1Unless otherwise indicated, all section references are to

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

all Rule references are to the Tax Court Rules of Practice and

Procedure.

T.C. Memo. 1996-492

UNITED STATES TAX COURT

FRED WILLIE THOMAS, Jr., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13010-94. Filed November 4, 1996.

Donna M. Meek, for petitioner.

Michael D. Zima, for respondent.

MEMORANDUM OPINION

DEAN, Special Trial Judge: This case was assigned pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1

Respondent determined deficiencies in and additions to

petitioner's Federal income taxes as follows:
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2Petitioner has the burden of proving that any income he

received for his services related to work performed as an

employee rather than from self-employment. Green v.

Commissioner, T.C. Memo. 1996-107. Petitioner has not addressed

this issue. Consequently, to the extent we find that petitioner

received income for his services, such income is self-employment

income.

 Additions to Tax 

 Sec. Sec.

Year Deficiency 6651(a)(1) 6654(a)

1987 $3,446 $862 $186

1988 3,724 931 238

1989 5,137 1,284 347

The issues for decision are: (1) Whether petitioner earned

self-employment income2 during the 1987, 1988, and 1989 taxable

years in the amounts determined by respondent, and (2) whether

petitioner is liable for additions to tax under sections 6651 and

6654.

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

The stipulation of facts and the attached exhibits are

incorporated herein by reference. Petitioner resided in

Morriston, Florida, at the time he filed his petition.

Background

In late 1978 or early 1979, petitioner started Fred Thomas

Tile Service, a sole proprietorship engaged in the installation

of ceramic tile for residences. Petitioner continued this

business during the years in issue and until its termination in

1993. Petitioner employed his brother, Lorenzo Thomas, as a tile

setter from early 1987 through late 1989. Petitioner continued

to manage the business during this time period.
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Petitioner did not make estimated tax payments and did not

file individual Federal income tax returns for 1987, 1988, and

1989. Respondent received information returns from several

payors indicating that petitioner had earned self-employment

income in 1987, 1988, and 1989 in the respective amounts of

$9,525, $15,223, and $20,551. On April 22, 1994, respondent

issued to petitioner a notice of deficiency for the years at

issue.

Respondent reconstructed petitioner's income during the

years in issue using either the information returns or Bureau of

Labor Statistics. The Bureau of Labor Statistics represent

estimates of petitioner's annual living expenses. For 1987,

1988, and 1989, the respective amounts from the Bureau of Labor

Statistics are $14,693, $15,671, and $16,814. For the years in

issue, respondent determined that petitioner had self-employment

income equal to the greater of petitioner's annual living

expenses (as determined from the Bureau of Labor Statistics) or

the amount of self-employment income reported on the information

returns. Thus, respondent determined that petitioner had selfemployment income in 1987, 1988, and 1989, in the respective

amounts of $14,693, $15,671, and $20,551.

Discussion

1. Reconstruction of Income

Where, as here, a taxpayer fails to maintain adequate books

and records as required by section 6001, the Commissioner may
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reconstruct the taxpayer's income using any method that clearly

reflects income. Sec. 446(b); Petzoldt v. Commissioner, 92 T.C.

661, 687, 693 (1989); Meneguzzo v. Commissioner, 43 T.C. 824, 831

(1965); Sutherland v. Commissioner, 32 T.C. 862 (1959). The

method of reconstructing income may be indirect and need only be

reasonable in light of all surrounding circumstances. Holland v.

United States, 348 U.S. 121 (1954); Giddio v. Commissioner, 54

T.C. 1530, 1533 (1970); Schroeder v. Commissioner, 40 T.C. 30, 33

(1963).

Respondent reconstructed petitioner's income for the years

at issue using the source and application of funds method. This

method has long been regarded as a reasonable method of

determining income. See United States v. Johnson, 319 U.S. 503,

517-518 (1943); Meier v. Commissioner, 91 T.C. 273, 295-296

(1988). The source and application of funds method is based on

the assumption that the amount by which the taxpayer's

applications of funds exceed his known sources of funds is

taxable income, unless the taxpayer can show his expenditures

were made from some nontaxable source of funds. See Taglianetti

v. United States, 398 F.2d 558, 562 (1st Cir. 1968), affd. 394

U.S. 316 (1969).

