T.C. Mem o. 2 01 4- 25 8

UNITED STAT ES TAX COURT

PEYMON MOTTAHEDEHAND APRIL MOTTAHED EH, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 22 03 9- 11
. Fi le d Dec em be r 29 , 20 14
. Peym on Mo tt ah ed ehan d Ap ril Mo tt ah ed eh , forth em se lv es . Mi le s D. Fri edm anan d S eb as ti anVoth, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION
MORR ISON, Ju dg e: The p et it io ne rs , Peym on Mo tt ah ed ehan d Ap ril Mo tt ah ed eh , a m arri edco up le , di d n otfil e fed eral -in co m e-t ax returns forth e y ears 20 01 th ro ug h 2 00 6. Th e res po nd en t (the “ IRS” ) m ai le d asep arat e n ot ic e o f-2
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[* 2] de fic ie nc y

to each sp ou se for

th es e y ears . The n ot ic es of d efi ci en cy refl ect ed 1 th e fo ll owi ng de fic ie nc y

de te rm in at io ns an d a dd it io ns to tax : 2 Additions to t ax Yea r Petitioner Def iciency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
2001 Pey

mon Mottahedeh $8,203 $1,846 $2,051 $328 April Mottahedeh 4,634 1,043 1,159 185 2002 Pey

mon Mottahedeh 11,316 2,546 2,829 378 April Mottahedeh 3,331 749 833 111 2003 Pey

mon Mottahedeh 12,811 2,882 3,203 331 April Mottahedeh 3,704 833 926 -0- 2004 Pey

mon Mottahedeh 12,215 2,748 3,054 350 April Mottahedeh 3,471 781 868 -0- 2005 Pey

mon Mottahedeh 10,102 2,273 2,526 405 April Mottahedeh 2,669 601 668 107 2006 Pey

mon Mottahedeh 15,560 3,501 3,890 736 April Mottahedeh 4,901 1,103 1,225 232 Afte r co nc es si on s b y

th e p art ie s, th e fo ll owi ng is su es rem ai n t o b e d eci de d:

3
The no ti ce t o Ap ril Mo tt ah ed ehwas i ss ue d t o “ Apr il L. Beat ty”, her fo rm er 1 na m e. All do ll ar am ount s ar e ro un de d t o t he ne ares t d ol lar. Unl es s o th erwi se

2 no te d, al l re fere nc es to sec ti on s ar e to th e In te rn al Rev enue Co de ineffe ctforth e y ears at i ss ue , 20 01 th ro ug h 2 00 6 a ndall Ru le Refe ren ces are t o t he Tax C ou rt Ru le s o f Prac ti ce an d P ro cedur e. The Mo tt ah ed eh s co nc ed edth atApri l M ot tahe de h re cei ve d wag e in co m e 3 (co nt in ue d...)-3
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[* 3] (1 ) Whe th er the IRS co rrec tl y de te rm in edth atth e Mo tt ah ed eh s ea rn edth e fo ll owi ng am ou nt s o f in co m e in th e ag gr eg at e: 4

Year Am ou nt 20 01 $4 4,7 57 20 02 61 ,53 6 20 03 69 ,65 3 20 04 66 ,92 4 20 05 56 ,85 0 20 06 83 ,62 9 W e h ol d t ha t the de te rm in at io ns are co rrec t. See in fra p art1.

(...co nt inue d) 3 of $1 1,4 69 du rin g 2 00 1. Th e IRS co nc ed edth atth e Mo tt ah ed eh s ar e n otli ab le for ad di ti on s t o t ax un de r se c. 66 54 forth e ta x year 20 01
. Fo r 20 01 , th e IRS de te rm in edth atth e Mo tt ah ed eh s’ sp en di ng for th e y ear 4 was $4 4,7 57 , th e num

be r ap pe ari ng inth e tabl e fo r 20 01 . The IR S al so de te rm in edth atth e Mo tt ah ed eh s wer e requi redto in cl ud e th is am ou ntinin co m e fo r 20 01 . In ad di ti on to th is am ou nt , th e IRS de te rm in edth atApri l M ot tahe de h earn ed$1 1,4 69 inwage s fo r 20 01 . The Mo tt ah ed eh s co nc ed e th atsh e earne d t hi s am ountof wa ge s. Th e Mo tt ah ed eh s ch al le ng e th e IRS ’s det erm in at io n t ha t the y earn ed$4 4,7 57 inin co m e fo r 20 01 on va rio us gro un ds , bu t the y do no t ar gu e th at th e IRS erre d b y

