-2 , In co m e Tax Reg s . If a t ax pay er p ay s a l u m p s u m fo r p ro p ert y

co m p ri s i n g b o th d ep reci ab l e i m p ro v em en t s an d n o nd ep reci ab l e l an d , s he m us tap p ort i o nth e co s tb et ween th e l an dan dth e i m

p ro v em en ts fo r p u rp o s es o f cal cu l at i n g d ep reci at i on d edu ct i o n s . Sec. 1 .1 6 7 (a)-5 , In co m e Tax Reg s .; s ee al s o Bro z v . Co m m is s i o n er, 1 3 7 T.C. 4 6 , 5 8 (2 01 1 ) (fi nd i n g th atth e l u m p s u m p ai d fo r a co m

b i n at i o n o f d ep reci ab l e an d

9 Th e ap p l i cab l e co n v en ti o ni s n o t i ni s su e i nth es e cas es .- 2 5 -

[* 2 5 ] n o n d ep reci ab l e p ro pert y “ m u s tb e ap p o rt io n ed b etween th e t wo ty p es o f p ro p erty t o d et erm i n e t h ei r res pect i ve co s ts ”). Tax p ay ers al s o m ay d ep reci at e t h e
co s t s o f cap i t al i m

p ro v em en t s t h ey

m ak e t o res i d en ti al ren t al p ro pert y aft er p u rch as in g th e p ro p ert y , b u tth ey b ear t h e b u rd eno f es t ab l i s h i ng an d
s ub s t an t i at i n g th es e co s t s . See s ecs . 1 6 7 , 2 6 3 ; Ch i co v . Co m m i s s i on er, T.C. M em o. 2 0 1 9 -1 2 3 , at * 3 7 -* 3 8
. M s . W i en k e ad m i t t edth ats he cal cu lat edd ep reci at i on d edu ct i o ns fo r each
ren t al p ro p ert y

u s in g th e en t i re p u rch as e p ri ce fo r t he p ro p ert y as the d ep reci ab l e
co s trat h er t h an ap po rt i o n i n g the p urch as e p ri ce b et ween th e l an dan dth e p reex i s t in g i m

p ro v em en t s . To th atam o u n ts h e al s o ad d edth e co st s o f cap i t al i m p ro v em en t s th ats h e an d M r. W i en k e m ad e t o each p ro p ert y aft er p u rch as i n g i t
. Sh e cl ai m edth ats o m e o f t h e ren t al p ro pert i es n eed edex ten s i v e ren o vat i on s th at req u i redth e W i en k es t o m ak e rep ai rs o r b u i l di m p ro v em en t s b efo re t h ey

co u l d p l ace t h e p ro p ert ies i nt o s erv i ce. Bu ts h e co u l dn o ts ub st an t i at e t h e co s t s fo r t h e W i en k es ’ p o s tp u rch as e cap i t al i m p ro v em en ts o r s h o wwh et h er s h e p rev i o u s l y d educt eds o m e o f t he co st s as rep ai rs . Th e i n v o i ces s h e d idp ro duce s h e co u l dn o t t i e t o a p art i cu lar p ro p ert y o r ren o v at i on . An d s h e was u n ab l e t o p ro du ce an y
s ch edu l es s h o wi n g h er cal cu l at i o no f h er d ep reci at i o n d edu ct i o n s . Sh e fi rs t t es t i fi edth ats h e d i d n o ti ncl u d e “ cap i t al i m p ro v em en t s ” i nh er d ep reci at i o n- 2 6 -

