T.C. Mem o. 2 01 4- 12 7

UNITED STAT ES TAX COURT JOHN K. KINUTHIA, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 19 98 8- 11 . Fil edJu ne 24 , 20 14 .
Jo hn K. Kinu th ia , pro se. W an daM. Co he n andSte ph enR. Doro gh azi , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION GOEKE, Ju dg e: Res po nd en t d et erm in edde fic ie nc ie s, ad di ti on s t o t ax , and pe na lt ie s fo r 20 08 an d 2 00 9 a s fo ll ows :-2 -

[* 2] Add it io ns to tax Pen al ty Year Defi ci en cy Sec. 6 65 1( a)(1 ) Sec. 6 65 1( a)(2 ) Sec. 6 66 2( a) 20 08 $9 8,2 72 --- --- $1 9,6 54 .40 20 09 14 ,50 4 $3 ,26 3.4 0 $2 ,74 2.5 2 --- Afte r co nc es si on s th e is su es forde ci si on are: 1 (1 ) whe th er p et it io ne r is en ti tl edto hi s cl ai m edde du ct io ns fro m Sch edul e C, Pro fitor Lo ss Fro m

Bu si ne ss , for20 08 . W e h ol d tha t h e is no t; (2 ) whe th er p et it io ne r fai le d t o re po rt $ 25 3,9 45 an d $ 56 ,33 6.9 1 o f in co m e fo r 20 08 an d 2 00 9, re sp ect iv el y . W e h ol d tha t h e d id ; (3 ) whe th er p et it io ne r is li ab le forad di ti on s t o t ax un de r se ct io n 6 65 1( a)(1 ) an d (2 ) fo r 20 09 . W e h ol d tha t h e is ; an d 2 (4 ) whe th er p et it io ne r is li ab le foranaccuracy-rela te d p en al ty und er s ect io n 66 62 (a) fo r 20 08 . W e h ol d tha t h e is .

Res po nd en t ag reedto reduc e th e 2 00 8 d efi ci en cy to $8 7,2 31 an d the 20 08 1 pe na lty to $1 7,4 46 .20 . He als o a gr eedto reduc e th e 2 00 9 d efi ci en cy to $1 1,2 94 an d the 20 09 pe na lty

un de r se ct io n 6 65 1( a)(1 ) to $2 ,68 2.9 0. All sec ti on refe ren ces are t o the Int ern al Rev enue Co de ineffe ctforth e 2 y ears inis su e, an d a ll Ru le refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d Pro cedur e, un le ss othe rwis e in di cat ed .-3 -

[* 3] FINDINGS OF FACT Pet it io ne r res id edinTexa s wh enhe fil edhi s p et it io n. Pet it io ne r ti m el y

fil eda Fo rm

10 40 , U.S. Ind iv idua l In co m e Tax Return, fo r 20 08 , bu t h e d idno t fi le a return o r pa y tax es for20 09 . Purs ua ntto sec ti on 60 20 (b ) res po nd en t p rep areda subs ti tu te forreturn (S FR) fo r hi m . On h is 20 08 Sch edul e C, p et it io ne r cl ai m edde du ct io ns rel at edto hi s s in gl em em be r li m it edli ab il ity

co m pany, CIO ASAP, LL C. He de du ct edcar an d tru ck ex pe ns es , m eal s an d e nt ert ai nm en t ex pe ns es , dep reci at io n, i ns ur an ce ex pe ns es , tra ve l ex pe ns es , andothe r expe ns es . The ag gr eg at e am ou ntof t he de du ct io ns he cl ai m edex ceed edth e g ro ss rece ip ts he rep orte d; th us , pet it io ne r rep orte d n o t ax li ab il ity for 20 08 . Res po nd en t co nduc te d abankde po si ts an al y si s an d d et erm in edth at pe ti ti on er h adm ad e ag gr eg at e d ep os it s o f $2 53 ,94 5 and$5 6,3 36 .91 in20 08 an d 20 09 , res pe ct iv el y . Res po nd en t d et erm in edth e d ep os it s re pr es en te d u nr ep orte d in co m e fo r 20 08 an d 2 00 9 t o the ex te ntth ey ex ceed edth e am ount s p et it io ne r rep orte d. Onth e b as is of h is fin di ng s, re sp on de ntis su edpe ti ti on er a n ot ic e o f de fic ie nc y

for20 08 an d 2 00 9. Pe ti ti on er t im el y pe ti ti on edth is Co urt. Thi s ca se was o rig in al ly set f ortri al on Janua ry