co m bi ni ng th e $ 44 ,75 7 a m ou ntitde te rm in edth e Mo tt ah ed eh s earn edon th e b as is of t he ir s pe nd in g a ndth e $ 11 ,46 9 t ha t Ap ril Mo tt ah ed eh earn edinwage s, fo r a t ot al in co m e am ou ntof $ 56 ,22 5. Th eref or e, itis ap pr op ria te to de fin e th e d is pu te d i ss ue for20 01 as wh ethe r th e IRS co rrec tl y de te rm in edth atth e Mo tt ah ed eh s wer e requi redto in cl ud e $ 44 ,75 7 i n i nc om e. Fo r furth er ex pl an at io n, s ee i nf ra n ot es 12 an d 1 4.-4
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[* 4] (2) Whe th er u nd er Ca li fo rn iaco m m un ity -p ro pe rty law th e in co m e is Peym on Mo tt ah ed eh ’s so le pro pe rty or co m m un ity pro pe rty. W e h ol d t ha t i t i s
co m m un ity pro pe rty. See in fra p art2. (3 ) Whe th er the Mo tt ah ed eh s ar e li ab le forsec ti on -6 65 1( a)(1 ) ad di ti on s t o t ax fo r fai li ng to fil e ta x re tu rn s fo r th e ta x years 2 00 1, 2 00 2, 2 00 3, 2 00 4, 2 00 5,
an d 2 00 6. We ho ldth atth ey are l iabl e. See i nf

ra p art3.a. (4 ) Whe th er the Mo tt ah ed eh s ar e li ab le forsec ti on -6 65 1( a)(2 ) ad di ti on s t o t ax fo r fai li ng to pa y

tax forth e ta x years 2 00 1, 2 00 2, 2 00 3, 2 00 4, 2 00 5, an d 20 06 . W e h ol d tha t the y

are l iabl e. See i nf

ra p art3.b
. (5 ) Whe th er Pe ym on Mo tt ah ed ehis li ab le forsec ti on -6 65 4 a dd it io ns to tax for fai li ng to pa y

est im at edin co m e ta x fo r th e ta x years 2 00 2, 2 00 3, 2 00 4, 20 05 , 20 06 , andwhethe r Apr il Mo tt ah ed ehis li ab le for20 02 , 20 05 , and 20 06 . W e h ol d tha t the y

are l iabl e. See i nf

ra p art3.c. FINDINGS OF FACT The st ip ul at io n o f fac ts , as s up pl em en te d, i s i nc or po rat edhe rei n b y

th is refe ren ce. At the ti m e th ey

fil edth ei r pe ti ti on , th e Mo tt ah ed eh s re si de d i n C al ifo rn ia
. The refo re, anap pe al of o ur de ci si on inth is cas e wou ldgo to th e U.S. Co urt o f App eal s fo r th e Nin th Cir cu itun le ss th e p art ie s s ti pu la te ve nu e in an othe r ci rcu it
.-5
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[* 5] See s ec. 7 48 2( b) (1 ), (A), (2 ). In r es ol vi ng th is cas e, we fo ll ow the pre ced en t of th e Nin th Cir cu it . See Go ls env. Co m mis si on er, 5 4 T.C. 7 42 , 75 6- 75 8 (1 97 0) , aff’d, 4 45 F.2d98 5 (1 0t h C ir. 1 97 1)
. The Mo tt ah ed eh s wer e m arri eddu rin g t he y ears 20 01 th ro ug h 2 00 6. Peym on Mo tt ah ed ehop erat eda bu si ne ss cal le d the “ Free do m Law Sch oo l”
. Apr il Mo tt ah ed ehwas h eav il y in vo lv edinth e b us in es s. Si nc e atlea st19 99 , th e Free do m Law Sch oo l h as org an iz edco nf eren ces att en de d b y

hu nd red s o f pe op le
. The Free do m

Law Sch oo l ch arg edfees to th e at te nd ees . The Fre ed om Law Sch oo l al so so ldbo ok s, t ap es , CDs, an d DVDs . It al so so ldpa ck ag es of s erv ic es , in cl ud in g:

• th e “ Si m

pl e Fre ed om

Pack ag e” (f

or anin it ia l fe e o f $4 ,00 0) ;

• th e “ Ro y al Free do m Pack ag e” (f

oranin it ia l fe e o f $6 ,00 0)
. The Free do m

Law Sch oo l al so off

eredm ul ti le ve l m ark et in g a rran ge m en ts , 5 in cl ud in g:

• “ Free do m

Fig ht er i n Tra in in g” ;

• “ Free do m

Pro m ot er”;

Ina m ul ti le ve l m ark et in g a rran ge m en t, a s al es pe rs on earn s a c omm is si on 5 on sal es m ad e b y

othe r sa le sp ers on s wh o wer e rec ru it edby the sal es pe rs on . See Ell io ttv. Co m

m is si on er, 9 0 T.C. 9 60 (19 88 ), aff’d wi th ou t p ub li sh edop in io n, 8 99 F.2 d 1 8 (9 th Cir . 19 90 ), fo r a g en eral di sc us si on of m ul ti le ve l m ark et in g.-6
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[* 6] • “ Free do m

Lead er”; an d

• “ Mas te r Free do m

Lead er”. Thro ug h i ts co nf

eren ces , m at eri al s, an d s erv ic e p ack ag es , th e Fre ed om Law Sch oo l p ro m ot edva rio us tec hn ique s fo r ev ad in g t he pa ym en t o f fed eral in co m e ta xe s. Th e te ch ni qu es in cl ud ed :