[* 2 6 ] cal cu l at i on s , b utth ent es t i fi edth ats h e d idfo r t h e t ax retu rn s. Oth er t h an th i s co n fu s i n g t es t i m o ny , s he d i dn o t ch al len g e res p o n d en t ’ s u s e o f co u n ty p ro p erty t ax reco rd s t o d et erm in e each p ro pert y ’ s co s tb as i s an d al lo cat e th e b as i s b et ween th e l an dan dth e i m p ro v em en t s . W e h o ldth atM s. W ien k e u s edan i m p erm i s s i b l e m eth o d t o cal cu l at e th e d ep reci at i o nd edu ct i o n s fo r t h e ren t al p ro p ert i es . Acco rd i n g l y , we s u s tai n
res p o n d en t’ s ch an g e o f m eth o dfo r co m p u t i n g th e ren t al p ro p ert ies ’ d ep reci at i o n d educt i o n s an dh i s ad

ju s t m en t s t o M s . W i en k e’ s Sch edu l e E d ep reci at io n d educt i o n s fo r 2 01 2 an d2 0 1 3
. 1 0 Res p o n d en t ’ s ch an g e t o M s . W i en k e’ s m et h o d o f co m p ut i n g d ep reci at i o n d educt i o n s i s a ch an g e i nh er m et h o d o f acco u n t i n g . See Pi n k s t o nv . Co m m i s s i o n er, T.C. M em o . 2 0 2 0 -4 4 , at* 2 2 ; s ec. 1 .4 4 6-1 (e)(2 )(i i )(a), In co m e Tax Reg s. Sect i o n4 8 1 (a) au tho ri zes th e Co m m is s i o n er t o ad

ju s ta t ax p ay er’ s i n co m e fo r t h e y ear t he t ax p ay er ch an g es h er m et h odo f acco u n t i n g , wh et h er i n i t i at edb y th e t ax p ay er o r the Co m

m i s s i o n er. See Su zy ’ s Zo o v . Co m m i s s i o n er, 2 7 3 F.3 d 8 7 5 , 8 8 3 (9 th Ci r. 2 0 0 1 ), aff’ g 1 1 4 T.C. 1 (2 0 0 0 ); s ee al so s ec.

1 0 W i th o u t th es e d edu ct i o n s M s . W i en k e’ s p as s i v e l o ss es are l es s th anh er p as s i v e g ai n s i n 2 0 1 2 an d2 0 1 3 . W e t h erefo re n eedn o tco n s id er res p o n d en t ’ s s eco n dch al l en g e t o M s . W i en k e’ s d edu ct io n s , n am el y , wh et h er s h e was p erm i t t ed t o cl ai m n o np as s i v e ren t al act i v i ty l o s s es as a real es t at e p ro fes si o n al . See s ec. 4 6 9 (c)(7 ).- 2 7 -

[* 2 7 ] 1 .4 4 6-1 (e)(2 )(i i )(d )(5 )(i i i ), In co m e Tax Reg s . (p ro v id i n g t h ata “ ch an g e fro m an im p erm i s s i b l e m et h o do f co m p ut i n g d ep reci at io n ” t o a p erm i s s i b l e
m et h o d “ res u l ts i na s ect i o n4 8 1 ad ju s t m en t .”). 1 1 Wh en th e ch an g e i n m et h o do f
acco u n t in g i s i n vo l u n tary (i .e., n o ti n i t i at edb y th e t ax p ay er), t h e en t i re am o u n to f th e ad ju s t m en ti s i n cl u d edi n th e t ax p ay er’ s i nco m e i nth e fi rs t t ax ab l e y ear i n wh i ch t ax ab le i n co m e i s co m p u t edu n d er a m et h o d o f acco u n t i ng th ati s d i fferen t fro m th e m et h o dth atwas u s edi n th e p ri o r y ear. Sec. 1 .4 8 1 -1 (c)(3 ), In co m e Tax Reg s.

1 1 In g en eral , th e p ro v i s i o n s i ns ec. 1 .4 4 6 -1 (e)(2 ), In co m e Tax Reg s . , ap p l y “ o no r aft er Decem

b er 3 0 , 2 0 0 3 .” Sec. 1 .4 4 6 -1 (e)(4 )(i ), In co m e Tax Reg s . Th e p ro v is i o n s i ns ec. 1 .4 4 6 -1 (e)(2 )(i i )(d ), In co m e Tax Reg s ., ap pl y wi th res p ectt o “ d ep reci ab l e o r am ort i zab l e as set [s ] p l aced i n s erv ice b y th e t ax pay er i na t ax ab le y ear en d i n g o no r aft er Decem ber 3 0 , 2 0 0 3
. ” See i d . s ub para. (4 )(i i ). Th e W i en k es p l aced s om e o f th e ren t al p ro p ert i es i n s erv i ce b efo re 2 0 03 , s o th e p ro v is i o n s i ns ec. 1 .4 4 6 -1 (e)(2 )(i i )(d ), In co m e Tax Reg s ., wo u l dn o tap p ly t o th os e p ro p ert i es . Ho wev er, s ec. 1 6 8 “ d et erm i n es th e d ep reci at i o nal l owan ce fo r t an g i b l e p ro p erty th at i s o f a ch aract er s ub