14 , 20 13 , bu t was co nt in ue d to all ow p et it io ne r ti m e to ha ve subp oe na s s erv edonhi s m an y bank in g-4 -

[* 4] in st itut io ns . Peti ti on er re cei ve d h is bankreco rd s, an d the parti es ag reedth at on Marc h 2 0, 2 01 3, p et it io ne r wou ldm eetwith the App eal s o ffi cer t o re vi ew th e do cu m en ts . Befo re the m eet in g c ou ldtak e p la ce, p et it io ne r cal le d the App eal s of fic er an d c an cel edit . Over the ne xtfew m on th s re sp on de ntha d an i nc reas in gl y di ffi cu ltti m e co nt act in g p et it io ne r. Thi s ca se was s etfortri al on Jan ua ry 6, 2 01 4, bu t p et it io ne r di d n otap pe ar. Res po nd en t fi le d am ot io n t o d is m is s fo r la ckof pr os ecu ti on . W e d en ie d the m ot io n b ecau se pe ti ti on er h adoff ereda st ip ul at io n o f fact s s uf fic ie ntto all ow u s t o a dd res s the m eri ts of h is cas e. OPINION I. Burd enof P ro of Gen eral ly, ta xp ay ers be ar the bu rd enof p ro vi ng , by a p rep on de ran ce o f th e ev id en ce, tha t the de te rm in at io ns of t he Co m m is si on er i n ano ti ce o f de fic ie nc y are in co rrec t. Ru le 14 2( a)(1 ); Welc h v . Helv eri ng , 29 0 U.S. 1 11 , 11 5 (1 93 3) . Deduc ti on s ar e a m at te r of leg is la ti ve gra ce, an d t axpa y ers be ar the bu rd enof pr ov in g the ir e nt it le m en t t o any deduc ti on s the y cla im . Rul e 1 42 (a)( 1) ; INDOPCO, In c. v. Co m

m is si on er, 5 03 U.S. 79 , 84 (19 92 ). Whe n the Co m m is si on er h as all eg edth ata ta xp ay er fa il edto rep ort i nc om e an d p ro du ced ev id en ce co nn ect in g the tax pa y er wi th th e al le ge d u nr ep orte d i nc om e, th e ta xp ay er be ars th e b ur de n o f di sp ro vi ng th e al le ga ti on . See Po rti ll o v . Comm is si on er, 9 32-5 -

[* 5] F.2 d 1 12 8, 1 13 3- 34 (5t h C ir. 1 99 1) , aff’g i n p art , rev ’g inpart T.C. M em o. 19 90 -6 8. Se ct io n 7 49 1( a) s hi fts th e b ur de n o f pr oo f to th e Co m mis si on er i f th e ta xp ay er p ro du ces cred ib le ev id en ce o n any factu al is su e an d s at is fie s the requi rem en ts of s ect io n 7 49 1( a)(2 ). Res po nd en t d et erm in edth atpe ti ti on er m ad e b an k d ep os it s dur in g the y ears inis su e in ex ces s o f th e am ou nt s o f ta xabl e in co m e h e rep orte d fo r th os e y ears . Acco rd in gl y , res po nd en t h as pre se nt edev id en ce s uf fic ie ntto co nn ectpe ti ti on er with the un rep orte d i nc om e al le ge d h ere. Pe ti ti on er h as no t p ro vi de d c red ib le ev id en ce t o s up po rt h is po si ti on s, n orha s h e o th erwi se m etth e requi rem en ts of se ct io n 7 49 1( a)(2 ). Co ns eque nt ly, pe ti ti on er h as th e b ur de n o f pr ov in g b ot h tha t he is en ti tl edto th e d educ ti on s h e cl ai m edan d tha t h e d idno t fa il to rep ort i nc om e. II. Subs tant iati on of B us in es s Ex pe ns es Sect io n 1 62 (a) p ro vi de s a d educ ti onforcert ai n b us in es s- rel at edexpe ns es . Tax pay ers m

us t m ai nt ai n re co rd s s uf

fic ie ntto subs tant ia te sec ti on 16 2 d educ ti on s th ey cla im . Sec. 6 00 1; Hrad es ky v. Co m m is si on er, 6 5 T.C. 8 7, 8 9- 90 (19 75 ), aff’d, 5 40 F.2d82 1 (5 th Cir . 19 76 ); s ee al so sec . 1.6 00 1- 1( a), (e) , Inc om e Tax Reg s. Des pi te nu m ero us op po rtu ni ti es to do so , pet it io ne r ha s n otpro vi de d any do cu m en ts to subs tant ia te th e d educ ti on s re sp on de ntdi sa ll owe d. Infact , at n o-6 -