• Mi ni m iz e fi na nc ia l re co rd s. 6

• Do n otgi ve in fo rm at io n t o t he IRS. 7

• Do n otfil e ta x re turn s. 8
Acco rd in g t o t he Free do m Law Sch oo l: “ ALL reco rd s ca n a ndwil l b e u se d 6 ag ai ns t you.” Acco rd in g t o t he Free do m Law Sch oo l, a t ax pa y er re cei vi ng anIRS 7 su m m on s s ho ul d g iv e th e IRS no in fo rm at io n o th er tha n t he tax pa y er’s n am e an d ad dr es s. Acco rd in g t o t he Free do m Law Sch oo l: If the aware c it iz endi d n otha ng hi m se lf b y co nf es si ng to earn in gs fro m em pl oyers o r ot he r th irdpa rti es , th e IRS ag en ts wou ldactua ll y ha ve to workan d c on du cta fu ll in ve st ig at io n i n o rd er t o fi nd witne ss es who co ul d t es ti fy th athe ha d a ctua ll y

work edor p erfo rm ed se rv ic es forth e th irdpa rty payers. Add it io na ll y , th e IRS wou ldha ve to bri ng to co urt the ori gi na l o f ALL th e can cel le d c he ck s tha t wo ul d ba ckup th e IRS ’ cl ai m s ag ai ns t you. Do y outh in k t hi s i s ea sy for the IRS t o d o? Acco rd in g t o t he Free do m Law Sch oo l: 8 Why are fil ers so EASY to RAPE an d ABUS E by th e IRS ? Becaus e th es e m is in fo rm edpe op le , by VOLUNTA RILY fi ll in g o uta 10 40 (co nt in ue d...)-7
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[* 7] The Mo tt ah ed eh s co ll ect edth e fee s p ai d b y th e Fre ed om

Law Sch oo l’s
cu st om ers . Peym on Mo tt ah ed ehals o re pr es en te d t ax pa y ers be fo re the Cal ifo rn ia Fran ch is e Tax Bo ardfora fee. The Mo tt ah ed eh s ap pl ie d t he tax -ev as io n t ech ni qu es advo cat edby the Free do m Law Sch oo l t o t he ir o wn fi na nc ia l af fai rs (in cl ud in g t he op erat io n o f th e Free do m Law Sch oo l an d P eym on Mo tt ah ed eh ’s rep res en ta ti on of t ax pa y ers be fo re the Cal ifo rn iaFran ch is e Tax Bo ard ). They enco ur ag edth ei r cu st om ers to pa y th em incas h. Th ey

tri edto av oi d b an ks an d o th er fi na nc ia l i ns ti tu ti on s. Th ey di d n otge ne ral ly keep fin an ci al reco rd s. Th ey m as ke d t he ir o wne rs hi p o f two pr op ert ie s fr om

th e IRS th ro ug h s ha m

tru starrang em en ts . They didno t fi le 9 fed eral -in co m e-t ax returns forth e ta x years 2 00 1 t hr ou gh 20 06
. InJan uary

20 08 , th e IRS be ga n a n aud itof t he Mo tt ah ed eh s’ fed eral
in co m e-t ax li ab il it ie s fo r th e y ears 20 01 th ro ug h 2 00 6. The IR S rev enue ag en t 1 0 (...co nt inue d) 8 In co m e Tax Co nf

es si on form

ha d g iv enth e IRS th e fu ll lau nd ry li st of ev erythi ng th ey

own , so th atth e IRS kn ows WHERE to go to st eal th ei r vi ct im ’s wealt h a ndass et s. The two pro pe rti es are a h ou se inPh el an , Cal ifo rn ia , inwhi chth e 9 Mo tt ah ed eh s l iv e an d apro pe rty in Vi ct orvi ll e, Cal ifo rn ia
. Befo re the au di t fo r th es e y ears , th e IRS ha d o th er i nt erac ti on s wi th 1 0 Peym onMo tt ah ed eh . It h adatt em pt edto co ll ectde li nque nttax es forpri ortax (co nt in ue d...)-8
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[* 8] as si gn edto th e au di t wro te a le tt er t o t he Mo tt ah ed eh s i nv it in g t he m to m eet with h er o n M arch 21 , 20 08 , at an IRS o ffi ce i n S anBern ard in o. The 1 1 Mo tt ah ed eh s d idno t ap pe ar atth e March 21 , 20 08 m eet in g. On M arch 28 , 20 08 , th e rev enue ag en t s erv edeach of t he Mo tt ah ed eh s wi th
a su m m on s re qu es ti ng th atth ey bri ng in fo rm at io n abo utth e so -cal le d S im pl e Free do m Pack ag e an d t he so -cal le d R oyal Fre ed om Pack ag e (i nc lu di ng th e n am es of an y on e who ha d b ou gh t the se servi ce p ack ag es ) to he r of fic e in Lon g B each , Cal ifo rn ia , at 9 a.m ., Mon da y , Apri l 2 8, 2 00 8. OnFri da y , Apri l 2 5, 2 00 8, Pe ym on Mo tt ah ed ehlef

t v oi cem ai l m es sa ge s wi th th e rev enue ag en t as ki ng forhe r fax
nu m be r so th athe co ul d fa x h er a l et te r ab ou t the su m m on se s. A da y

lat er, o n Satur da y , Apri l 2 6, 2 00 8, h e m ai le d alet te r ab ou t the su m m on se s t o t he rev enue ag en t b y ex pr es s m ai l. Inth e le tt er the Mo tt ah ed eh s s ta te d tha t the y wou ldco m