The Commissioner's analysis should be adjusted, however,

whenever the taxpayer demonstrates: (1) The analysis does not

reflect, as a nontaxable source of income, funds accumulated from

prior taxable years and expended during the current year, or (2)
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the analysis includes, as an application of funds, amounts that

do not reflect expenditures made by the taxpayer during the year. 

Chandler v. Commissioner, T.C. Memo. 1996-51.

In the instant case, respondent used the Bureau of Labor

Statistics as a proxy for petitioner's application of funds

(i.e., expenditures). We have previously approved this type of

use when reconstructing a taxpayer's income. See Giddio v.

Commissioner, supra at 1533.

Petitioner essentially contends that the self-employment

income reported on the information returns represents the total

gross receipts of Fred Thomas Tile Service during the years in

issue. Petitioner contends that after paying all business

expenses (including paying Lorenzo Thomas for his labor), his

business either broke even or lost money, and, therefore, he had

no "income" during the years in issue. In the absence of any

evidence to corroborate this claim, we are unpersuaded.

Petitioner testified that he maintained records of all

business transactions, yet he did not provide any books or

records of the business during respondent's audit or before this

Court. Petitioner indicated that all business receipts were

deposited into and all business expenses were paid from a

business checking account, yet he did not submit the bank

statements into evidence. Petitioner did not submit into

evidence any check stubs, canceled checks, or Forms W-2

indicating the amount of wages paid to Lorenzo Thomas. With no
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3Section 6041(a) requires a payor to issue a Form 1099-MISC

to a nonemployee payee (as well as to respondent) regarding

remuneration for services only when such remuneration equals or

exceeds $600 in any taxable year.

evidence to support his claim, we are not convinced that

petitioner's business expenses equaled or exceeded income during

the years in issue. Nor are we convinced that the selfemployment income reported on the information returns represents

the total gross receipts of petitioner's business for each year.3

Petitioner asserts that he earned no income during the years

in issue because all income from his business was earned and

reported by Lorenzo Thomas. Petitioner testified that a back

injury prevented him from doing any of the actual tile setting

during the three years in issue. Therefore, petitioner asserts,

Lorenzo Thomas performed all the tile setting and earned all the

income from the business.

Petitioner did not offer medical records or any other

evidence to corroborate his claim that a back injury prevented

him from working during the years in issue. We also note that

during the audit of petitioner's returns he did not mention that

he had a back injury and did not assert that Lorenzo Thomas

earned all the income from the business. We hold that petitioner

has failed to show that he had business expenses that equaled his

income during the years in issue.

Petitioner also contends that he did not make the personal

expenditures attributed to him by respondent during the years in
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issue because his then wife, Ora Mae Thomas, supported him,

herself, and their daughter. Based on the facts in the record,

however, we find this claim implausible. The Bureau of Labor

Statistics indicate that a three-member household incurred

average annual living expenses during 1987, 1988, and 1989 in the

respective amounts of $28,549, $30,446, and $32,643. Ora Mae

Thomas earned wage income during 1987, 1988, and 1989 in the

respective amounts of $10,434.79, $5,705.21, and $12,762.00. 

That she could support a three-member household on such a meager

income seems unlikely.

Accordingly, we find that petitioner earned self-employment

income in the amounts determined by respondent for the years in

issue.

2. Additions to Tax Under Section 6651(a)(1)

Respondent determined an addition to tax under section

6651(a)(1) for each year in issue, asserting that petitioner

failed to file Federal income tax returns. In order to avoid

this addition to tax, petitioner must prove that his failure to

file was: (1) Due to reasonable cause and (2) not due to willful

neglect. Sec. 6651(a); United States v. Boyle, 469 U.S. 241, 245

(1985); In re Sanford, 979 F.2d 1511, 1512 (11th Cir. 1992). A

failure to file a Federal income tax return is due to reasonable

cause if the taxpayer exercised ordinary business care and

prudence and, nevertheless, was unable to file the return within

the prescribed time. In re Sanford, supra at 1514; sec.
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301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect means a

conscious, intentional failure or reckless indifference. United

States v. Boyle, supra at 245.

Petitioner testified that his tax preparer, Beatrice Corey

of Bee's Income Tax Service, advised him that he need not file a

return for the years in issue. Therefore, petitioner argues, his

failure to file was due to reasonable cause.

The responsibility to file returns and pay tax when due

rests upon the taxpayer and cannot be delegated; in general, the

taxpayer must bear the consequences of any negligent errors

committed by its agent in that regard. Logan Lumber Co. v.