[* 6] po in t h as pe ti ti on er ev ench al le ng edth es e d is al lo wan ces . Peti ti on er h as m ad e nu m ero us all eg at io ns reg ard in g re sp on de nt ’s con du ct , bu t h e h as co nt in ua ll y fai le d t o p res en t an y

ev id en ce o r arg um en t re ga rd in g h is tax li ab il it ie s. Th eref or e, we ho ldth atpe ti ti on er i s n oten ti tl edto th e d educ ti on s h e cl ai m edfor20 08 , be cau se he fai le d t o c arry his burd enof p ro vi ng th atres po nd en t’s d et erm in at io ns are i nc orrect . III. Un rep orte d In co m e Sect io n 6 1 d efi ne s g ro ss in co m e as in co m e fro m what ev er s ou rce d eri ve d. The co nc ep t o f in co m e und er s ect io n 6 1 i s b ro adgi ve n C on gr es s’ des ire to “ ta x a ll ga in s ex cep t tho se sp eci fic al ly exem pt ed .” Co m

m is si on er v . Glen sh aw Glas s C o., 34 8 U.S. 4 26 , 43 0 (1 95 5) ; Ir el an d v . Comm is si on er, 6 21 F.2d73 1, 7 34 -7 35 (5t h Ci r. 19 80 ). Sect io n 6 00 1 re qu ire s al l t axpa y ers to m ai nt ai n s uf fic ie ntreco rd s t o de te rm in e th ei r co rrec t t ax li ab il it ie s. Whentax pa y ers fai l t o k eep ad equa te bo ok s an d re co rd s, the Co m

m is si on er m ay

reco ns tru ctin co m e u si ng a m etho d tha t cl earl y refl ect s the ful l am ou ntof t he ir i nc om e. Sec. 4 46 ; M en eg uz zo v. Co m m is si on er, 4 3 T.C. 8 24 , 83 1 (1 96 5) ; s ee al so Mi ll er v . Comm is si on er, 2 37 F.2 d 8 30 , 83 8 (5 th Cir . 19 56 ), aff’g i n p art , rev ’g inpart T.C. M em o. 1 95 5- 11 2. The reco ns tru ct io n n eedon ly be rea so nabl e inth e li gh t o f al l s urro un di ng fact s-7 -

[* 7] an d c irc um st an ces . Gid di o v . Comm is si on er, 5 4 T.C. 1 53 0, 1 53 3 (1 97 0) ; Sch ro ed er v . Comm is si on er, 4 0 T.C. 3 0, 3 3 (1 96 3) . Res po nd en t u se d the bankde po si ts m etho d t o re co ns tru ctpe ti ti on er’s in co m e fo r 20 08 an d 2 00 9. Co urts ha ve lo ng acce pt edth e b an k d ep os it s m etho d. Cl ayto n v . Comm is si on er, 1 02 T.C. 63 2, 6 45 (19 94 ). Ban k d ep os it s ar e p rima faci e ev id en ce o f in co m e, Tok ars ki v. Co m m is si on er, 8 7 T.C. 7 4, 7 7 (1 98 6) , and th e ta xp ay er h as th e b ur de n o f sh owi ng th atan y bankde po si t i s n otin co m e, Est at e o f Mas on v. Co m

m is si on er, 6 4 T.C. 6 51 , 65 7 (1 97 5) , aff’d, 5 66 F.2d2 (6 th Ci r. 19 77 ). The b an k d ep os it s m etho d a ss um es th atall m on ey de po si te d i n a ta xp ay er’s b an k a cco un t dur in g agi ve n p eri odco ns ti tu te s t ax ab le in co m e, bu t the Gov ern m en t m

us t t ak e in to acco un t an y no nt ax ab le so ur ce o r de du ct ib le ex pe ns e of whi chitha s kno wled ge . DiLeo v. Co m m is si on er, 9 6 T.C. 8 58 , 86 8 (1 99 1) , aff’d, 9 59 F.2d16 (2dCir . 19 92 ). Usi ng th e b an k d ep os it s m etho d, re sp on de ntde te rm in edth atpe ti ti on er h ad rece iv edgro ss in co m e o f $2 53 ,94 5 i n 2 00 8 and$5 6,3 36 .91 in20 09 . Peti ti on er rep orte d i nc om e o f on ly $69 ,75 5 fo r 20 08 , di d n otfil e fo r 20 09 , andfai le d t o pr es en t an y

ev id en ce o r arg um en t d em on st rat in g i na ccu raci es inres po nd en t’s de te rm in at io ns . Peti ti on er h as no t ca rri edhi s b ur de n o f pr ov in g tha t the bank-8 -