pl y with t he su m

m on se s o nl y

if the rev enue ag en t an swe red36 qu es ti on s s etforth in th e le tt er. Inth e le tt er the Mo tt ah ed eh s al so st at edth atth e Lon g B each off ic e was to o fa r fro m

th ei r ho us e in Ph el an , at l eas t 1 -1 /2 ha lf h ou rs away . They su gg es te d
(...co nt in ue d) 1 0 y ears . It h adin ve st ig at edhi m forpro m ot in g abu si ve tax sh el te rs an d fo r cri m in al ta x v io la ti on s. SanBern ard in o i s b etweenth e IRS ag en t’s o ffi ce i n Lo ng Beac h a ndth e 1 1 Mo tt ah ed eh s’ ho us e in Ph el an .-9
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[* 9] th ey m eetin st eadina “ li br ary m eet in g ro om ” in eithe r SanBern ard in o, Ont ari o, o r Ri ve rs id e. The Mo tt ah ed eh s d idno t ap pe ar atth e m eet in g s ch edul edfor9 a.m ., Apri l 28 , 20 08 . At 9: 22 a.m . th atda y , th e rev enue ag en t s en t an em ai l t o s om e o th er IR S
em pl oyees s ta ti ng th atsh e h adli st en edto Peym on Mo tt ah ed eh ’s Apri l 2 5, 2 00 8
vo ic em ai ls inwhi chhe ha d re qu es te d h er fa x n um be r in ord er t o s en d h er a l et te r ab ou t the su m

m on se s. Inhe r em ai l the rev enue ag en t co m pl ai ne d t ha t s he di d n ot
wan t t o c al l Pe ym onMo tt ah ed ehbe cau se he m ig htbe pl ay in g “ an ot he r gam e”. Non ethe le ss , th e rev enue ag en t ca ll edPeym onMo tt ah ed ehon Apri l 2 8. Un ab le to
reac h h im , sh e le ft h im

a vo ic em ai l m es sa ge with h er t el ep ho ne nu m be r. He di d
no t re tu rnhe r cal l. Lat er o n t he same day , th e rev enue ag en t re cei ve d the let te r ab ou t the su m

m on se s tha t Pe ym on Mo tt ah ed ehha d m ai le d o n Ap ril 26 , 20 08
. On J un e 2 0, 2 00 8, the rev enue ag en t s en t a wri tt enreque stto Peym on Mo tt ah ed ehforth e rec or ds of h is bu si ne ss act iv it ie s fo r th e y ears 20 01 th ro ug h 20 06 . She reque st edth athe m ai l the reco rd s t o h er b y Ju ly 7, 20 08 . Peym on Mo tt ah ed ehdi d n otm ai l h er the reque st edreco rd s. Bes id es see ki ng in fo rm at io n fr om th e Mo tt ah ed eh s, the rev enue ag en t al so
so ug htin fo rm at io n fr om

va rio us pa rti es with wh om th e Mo tt ah ed eh s d idbu si ne ss . Howev er, s he was u nabl e to ge t en ou gh in fo rm at io n t o d ire ct ly det erm in e th e-1 0-

[* 10 ] am ou nt s o f th e Mo tt ah ed eh s’ in co m e. Co ns eque nt ly, sh e d et erm in edth ei r in co m e b y

ass um in g t ha t the ir a nn ua l i nc om e was equa l t o t he ir ann ua l s pe nd in g. To es ti m at e so m e cat eg or ie s o f th e Mo tt ah ed eh s’ sp en di ng , th e ag en t re li edon
av erag e sp en di ng st at is ti cs fro m th e Bu reauof Lab orSta ti st ic s. Fo r ot he r cat eg or ie s o f sp en di ng (cat eg or ie s fo r whi chsh e h adsp eci fic in fo rm at io n) , sh e
es ti m at eddi rect ly how m uc h t he Mo tt ah ed eh s s pe nt . Usin g t hi s co m bi ne d ap pr oa ch , th e ag en t m ad e th e fo ll owi ng est im at es of t he co up le ’s sp en di ng : $4 4,7 57 for20 01 , $6 1,5 36 for20 02 , $6 9,6 53 for20 03 , $6 6,9 24 for20 04 , $5 6,8 50 fo r 20 05 , and$8 3,6 29 for20 06 . For i nc om e-t ax purp os es , th e rev enue ag en t
as su m edth ateach sp ou se earn edha lf o f eac h o f th es e an nu al sp en di ng est im at es . 1 2 Fo r 20 01 , ho wev er, the re i s a d ev ia ti onth atis be stexpl ai ne d a fte r 1 2 ex pl ai ni ng th e o th er fi ve y ears , 20 02 th ro ug h 2 00 6. Fo r 20 02 , th e rev enue ag en t as su m edth atPeym onMo tt ah ed ehha d $ 30 ,76 8 i n g ro ss in co m e an d t ha t Ap ril Mo tt ah ed ehals o h ad$3 0,7 68 . For 2 00 3, the rev enue ag en t as su m edth atPeym on Mo tt ah ed ehha d $ 34 ,82 6 i n g ro ss in co m e an d t ha t Ap ril Mo tt ah ed ehals o h ad $3 4,8 26 . For 2 00 4, the rev enue ag en t as su m edth atPeym on Mo tt ah ed ehha d $3 3,4 62 ingro ss in co m e an d t ha t Ap ril Mo tt ah ed ehals o h ad$3 3,4 62 . For 2 00 5, th e rev enue ag en t as su m edth atPeym on Mo tt ah ed ehha d $ 28 ,42 5 i n g ro ss in co m e an d t ha t Ap ril Mo tt ah ed ehals o h ad$2 8,4 25 . For 2 00 6, the rev enue ag en t as su m edth atPeym onMo tt ah ed ehha d $ 41 ,81 4 i n g ro ss in co m e an d t ha t Ap ril Mo tt ah ed ehals o h ad$4 1,8 14 . Thu s fo r eac h year fro m 20 02 th ro ug h 2 00 6, the rev enue ag en t as su m edth ateach sp ou se earn edha lf o f th e ag gr eg at e sp en di ng es ti m at e. Fo r 20 01 , ho wev er, the rev enue ag en t as su m edth atApri l M ot tahe de h earn ed$1 1,4 69 inwage s p lu s $ 22 ,37 8 (h al f of th e ag gr eg at e sp en di ng est im at e), a to ta l g ro ss in co m e fo r he r of $3 3,8 47 . The rev enue ag en t as su m edPeym on Mo tt ah ed ehearn ed$2 2,3 78 ingro ss in co m e (h al f of th e ag gr eg at e sp en di ng