jectt o t h e al l owan ce fo r d ep reci at i o n p ro v i d edi n s ect i on 1 6 7 (a) an dth ati s p laced i ns erv i ce aft er Decem b er 3 1, 1 9 86 ”. Sec. 1 .1 68 (a)-1 (a), In co m e Tax Reg s . Th e W i en k es p l aced al l o f t h e ren t al p ro pert i es i ns erv i ce aft er Decem

b er 3 1 , 1 9 8 6 , as p arto f t hei r t rad e o r b us i n es s . Th erefo re, al l o f t h e p ro p ert i es s h o u l d h av e b een d ep reci at edu s i n g th e M ACRS s y st em es t ab l i s h edb y s ec. 1 6 8 an dan y ad ju s tm en ts t o t h e d ep reci ab l e b as es an dM ACRS reco v ery p eri o d s fo r t h es e as s et s co n s t i tu t e ch an g es i nth e W i en k es ’ m et h odo f acco u n t in g th atreq u i re a s ec. 4 8 1 ad ju s t m en tt o p rev en t dup l i cat i o no f d edu ct i o n s o r o m i s s i o no f i n co m e. See Pi n k s t o nv . Co m m i s si on er, T.C. M em o . 2 02 0 -4 4 , at* 1 0 , * 1 9
.- 2 8 -

[* 2 8 ] A t ax p ay er’ s t ax ab le i n co m e fo r t h e y ear o f a ch an g e i n m et ho do f
acco u n t in g i s co m

p u t edb y t ak i n g “ i n to acco un tth os e ad ju s t m en t s wh i ch are d et erm i n edt o b e n eces s ary s o l el y b y reas o n o f t h e ch an ge i no rd er t o p rev en t
am ou n t s fro m b ei n g dupl icat edo r o m i t t ed ”. Sec. 4 81 (a)(2 ); s ee s ec. 1 .4 8 1-1 (a)(1 ), In co m e Tax Reg s .; s ee al s o M i n g o v . Co m m i s s io n er, 7 7 3 F.3 d6 2 9 , 6 35 (5 th Ci r. 2 0 1 4 ) (“ Fo l l o wi n g a ch an g e o f acco u n t i n g m et h od , th e Co m m i s s i on er m ay

m ak e
an y n eces s ary ad

ju s t m en t s t o p rev en tt ax ab l e i n co m e fro m b ei n g dupl i cat edo r
o m it t edas a res ul to f t he ch an g e u n d er I.R.C. § 4 81 (a)(2 ).”), aff’ g T.C. M em o . 2 0 1 3 -1 4 9 . Th e ad

ju st m en t fo r t h e y ear o f t h e ch an g e m ay refl ectt ax l i ab i l i t i es fo r y ears “ wh en th e s t atu t e o f l im i tat i o ns wo u ldo th erwi s e b ar reo p en i ng th e t ax p ay er’ s p ri o r retu rn s .” Su zy ’ s Zo o v . Co m m i s s i o ner, 2 7 3 F.3 dat 8 8 4 (ci t i n g Ran ki nv . Co m

m i s s i on er, 1 3 8 F.3 d1 2 8 6 , 1 2 8 8 (9 th Ci r. 1 9 98 ), aff’ g T.C. M em o . 1 9 9 6 -3 5 0 ); s ee al s o M i n g o v . Co m m i s si o n er, 7 7 3 F.3 dat6 3 6 (“ On ce t here h as b een a ch an g e i n t h e m et h o d o f acco u n t i n g , n o s t atu t e o f l i m i t at i o n s ap p l i es t o th e Co m m i s s i o n er’ s ab i l i ty