[* 8] de po si ts res po nd en t i de nt ifi edwere n ottax ab le in co m e. Acco rd in gl y , we su st ai n re sp on de nt ’s det erm in at io ns of u nr ep orte d i nc om e. IV. Add it io ns to Tax andPen al ti es A. Bu rd enof P ro of The Co m m is si on er b ears th e b ur de n o f pr oduc ti on on th e ap pl ic ab il ity of ad di ti on s t o t ax an d p en al ti es . Sec. 7 49 1( c); Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). Once th e Co m m is si on er m eet s thi s b ur de n, the tax pa y er b ears th e b ur de n o f pr ov in g tha t the ad di ti on s t o t ax an d p en al ti es are i napp ro pr ia te be cau se of r eas on ab le cau se or o th erwi se . Hig be e v . Comm is si on er, 1 16 T.C. at 44 6- 44 7. B. Add it io ns to Tax Sect io n 6 65 1( a)(1 ) im

po se s an ad di ti on to tax forfai lure t o t im el y fil e a return unl es s the tax pa y er s ho ws tha t s uc h fa il ur e was du e to reas on ab le cau se an d no t wi ll fu l n eg le ct . Res po nd en t i m po se d o n p et it io ne r anad di ti on to tax for 3 fai li ng to fil e h is 20 09 in co m e ta x re tu rn . The p art ie s s ti pu la te d tha t p et it io ne r The ad di ti on to tax is equa l t o 5 % of t he am ou ntof t he tax requi redto be 3 sh own on th e return i f th e fai lu re t o fi le is no t fo r m or e th anon e m on th . An ad di ti on al 5% i s i m

po se d fo r eac h m on th or f ract io n the reo f in whi chth e fai lu re t o fil e co nt in ue s, t o am ax im um of 2 5% o f th e ta x. Th e ad di ti on to tax is im po se d o n th e n etam ou ntdu e. Sec. 6 65 1( a)(1 ) an d (b ); C ab ira c v . Comm is si on er, 1 20 T.C. 16 3, 1 68 n.9 (20 03 ).-9 -

[* 9] fai le d t o fi le hi s 2 00 9 t ax return. Acco rd in gl y , we con cl ud e th atres po nd en t ha s p ro du cedsu ffi ci en t ev id en ce t o s ho w th atth e se ct io n 6 65 1( a)(1 ) ad di ti on to ta x i s ap pr op ria te un le ss pe ti ti on er p ro ve s tha t h is fai lure t o fi le was due to reas on ab le cau se . Peti ti on er h as no t p ro du cedan y ev id en ce d em on st rat in g tha t h is fai lu re t o fi le was due to reas on ab le cau se . There fo re, we h ol d p et it io ne r li ab le for th e se ct io n 6 65 1( a)(1 ) ad di ti on to tax . 4 Sect io n 6 65 1( a)(2 ) im

po se s an ad di ti on to tax forfai lure t o t im el y pay th e am ountof t ax sh own on a ta xp ay er’s Fed eral in co m e ta x re tu rn . Sect io n 5 66 51 (a)( 2) ap pl ie s o nl y

when anam ou ntof t ax ap pe ars on th e ta xp ay er’s return. Cab ira c v . Comm is si on er, 1 20 T.C. 16 3, 1 70 (20 03 ); Ki ns lo w v. Co m m is si on er, T.C. Mem o. 2 00 2- 31 3. As s ta te d, p et it io ne r di d n otfil e a return fo r 20 09 ; h owe ve r, res po nd en t pr ep areda va li d S FR u nd er s ect io n 6 02 0( b) . Purs ua ntto sec ti on 66 51 (g )(2 ), an Hav in g c on cl ud edth atpe ti ti on er’s fai lu re t o t im el y fil e was witho ut 4 reas on ab le cau se , we nee d n otde te rm in e whe th er i t re su lt edfro m wil lfu l n eg le ct . See S ta ff IT, In c. v. Un it edSta te s, 4 82 F.3d79 2, 7 98 (5t h C ir. 2 00 7) . The ad di ti on to tax is equa l t o 0 .5% o f th e am ou ntsh own as t ax onth e 5 return i f th e fai lu re t o p ay is no t fo r m or e th anon e m on th , with an a dd it io na l 0 .5% fo r eac h a dd it io na l m on th or f ract io n the reo f du rin g wh ic h s uc h fa il ur e to pay co nt in ue s, n otex ceed in g 2 5% i n the ag gr eg at e. Sec. 6 65 1( a)(2 ). The ad di ti on to ta x u nd er s ec. 6 65 1( a)(1 ) is reduc edby the am ou ntof the ad di ti on un de r se c. 66 51 (a)( 2) for