(co nt in ue d...)-1 1-

[* 11 ] Fo r se lf- em

pl oym en t-t ax pu rp os es , th e rev enue ag en t as su m edth atPeym on Mo tt ah ed ehalo ne earn edsel f-em pl oym en t i nc om e equa l t o t he am ou ntth e
rev enue ag en t es ti m at edth e co up le sp en t fo r eac h year. Usi ng th e ab ov ede sc rib edde te rm in at io ns , est im at es , andass um pt io ns to cal cu la te each sp ou se ’s ta x l iabi li ty, th e IRS pre pa reda subs ti tu te for return fo r eac h s po us e fo r eac h o f th e si x years. Th e n ot ic e o f de fic ie nc y sen t t o e ach sp ou se refl ect edth e sa m e ta x cal cu la ti on s u se d i n p rep ari ng th e subs ti tu te s fo r returns . OPINION 1. The IRS co rrec tl y

de te rm in edth atth e Mo tt ah ed eh s earn edinth e ag gr eg at e $4 4,7 57 for

20 01 , $6 1,5 36 for20 02 , $6 9,6 53 for20 03 , $6 6,9 24 for20 04 , $5 6,8 50 for

20 05 , and$8 3,6 29 for

20 06
. Sect io n 1 im

po se s an in co m e ta x o n annua l t ax ab le in co m e. Taxabl e in co m e is de fin edas g ro ss in co m e m inus de du ct io ns . Sec. 6 3( a). Gro ss in co m e in cl ud es in co m e fro m

an y so ur ce, i nc lu di ng co m

pe ns at io n fo r se rv ic es . Sec. 61 (a)( 1)
. The in co m e ta x l iabi li ty of a m arri edco up le who fil e a joi ntreturn i s cal cu la te d b y

ag gr eg at in g t he sp ou se s’ in co m e. Sec. 6 01 3( d) (3 ). The re su lt in g t ax li ab il ity is joi nt ly borne by the co up le . Id. Bu t fo r a m arri edco up le who , li ke th e (...co nt in ue d) 1 2 am ount ).-1 2-

[* 12 ] Mo tt ah ed eh s, d o n otfil e a joi ntreturn, a s ep arat e in co m e ta x i s i m po se d o n each sp ou se ’s in co m e. Sec. 1 (d ); s ee al so Ordl oc k v . Comm is si on er, 5 33 F.3d 11 36 , 11 38 (9t h C ir. 2 00 8) , aff’g 1 26 T.C. 47 (20 06 ). Thu s, the in co m e ta x im po se d o n t he in co m e o f eac h o f th e Mo tt ah ed eh s i s ca lc ul at edby det erm in in g th e in co m e o f eac h s po us e. As a p rel im in ary st ep th e IRS fir stde te rm in ed
am ount s o f in co m e th atth e Mo tt ah ed eh s earn edinth e ag gr eg at e. W e co ns id er the
co rrec tn es s o f th is de te rm in at io n i n t hi s p art1 o f th e o pi ni on . See i nf ra p art2 fo r th e d is cu ss io n o f th e que st io n o f ho w th es e am ou nt s s ho ul d b e al lo cat edto each sp ou se . Inth e n ot ic es of d efi ci en cy , th e IRS de te rm in edth atth e Mo tt ah ed eh s
earn edth e fo ll owi ng am ou nt s o f in co m e in th e ag gr eg at e: $4 4,7 57 for20 01 , $6 1,5 36 for20 02 , $6 9,6 53 for20 03 , $6 6,9 24 for20 04 , $5 6,8 50 for20 05 , and $8 3,6 29 for20 06
. The se am ou nt s wer e unr ep orte d, as ne ithe r of th e Mo tt ah ed eh s fi le d i nc om e ta x re turn s fo r th e y ears 20 01 th ro ug h 2 00 6. InW ei m ers ki rch v. Co m mis si on er, 59 6 F .2d35 8, 3 60 -3 62 (9t h C ir. 1 97 9) , rev ’g 67 T.C. 67 2 (1 97 7) , th e Co urt o f App eal s fo r th e Nin th Cir cu ithe ldth atforth e IRS to pre va il ina cas e in vo lv in g
un rep orte d i nc om e, itm

us t b ui lda m in im al ev id en ti ary fo un da ti on th atli nk s the ta xp ay er t o t he all eg edin co m e-p ro du ci ng act iv it ie s. We fin d t ha t s uf fic ie nt-1 3-