t o co rrect erro rs o no l dt ax retu rn s . ”). Co n g res s h as

“ m an d at edth ro u g h i t s en act m en to f s ect io n4 81 th atan ad ju s t m en t u n d er s ect i o n 4 8 1 g en eral l y

m u stb e m ad e t o rem o v e t he t hreat o f a d o ub l e b en efi t o r o m i s s i o n wh en ev er t h ere i s a ch an g e i na m et h o d o f acco u n t i n g.” W as co Real Pro p s . I, LLC
v . Co m m i s s i o n er, T.C. M em o . 2 0 1 6 -2 2 4 , at* 5 0 , aff’ d , 7 4 4 F. Ap p ’ x 5 3 4 (9 th Ci r.- 2 9 -

[* 2 9 ] 2 0 1 8 ); s ee al s o Su zy ’ s Zo o v . Co m m i s s i o n er, 2 7 3 F.3 dat8 8 3 (“ Th e p u rp o s e
o f § 4 8 1 i s t o p rev en tei th er a d i s t o rt i o n o f t ax ab l e i n co m e o r a wi n d fal l t o th e t ax p ay er ari s i n g fro m

a ch an g e i nacco un t i n g m et h o d[.] ”). A ch an g e i nm et h o do f acco un t i ng i n cl u d es n oto n l y a ch an ge i n t h e t ax p ay er’ s o v eral l p l ano f acco u n t i n g b u t al s o “ a ch an g e i n t h e t reat m en t o f an y
m at eri al i t em

u s edi ns u ch o v eral l p l an .” Sec. 1 .4 46 -1 (e)(2 )(i i )(a), In co m e Tax Reg s. Ani t em

i s “ m at eri al ” wh en i taffect s the t i m i n g o f rep o rt in g i n co m e o r d educt i o n s , as o p po s edt o “ h o wm u ch i n co m e i s rep ort ed , o r wh et h er a d edu ct i o n
wo u l dev er h av e b een ap p ro p ri at e.” Ran k in v Co m m i s s i o n er, 1 3 8 F.3 dat1 2 8 8 ;
s ee s ec. 1 .4 4 6 -1 (e)(2 )(i i )(a), In co m e Tax Reg s . (d efi n i n g a m at eri al i t em as “ an y i t em th at i n v o lv es th e p ro per t i m e fo r t h e i n cl u si o n o f t h e i t em i ni n co m e o r t h e t ak i n g o f a d edu ct i o n ”); s ee al so W ayn e Bo l t& Nu tCo . v . Co m m i s s i o n er, 9 3 T.C. 5 0 0 , 5 1 0 (1 9 8 9) (h ol d i n g th at wh en an acco u nt i n g p ract i ce “ p o s tp o n es th e rep o rt i n g o f i n co m e, rat her t h an p erm an en t l y av o i di n g the rep ort i ng o f i n co m e
o v er t h e t ax p ay er’ s l i fet i m e, i ti n v o l v es th e p ro p er t i m e fo r rep o rt i n g i nco m e”); Pri m o Pan ts Co . v . Co m

m i s s i o n er, 7 8 T.C. 7 05 , 7 22 (1 9 92 ) (n o t i n g th atm at eri al i ty

“ tu rn s o nwh et her t h e i t em s affect t i m i n g”). Res p o n d en tch an gedM s . W i en k e’ s m et h o do f acco u n t i n g fo r h er d ep reci at i o nd edu ct i o n s s t art i n g i n2 0 1 2
. See s ec. 1
. 4 4 6 -1 (e)(2 )(i i )(a), In co m e- 3 0 -