any m on th(or

frac ti on th ereo f) t o wh ic h an a dd it io n t o t ax un de r se c. 66 51 (a)( 1) an d (2 ) ap pl ie s. Sec . 66 51 (c)( 1) .-1 0-

[* 10 ] SFR i s treat edas t he tax pa y er’s return fo r pu rp os es of d et erm in in g the se ct io n 6 65 1( a)(2 ) ad di ti on to tax . Res po nd en t h as pre se nt edev id en ce s ho win g th atpe ti ti on er d idno t m ak e an y tax paym en ts in20 09 . Accor di ng ly, we co nc lu de th atres po nd en t h as pro du cedsu ffi ci en t ev id en ce t o s ho w th atth e se ct io n 66 51 (a)( 2) ad di ti on to tax is ap pr op ria te un le ss pe ti ti on er p ro ve s tha t h is fai lu re t o pa y was due to reas on ab le cau se . Peti ti on er h as no t p ro du cedan y ev id en ce de m on st rat in g tha t h is fai lu re t o p ay th e ap pr op ria te am ou ntwas due to reas on ab le cau se . There fo re, we h ol d p et it io ne r li ab le forth e se ct io n 6 65 1( a)(2 ) ad di ti on to ta x. 6 C. Pen al ti es Sect io n 6 66 2( a) an d (b )(2 ) im po se s a 2 0% a ccu racy-rela te d p en al ty if an y pa rt o f anun de rp aym en t o f ta x re su lt edfro m a subs tant ia l u nd ers tate m en t o f in co m e ta x. A subs tant ia l und ers ta te m en t ex is ts if the am ou ntof t he un de rs ta te m en t ex ceed s the gre at er o f 10 % of t he tax requi redto be sh ownon th e return o r $5 ,00 0. Se c. 66 62 (d )(1 )(A)(i ) an d (i i). Res po nd en t d et erm in ed , andwe ag ree, tha t p et it io ne r is li ab le for th e 2 0% pe na lty un de r se ct io n 6 66 2 fo r th e 2 00 8 t ax y ear. Re sp on de ntde te rm in edth at Hav in g c on cl ud edth atpe ti ti on er’s fai lu re t o t im el y pay was wi th ou t 6 reas on ab le cau se , we nee d n otde te rm in e whe th er i t re su lt edfro m wil lfu l n eg le ct . See S ta ff IT, In c., 48 2 F .3dat 7 98 .-1 1-

[* 11 ] pe ti ti on er s ho ul d h av e rep orte d atax li ab il ity of $ 98 ,27 2 fo r 20 08 , bu t h e rep orte d z ero . The u nd ers ta te m en t i s g reat er than 1 0% o f th e ta x re qu ire d t o b e sh own on th e return, wh ic h i s g reat er tha n $ 5,0 00 . Accor di ng ly, we co nc lu de th at res po nd en t h as pro du cedsu ffi ci en t ev id en ce t o s ho w th atth e 2 0% p en al ty is ap pr op ria te . Purs uantto sec ti on 66 64 (c)( 1) , an a ccu racy-rela te d p en al ty und er s ect io n 66 62 do es no t ap pl y

to an y po rti on of a n u nd erp aym en t fo r whi cha ta xp ay er es tabl is he s tha t h e h adreas on ab le cau se an d a ct edingo odfai th . Peti ti on er h as no t pr oduc edev id en ce s uf

fic ie ntto sat is fy

sec ti on 66 64 (c)( 1) . There fo re, we h ol d pe ti ti on er l iabl e fo r th e 2 0% p en al ty und er s ect io n 6 66 2( a) an d (b )(2 ). Inreac hi ng ou r ho ld in gs he rei n, we h av e co ns id eredall arg um en ts m ad e, an d, t o the ex te ntno t m en ti on edab ov e, we co nc lu de th ey are m oo t, i rrel ev an t, o r witho utm eri t. To re fle ctth e fo reg oi ng an d re sp on de nt ’s con ces si on s, Deci si on wil l b e en te redfor res po nd en t i n the reduc edam ou nt s.