[* 13 ] ev id en ce l in ks Peym on Mo tt ah ed ehto th e in co m e-p ro du ci ng act iv it ie s o f (1 ) th e Fre ed om

Law Sch oo l, an d (2 ) pr act ic e b efo re the Cal ifo rn iaFran ch is e Tax Bo ard . W e fi rs t co ns id er the Free do m Law Sch oo l. The Mo tt ah ed eh s s ti pu la te d th at“ Peym on Mo tt ah ed ehis th e p res id en t an d fo un de r of Free do m Law Sch oo l”
an d t ha t “ Peym on Mo tt ah ed ehwas the pre si de ntof F reed om Law Sch oo l
co nt in uo us ly dur in g t he y ears at i ss ue .” Furth erm or e, do cu m en tary ev id en ce
co nn ect s Pe ym on Mo tt ah ed ehto th e Fre ed om Law Sch oo l. Fo r ex am

pl e, Peym on Mo tt ah ed eh ’s nam e was m en ti on edincu st om er t es ti m on ia ls onth e Fre ed om Law Sch oo l’s web si te . His n am e an d p ic tu re were pro min en tl y di sp lay edinot he r pr om ot io na l m at eri al s o f th e Fre ed om Law Sch oo l. Do cu m en tary ev id en ce al so
es tabl is he s tha t Ap ril Mo tt ah ed ehhe lp edop erat e th e Fre ed om Law Sch oo l b y
arra ng in g c on fere nc es an d h an dl in g i ts fin an ces . Her na m e ap pe ars on sev eral ch eck s an d m on ey

ord ers rece iv edfro m

cu st om ers of t he Free do m Law Sch oo l. Ch eck s an d m on ey

ord ers fro m

th e cu st om ers were d ep os it edin to he r acc ou ntat Arro whe adCred itUni on . There are s ev eral hu ndredpa ge s o f th es e d oc um en ts . Apr il Mo tt ah ed eh ’s nam e ap pe ars onva rio us leg al do cu m en ts th atth e Mo tt ah ed eh s u se d t o c on ceal th ei r own ers hi p o f two pro pe rti es . To be tt er co nc eal th ei r own ers hi p, s he als o app aren tl y wrot e le tt ers to len de rs un de r a fak e le tt erh ead fal se ly clai m in g t ha t s he m an ag edpro pe rty as a tru st ee. As t o P eym on-1 4-

[* 14 ] Mo tt ah ed eh ’s in vo lv em en t i n p ract ic e b efo re the Cal ifo rn iaFran ch is e Tax Bo ard , th e rec or d c on ta in s co pi es of o ffi ci al an no un cem en ts of t he he ari ng s in vo lv in g t he bo ardinwhi chhe was l is te d a s the rep res en ta ti ve of s ev eral ta xp ay ers . One o f hi s cu st om ers tes ti fie d t ha t dur in g t he y ears 20 03 th ro ug h 2 00 9 he pa ida to ta l o f $2 2,0 00 to Peym on Mo tt ah ed ehto rep res en t h im be fo re the Cal ifo rn iaFran ch is e Tax Bo ard . The p aym en ts were m ad e in cas h a t Pe y m on Mo tt ah ed eh ’s reque st . Add it io na ll y , Apri l M ot tahe de h p art ic ip at edinPeym on Mo tt ah ed eh ’s pra ct ic e b efo re the Cal ifo rn iaFran ch is e Tax Bo ard . She he lp ed op erat e th e Fre ed om

Law Sch oo l, an d t he reco rdde m on st rat es th athi s p ract ic e be fo re the Cal ifo rn iaFran ch is e Tax Bo ardwas l in ke d t o the Free do m Law Sch oo l. Fo r ex am pl e, th e web si te forth e Fre ed om Law Sch oo l o ffer edass is tanc e to pe rs on s i nv ol ve d wi th di sp ut es with t he st at e ta xi ng au th or it ie s s uc h a s the Cal ifo rn iaFran ch is e Tax Bo ard
. W e co nc lu de th atth e IRS ha s es tabl is he d t he m in im al ev id en ti ary fo un da ti on requi redby W ei m ers ki rchv. Co m m is si on er, 5 96 F.2dat 3 60 -3 62 . The IRS h as li nk edbo th Peym on Mo tt ah ed ehan d Ap ril Mo tt ah ed ehto th e in co m epr oduc in g a ct iv it ie s o f Free do m Law Sch oo l an d t he pra ct ic e b efo re the Cal ifo rn ia Fran ch is e Tax Bo ard . Techn ic al ly, itis su ffi ci en t fo r th e IRS to pro ve a li nkto Peym onMo tt ah ed ehalo ne . See Co st a v . Commis si on er, T.C. Mem o. 1 99 0- 57 2,-1 5-