[* 3 0 ] Tax Reg s . Res p o n d en tth en m ad e a s ect i o n 4 8 1(a) ad ju s t m en tt o i n cl u d e i n M s . W i en k e’ s i n co m e o n e-h al f o f t h e d i s al l o wed d ep reci at i o nd edu ct i o n s fro m h er earl ier t ax y ears fo r each p ro pert y . Fo r al l b u tth ree p ro p ert i es , the d i s al l o wed d ep reci at i o nd edu ct i o n s fo r each p ro pert y are l es s th an the rem ai n i n g l i fet i m e al l o wab le d ep reci at i o nam o u n t s th e W ien k es are p erm i tt edt o d edu ctaft er 2 0 1 1 fo r each p ro pert y . Fo r t h ree p ro p ert i es , al l o nFo o th i l l Bo u l ev ard(Fo o th i l l p ro p ert i es ), the d i sal lo wedd ep reci at i o nd edu ct io n s ($ 1 9 ,6 5 7 , $ 1 27 ,0 9 0 , an d $ 4 9 ,2 7 8 , res pect i vel y ) ex ceed th e rem ai n in g l i fet i m e al l o w ab l e d ep reci ab l e
am ou n t s aft er 2 0 1 1 ($ 1 5 ,6 7 4 , $ 5 ,0 2 2 , an d$ 28 ,0 6 1 , res p ect i v el y ). Bu t , as we
ex p lai n edab o ve, M s . W i en k e o ffered n o ev i d en ce reg ard i n g t h e co s tb as es th at
s h e u sedt o cal cu l at e t he d ep reci at i o n d edu ct i on s an dd i dn o tch al l en g e
res p o n d en t’ s co m

p ut at i o no f h er co s t b as es . Th e reco rdd o es n o t s h o w th atth e d i s al lo wedam o un t s ex ceed the co stb as i s th atth e W i en k es wo u l d b e ab l e t o o ffs et ag ai n s tg ro s s p ro ceed s wh en th ey s el l th e Fo o th il l p ro p ert i es . Th erefo re,
res p o n d en t h as o n l y “ ch an g edth e t i m in g o f wh en(an dh ow) t h at co s treco very wi l l o ccu r” fo r the Fo o thi ll p ro p ert i es . 1 2 See Pi n ks t o nv . Co m m i ss i o ner, at * 1 5
.

1 2 “ In d et erm i n i n g wh eth er an i t em p o s tp o n es o r accel erat es th e rep o rt i n g o f i n co m e, co u rt s h av e g en eral l y as s u m edth atrel ev an tfu tu re ev en t s (s u ch as s al e o f th e p ro p ert y ) wi l l u l t i m at el y o ccu r.” Pi n k s t o nv . Co m m is si o n er, at* 1 5 n .5
.- 3 1 -

[* 3 1 ] Becau s e t he W i en k es wi l l b e al l owedt o reco v er th e d i sal l owedd ep reci at i o n d educt i o n s i nl at er y ears , we co n cl u d e t h atres p o n d en t ’ s s ect i o n 4 81 ad ju s t m en t s affect wh en th atco streco v ery i s ap p ro p ri at e, n o twh ether i twas ev er ap p ro p ri at e. See Ran k i nv . Co m

m i ss i o n er, 1 3 8 F.3 dat 1 2 8 8 . Acco rd i n g ly , we s u s tai n
res p o n d en t’ s en t i re s ect i o n4 8 1 ad ju s t m en t
. B. Ev erg ro w A co rp o rat i o nal s o b ears th e b u rd en o f p ro v i n g i ts en t it l em en tt o an y d educt i o n s . See Co m

m i s s i on er v . Nat ’ l Al fal fa Deh y drat i n g & M i l l i n g Co ., 4 1 7 U.S. 1 3 4 , 1 4 9 (1 9 7 4 ); New Co l o n i al Ice Co . v . Hel v eri n g , 2 9 2 U.S. at4 4 0 . Li k e
an y o th er t ax p ay er, a co rp o rat io ni s req u i redt o m ai nt ai ns u ffi ci en treco rd s t o
es t ab l i s h th e am o u n to f a d edu ct i o nt o en ab l e t h e Co m m i s s io n er t o d et erm i n e t h e
co rrect t ax l i ab i l i ty . Sec. 6 0 0 1 ; s ec. 1 .6 0 0 1-1 (a), In co m e Tax Reg s .; s ee al s o Hi g bee v . Co m