Commissioner, 365 F.2d 846, 854 (5th Cir. 1966), affg. on this

issue T.C. Memo. 1964-126; Pritchett v. Commissioner, 63 T.C.

149, 173-175 (1974); Abernathy v. Commissioner, T.C. Memo. 1992-

237.

There is a well-recognized, albeit narrow, exception to the

rule that responsibility for filing accurate returns cannot be

delegated. When the taxpayer selects a competent tax adviser and

supplies him with all relevant information, it is consistent with

ordinary business care and prudence to rely upon his professional

judgment as to the taxpayer's tax obligations. United States v.

Boyle, supra at 250-251; Commissioner v. American Association of

Engrs. Employment, Inc., 204 F.2d 19 (7th Cir. 1953); Haywood

Lumber & Mining Co. v. Commissioner, 178 F.2d 769, 771 (2d Cir.

1950), modifying 12 T.C. 735 (1949). In order to qualify for
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this exception the taxpayer must demonstrate that: (1) The tax

adviser or return preparer had sufficient expertise to justify

reliance, Zabolotny v. Commissioner, 97 T.C. 385, 401-402 (1991),

affd. in part and revd. in part on other grounds 7 F.3d 774 (8th

Cir. 1993), (2) the taxpayer provided necessary and accurate

information, Coldwater Seafood Corp. v. Commissioner, 69 T.C.

966, 974 (1978), and (3) the taxpayer actually relied in good

faith on the tax adviser's or return preparer's judgment, New

York State Association of Real Estate Bds. Group Ins. Fund v.

Commissioner, 54 T.C. 1325, 1336 (1970); Kenner v. Commissioner,

T.C. Memo. 1974-273.

Petitioner has not shown that he qualifies for this

exception. First, there is no evidence in the record that Ms.

Corey possessed, or reasonably appeared to possess, sufficient

relevant expertise to warrant reliance on her judgment. 

Petitioner offered no evidence whatsoever regarding her

qualifications as a tax adviser. Second, petitioner did not

provide complete and accurate information to Ms. Corey. 

Petitioner indicated to Ms. Corey that he had no income during

the years in issue. In light of our previous holding that

petitioner earned self-employment income from his business, we

find that he did not fully disclose all relevant facts to his tax

adviser. Third, petitioner has not established that his failure

to file returns was in fact based on advice from Ms. Corey. 
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Accordingly, petitioner has not carried his burden of proving

reasonable reliance on a qualified tax adviser.

On brief, petitioner further argues that he had reasonable

cause for not filing returns because determining the proper

taxpayer to report the income from the tile setting business was

a complex legal issue. Even though several payors filed

information returns reporting that petitioner earned selfemployment income, petitioner contends that he believed Lorenzo

Thomas was the proper taxpayer, given that Lorenzo Thomas

performed all of the actual tile setting.

In some cases taxpayers have succeeded in avoiding additions

to tax by showing that the deficiency resulted from an honest and

reasonable misunderstanding of complex law. Metra Chem Corp. v.

Commissioner, 88 T.C. 654, 661 (1987) (no negligence for purposes

of sec. 6653(a)); Yelencsics v. Commissioner, 74 T.C. 1513, 1533

(1980) (same); Belz Inv. Co. v. Commissioner, 72 T.C. 1209, 1233-

1234 (1979), affd. 661 F.2d 76 (6th Cir. 1981) (same).

Petitioner's situation does not present a complex legal

issue reasonably susceptible of different interpretations. 

Petitioner earned income from his tile setting business that he

simply failed to report. Petitioner has failed to demonstrate

the existence of a situation that only a very sophisticated

taxpayer could reasonably be expected to comprehend.

We conclude that petitioner has not shown that his failure

to file returns for the years at issue was due to reasonable
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cause and not due to willful neglect. Accordingly, we sustain

respondent's determination that he is liable for additions to tax

under section 6651(a)(1).

3. Additions to Tax Under Section 6654

Respondent determined an addition to tax under section 6654

for each year in issue, asserting that petitioner failed to pay

estimated tax. This addition to tax is mandatory unless

petitioner proves that he has met one of the exceptions contained 

in section 6654. In re Sanford, 979 F.2d at 1514; Recklitis v.

Commissioner, 91 T.C. 874, 913 (1988). Because petitioner has

failed to do so, we sustain respondent on this issue.

To reflect the foregoing,

Decision will be entered

for respondent.