m i ss i o n er, 1 1 6 T.C. at4 4 0
. Un d er th e Co h an ru l e, t h e Co u rtm ay es ti m at e t h e am o u n to f an ex p en s e i f th e co rp o rat e t ax pay er i s ab l e t o d em o n s trat e t hati t h as p ai do r i n cu rreda d educt i b l e ex p en s e b u t can no ts ub s t an ti at e th e p reci s e am o u n t , as l o n g as i t p ro duces cred i b l e ev i d en ce t h atp ro v i d es a b as i s fo r t h e Co u rt t o d o s o . See Co h an
v . Co m m i s s i o n er, 3 9 F.2 d5 4 0 , 5 4 3 -5 4 4 (2 dCi r. 1 93 0 ); s ee al s o Van i cekv . Co m m i s s i o n er, 8 5 T.C. 7 31 , 7 4 2 -7 4 3 (1 9 8 5 ). Al l owi n g a d edu ct i o nwi th ou t- 3 2 -

[* 3 2 ] ev id en ce t h at wo u l den ab l e u s t o m ak e t h es e d et erm i n at i o n s wo u l dam o u n t t o “ u n g u id edl arg es s e”. W i l li am s v . Un i t edSt at es , 2 4 5 F.2 d5 5 9 , 5 6 0 (5 th Ci r. 1 9 5 7 ). 1
. 2 0 1 2 Bu s in es s Ex p en s e Dedu ct i o ns Ev erg ro wfai ledt o p ro du ce an y ev i d en ce t o s h o w thati t actu al ly p ai dt ax es , l i cen se ex p en s es , o r i n teres ti n2 0 1 2 . Acco rd i n g l y , we s us t ai nres p o n d en t ’ s ad ju s t m en t s t o Ev erg ro w’ s b us i n es s ex p en s e d edu ct i o ns fo r 2 0 1 2.

2
. 2 0 1 3 an d2 01 4 Offi cers ’ Co m p en s at io nDeduct i on s In co m p u t i n g i t s co rp o rat e i n co m e t ax , a co rp o rat i o nm ay d edu ctfro m

i t s i n co m e “ a reas o n ab l e al lo wan ce fo r s al ari es o r o th er co m p en s at io n fo r p ers o n al
s erv i ces actu al l y

ren d ered ”. Sec. 1 6 2 (a)(1 ). Paym en t s t o co rp o rat e s h areh o l d ers i nthe fo rm

o f s al ari es o r o th er co m

p en s at i o n“ warran tcl o s e s cru t i n y t o en s u re t h at a p o rt i on o f t h e p u rp o rt edco m p en s at i o np aym en t s i s n o t a d i sg u i sedd i v i d en d .” El l i ot t s , In c. v . Co m

m is s i o n er, 7 1 6 F.2 d1 2 4 1, 1 2 4 3 (9 th Ci r. 1 9 8 3 ), rev ’ g an d
rem an di n g T.C. M em o . 1 9 8 0 -2 8 2
. Paym en ts p ri m ari l y fo r t h e b en efi t o f a
s h areh o ld er rat h er t h an fo r p ers o n al s erv i ces p ro v id edb y th e s hareh o l d er are n o t
co m p en s at i o n b u trat h er are n o n d edu ct i b l e co n s tru ct i v e d i vi d en ds . Ho o dv . Co m m i s s i o n er, 1 1 5 T.C. at1 7 6 n .5 ; M ag n o nv . Co m m i s s i o ner, 7 3 T.C. 9 8 0 , 9 9 4
- 9 9 7 (1 98 0 ); s ee al s o Ben s on v . Co m m i s s i on er, 5 6 0 F.3 d1 1 3 3 , 1 1 3 4 (9 th Ci r.- 3 3 -

[* 3 3 ] 2 0 0 9 ) (fi n di n g th atan eco n o m i c b en efi ti s a co n st ru ct iv e d i v id en dwh en th e
co rp o rat i o n p ro v i des i tt o a s h areh o l d er “ wi th n o ex p ect at i o no f rei m b urs em en t ”), aff’ g T.C. M em o . 2 0 0 6 -5 5
. Ev erg ro wm ad e i rreg u lar p aym en t s t o th e W i en k es i nth e fo rm o f draws an d p aym en t s o f t h ei r p ers on al ex p en s es th att o g et h er t o tal ed$ 2 5 ,3 4 6 an d$ 2 6 , 6 3 8 i n 2 0 1 3 an d2 0 1 4 , res p ect i v el y . Ev erg ro w d i d n o twi th h o l dem pl o ym en tt ax o r i s s u e Fo rm s W -2 rel at edt o an y o f t hes e p aym en t s , n o r d idi tp res en tan y cred i b l e
ev i d en ce t h ati tm ad e t h es e p aym en t s fo r p ers o n al s erv ices th e W i en k es ren d ered
o r wi th an y

ex p ect at i o n t h atth e W i en k es wo u l drei m b u rs e i t. W e t h erefo re h o ld th atth es e p aym en t s were n o nd edu ct i b l e co ns tru ct i v e d i vi d en d s . An dEv erg ro w d i dn o t p ro v i d e an y

s ubs t an t i at i o n fo r t he rem ai n i ng $ 2 1 6 ,0 0 0 i t cl ai m edas
o ffi cers ’ co m

p en s at i o nfo r 2 01 4 ; i nd eedM s . W i en k e i neffect ad m i t t edthats h e ad d edth i s d edu ct i o nb ecau se i twas “ s o m eth i n g i n* * * [h er] m i n d ”, an d t h e
rev en u e ag en tt es t i fi ed th at s he t o l dh i m thats h e creat edthe d edu ct io ns o th at Ev erg ro w’ s n eti n co m e wo ul dm o re cl o s el y refl ectwh at i t earn ed fo r t h e y ear. Th erefo re, we wi ll s u s t ai nres p o n den t ’ s d i s al l o wan ce o f Ev erg ro w’ s o ffi cers ’
co m p en s at i o n d edu ct i o n s fo r 2 0 1 3 an d2 0 1 4
.- 3 4 -

[* 3 4 ] IV. Co s to f Go o d s So l d A b u s in es s i s al l o wedt o o ffs eti ts g ro s s recei pt s wi th COGS t o co m p u t e g ro s s i n co m e. See M et ra Ch em . Co rp . v . Co m m i s s io n er, 8 8 T.C. 6 5 4, 6 6 1 (1 9 8 7 );
s ecs . 1 .6 1-3 (a), 1 .1 6 2-1 (a), In co m e Tax Reg s . COGS i s n ota d edu ct i o nan di s n o t
s ub jectt o t h e l i m i t s o nd educt i o n s i ns ect i o n1 6 2 , M et ra Ch em . Co rp . v . Co m m i s s i o n er, 8 8 T.C. at 6 6 1 , b u tan y am o u n t rep o rt edas COGS s t i l l m u s tb e
s ub s t an t i at ed , Ki n g v . Co m m i s s i o n er, T.C. M em o . 1 9 9 4 -3 1 8 , 1 9 9 4 W L 3 3 0 6 1 3 , at* 2 , aff’ dwi th o utp ubl i s h edo p i n i o n , 6 9 F.3 d5 44 (9 th Ci r. 1 9 9 5 ). Ev erg ro ws ubm it t edn o ev i d en ce t o s ub s t an t i at e t hati t h adCOGS i nex ces s
o f an y am o u n t s res p o n d en tal read y al lo wed fo r t h e y ears i ni ss ue. Acco rd i n g l y , Ev erg ro w h as n o t p ro v ed i ti s en t i t l edt o an y ad di t i o n al COGS. W e t h erefo re wi l l
s u s t ai nres p o n den t ’ s ad

ju st m en t s t o i ts COGS fo r t h e y ears i ni s su e. V. Ad d it i o n s t o Tax Sect io n6 6 5 1 (a)(1 ) au tho ri zes th e i m p o s i t io no f anad d i t i on t o t ax fo r fai l u re t o fi l e a ret u rn t i m el y

u n l es s a t ax p ay er s h ows th ats u ch fai l u re was due t o
reas on ab l e cau s e an dn o twi l lfu l n eg l ect . See Un i t edSt at es v . Bo y l e, 4 6 9 U.S. 2 4 1 , 2 4 5 (1 9 8 5). Th e Co m m i s s i o n er b ears th e b u rd eno f p ro duct i o nfo r t h i s ad d it i o nt o t ax fo r i n d iv idu al s . See s ec. 7 4 9 1 (c); Hi gb ee v . Co m m i ss i o ner, 1 1 6- 3 5 -

[* 3 5 ] T.C. at4 4 6 -4 4 7
. 1 3 W e h av e h el dth at , as p art o f t h atb u rd en , th e Co m m i s s i o n er m

u s ti n tro du ce ev i d en ce s h owi n g t h atthe t ax p ay er d i d n o tfi l e h i s retu rn (o r a req u es tfo r ex ten s i on o f t i m e) b y the o ri g i n al du e d at e o f t h e ret u rn . Wh eel er v . Co m

m i s s i on er, 1 2 7 T.C. 2 0 0 , 2 0 7 -2 0 8 (2 0 06 ), aff’ d , 5 2 1 F.3 d 1 2 8 9 (1 0 th Ci r. 2 0 0 8 ). Res p o n den ts at i s fi edh is b u rd enwh en h e p ro du cedth e t ax retu rn s fo r M s . W i en ke fo r b o th y ears i ni s su e s h o wi n g th e ret u rn s were n o tfi l ed b y th ei r du e d at es . Th e reco rdal so s h o ws th at Ev erg ro w’ s t ax retu rn s were n o t t i m el y fi l ed
. M s . W i en k e arg uedthatth e reas o nab l e cau s e ex cep t i on s h ou l dap p ly b ecau s e b o th h er ret u rn s an dEv erg ro w’ s retu rn s were fi l ed l at e b ecau s e o f p ers o n al i s s u es wi th h er h us b an d . Wh et h er a t ax pay er h as “ reas on ab l e cau s e” wi th i nth e m ean i n g o f s ect i on 6 6 51 (a)(1 ) d ep en ds o nwh et h er t h e t ax p ay er

“ ex erci s ed‘ o rd i naryb us i nes s care an dp ru d en ce’ b u tn ev ert h el es s was ‘ un ab l e t o fi le t h e ret u rn w it hi nthe p res cri b edt i m e.’ ” Un it edSt at es v . Bo y l e, 4 6 9 U.S. at2 4 6 (qu o t i n g s ect i o n3 0 1 .6 6 5 1 -1 (c)(1 ), Pro ced
. & Ad m i n . Reg s .). Wh i l e we are
s ym p ath et i c t o th e ch al l en g es M s . W i en k e faced o v er th i s p eri o d, n o th in g i nth e

1 3 Th e b urd eno f p ro du ct i o n as t o Ev erg ro w’ s ad d i t io n s t o t ax rem ai n s wi th Ev erg ro w b ecau se s ec. 7 4 9 1 (c) d o es n o t ap pl y t o co rp o rat i o ns . See Dyn am o Ho l di n g s Lt d. P’ s h i p v . Co m m i s s io n er, 1 5 0 T.C. 2 2 4 , 2 3 1 -2 3 2 (2 0 1 8 ); NT, In c. v . Co m m i s s i o n er, 1 2 6 T.C. 1 9 1 , 1 9 5 (2 0 0 6).- 3 6 -

[* 3 6 ] reco rd s ho ws thats h e ap p l i edfo r an y ex t en s io n s o f t i m e t o fi l e t h e t ax retu rn s o r co u l dn oth av e p rep aredt i m el y retu rn s wi th a reas o n ab l e d eg ree o f
accu racyo n t h e b as i s o f t he i n fo rm at i o nav ai l ab le t o h er. W e t h erefo re h o l dth at p et i t i o n ers are l iab l e fo r t he s ect i o n 6 6 5 1 (a)(1 ) ad d i t i o ns t o t ax i ni s su e as d et erm i n edb y

res p o n den t
. An y co nt en t i o n s we h av e n o tad dres s edwe d eem i rrel ev an t , m o o t, o r
m eri t l es s . To refl ectthe fo reg o i n g , Ap p ro p ri at e d eci si o n s wi l l b e en t ered
.