[* 15 ] 60 T.C.M. (CCH) 1 17 8, 1 18 6- 11 87 (19 90 ). Thi s i s b ecau se th e in co m e fro m th es e act iv it ie s i s co m

m un ity pro pe rty. See in fra p art2. Nex t we co ns id er wh ethe r th e IRS ’s det erm in at io ns are s up po rte d b y th e pr ep on de ran ce o f th e ev id en ce. The fa ctua l que st io n t o b e res ol ve d fo r 20 01 is 1 3 A tax pa y er g en eral ly has th e b ur de n o f pr oo f reg ard in g d et erm in at io ns in 1 3 th e n ot ic e o f de fic ie nc y . Tax Ct . R. Pract . & Pro c. 14 2( a); Ro ckwell v. Co m m is si on er, 5 12 F.2d88 2, 8 85 (9t h C ir. 1 97 5) , aff’g T.C. Mem o. 1 97 2- 13 3. The burd enof p ro of

is th e b ur de n o f pe rs ua si on , whi chrequi res th e ta xp ay er t o “ sh ow the m eri ts of * * * [th e] clai m by at le as t a p rep on de ran ce o f th e ev id en ce.” Ro ckwell v. Co m

m is si on er, 5 12 F.2dat 8 85 ; s ee al so Hardy v. Co m m is si on er, 1 81 F.3 d 1 00 2, 1 00 4 (9 th Cir . 19 99 ), aff’g T.C. Me m o. 1 99 7- 97 ; Rapp v. Co m m is si on er, 7 74 F.2d93 2, 9 35 (9t h C ir. 1 98 5) . Sec. 7 49 1( a) p ro vi de s an ex cep ti on to th e g en eral rul e th atth e ta xp ay er b ears th e b ur de n o f pr oo f. Sec. 74 91 (a) i m

po se s the burd enof p ro of on th e IRS forfactua l i ss ue s fo r whi chfou r co nd it io ns ha ve be enm et : (1 ) th e ta xp ay er co m pl ie d wi thth e subs tant ia ti on requi rem en ts of t he Int ern al Rev enue Co de , (2) th e ta xp ay er m ai nt ai ne d a ll reco rd s requi redun de r th e In te rn al Rev enue Co de , (3) th e ta xp ay er co op erat edwith reas on ab le reque st s b y

th e IRS forwitne ss es , in fo rm at io n, d oc um en ts , m eet in gs , an d i nt erv ie ws, an d (4 ) th e ta xp ay er i nt ro du cedcred ib le ev id en ce. Sec . 74 91 (b ) pr ov id es an ot he r ex cep ti on to th e g en eral rul e th atth e ta xp ay er b ears th e b ur de n o f pr oo f: “ Inth e cas e o f anin di vi du al tax pa y er, the Secr et ary sh al l h av e th e b ur de n of pro of inany co urt p ro ceed in g wi th res pe ctto an y it em of i nc om e whi chwas reco ns tru ct edby the Secr et ary so le ly thro ug h the us e o f st at is ti cal in fo rm at io n o n un rel at edtax pa y ers .” The t erm “ Secr et ary” m ean s “ th e Sec ret ary of th e Treas ury orhi s d el eg at e”, s ec. 7 70 1( a)(1 1) (B), an d the term “ hi s d el eg at e” m ean s “ an y of fic er, em pl oyee, or a ge nc y

of t he Treas ury

Depa rtment dul y

au th or iz edby the Secr et ary of

th e Treas ury

di rect ly, orin di rect ly by on e o r m or e red el eg at io ns of au th or ity , to pe rfo rm

th e fu nc ti on m en ti on edor d es cri be d i n the co nt ex t” , sec . 77 01 (a)( 12 )(A)(i ). The M ot tahe de hs co nt en d t ha t s ec. 7 49 1( a) an d (b ) im po se s th e b ur de n o f pr oo f on th e IRS . W e res ol ve all factua l i ss ue s i n t hi s ca se ba se d o n a p rep on de ran ce o f ev id en ce. The refo re, we n eedno t co ns id er wh ethe r th e IRS ha s the bu rd enof p ro of

. See Est at e o f Bo ng ardv. Co m m is si on er, 1 24 T.C. 95 ,

(co nt in ue d...)-1 6-

[* 16 ] th is : Di d t he Mo tt ah ed eh s ea rn$4 4,7 57 of i nc om e? Foreach of t he 1 4 (...co nt in ue d) 1 3 11 1 (2 00 5)
. Bo th pa rti es ass um e th at$4 4,7 57 is th e rel ev an t am ou ntfor 20 01 . Thu s, 1 4 th e IRS ’s op en in g b rie f co nt ai ns th is st at em en t: “ RA Tha i co rrec tl y de te rm in ed th atpe ti ti on ers ha d $ 44 ,75 7.0 0 o f in co m e dur in g 2 00 1 b as edon res po nd en t’s BLS an al y si s, as m od ifi edby pet it io ne rs ’ actua l ex pe ns es an d re co rd s.” Th e Mo tt ah ed eh s’ res po ns e is th atth is st at em en t an d s im il ar s ta te m en ts ab ou t o th er y ears “ are a ll wron g s in ce the y all erro ne ou sl y

cla im th atTHAI us edBLS num be rs to ass es s t ax es ag ai ns t PETITIONERS.” The Co urt o bs erv es th atfor 20 01 th e n ot ic e o f de fic ie nc y de te rm in edth at th e Mo tt ah ed eh s ea rn edth e fo ll owi ng am ou nt s o f in co m e:

Tax pa y er Exp lana ti on Am ou nt Apr il Mo tt ah ed eh W ag e in co m e $1 1,4 69 Apr il Mo tt ah ed eh Apr il Mo tt ah ed eh ’s on e-h al f sh are

of $4 4,7 57 (th e IRS ’s est im at e o f th e Mo tt ah ed eh s’ sp en di ng for 20 01 ) 22 ,37 8

Peym on Mo tt ah ed eh Peym on Mo tt ah ed eh ’s on e-h al f

sh are o f $4 4,7 57 (th e IRS ’s es ti m at e o f th e Mo tt ah ed eh s’ sp en di ng for20 01 ) 22 ,37 8

Tot al 56 ,22 5 The refo re, i t ap pe ars th at(1) $4 4,7 57 was the IRS’s d et erm in at io n o f th e Mo tt ah ed eh s’ no nwa ge in co m e an d (2 ) $5 6,2 25 was IR S’s de te rm in at io n o f th e Mo tt ah ed eh s’ wage an d n on wag e in co m e. The M ot tahe de hs m ig hthave arg ue d th atth e que st io n t o b e res ol ve d s ho ul d b e in st ead : Di d t he Mo tt ah ed eh s ea rn $5 6,2 25 of i nc om e? Our an swe r to th atqu es ti on wou ldbe --y es . In o urvi ew th e pr ep on de ran ce o f th e ev id en ce s up po rts th e p ro po si ti on th atth e Mo tt ah ed eh s’ ag gr eg at e in co m e fo r th e y ear i s atlea st$5 6,2 25 . Our v ie w is in fo rm edby the (co nt in ue d...)-1 7-

[* 17 ] ot he r y ears , 20 02 th ro ug h 2 00 6, we m us t re so lv e si m il ar que st io ns with di ffer en t i nc om e th res ho ld s: $6 1,5 36 for20 02 , $6 9,6 53 for20 03 , $6 6,9 24 for 20 04 , $5 6,8 50 for20 05 , and$8 3,6 29 for20 06 . W e fi ndth atth e an swe rs are yes fo r al l o f th e y ears 20 01 th ro ug h 2 00 6. Ou r fi nd in gs are s up po rte d b y th ree t y pe s of ev id en ce. Fi rs t, the re i s d ire ctev id en ce tha t the Mo tt ah ed eh s re cei ve d pa ym en ts of i nc om e in sp eci fic am ou nt s. Fo r ex am pl e, th ere a re co pi es of c he ck s
an d m on ey

ord ers fro m

cu st om ers of t he Free do m Law Sch oo l tha t wer e d ep os it ed in to Apri l M ot tahe de h’s cr ed it -uni on acco un t. An d o ne of P eym onMo tt ah ed eh ’s
cu st om ers tes ti fie d t ha t h e p ai d P eym onMo tt ah ed eh$2 2,0 00 incas h fo r rep res en ti ng hi m

be fo re the Cal ifo rn iaFran ch is e Tax Bo ard . Seco nd , th e rec or d
su gg es ts th atth e sp eci fic am ount s o f in co m e are bu t a f ract io n o f th e to ta l i nc om e
earn edby the Mo tt ah ed eh s. Th e Mo tt ah ed eh s trie d t o avo idba nk s an d re co rd s. Mu chof t he ir i nc om e was th eref or e h id de n fr om

th e IRS --an d fr om

th e Co urt.

(...co nt in ue d) 1 4 co ns id erat io ns ou tl in edinth e te xt , i.e., (1 ) di rectev id en ce s ho ws tha t the Mo tt ah ed eh s re cei ve d s om e p aym en ts of i nc om e, (2 ) th es e p ro ve n p aym en ts are bu t a s m al l fr act io n o f th ei r actua l i nc om e (b ecau se th e Mo tt ah ed eh s h idth ei r in co m e), an d (3 ) th e Mo tt ah ed eh s m us t h av e p ai d t he ir l iv in g e xp en se s fr om so m e so ur ce. Inan y

ev en t, the Mo tt ah ed eh s d o n otarg ue th atth e co rrec t fi gure fo r th e Co urt t o re vi ew is $5 6,2 25 , no t $ 44 ,75 7. We are th eref or e n otrequi redto co ns id er the effe ct s o f th is m etho do lo gi cal asp ectof t he no ti ce o f de fic ie nc y .-1 8-

[* 18 ] Thi rd , th e Mo tt ah ed eh s h adpe rs on al li vi ng ex pe ns es th atm us t h av e b een pa idfro m so m e so ur ce. The Mo tt ah ed eh s co un te r th atinreco ns tru ct in g t he ir i nc om e th e rev enue ag en t s ho ul d h av e co ns id eredon ly the in co m e ref le ct edinth ei r ba nkan d c red it
un io n re co rd s. Bu t the Mo tt ah ed eh s trie d t o a vo idth e u se of b an ks . Thei r ba nk
reco rd s wo ul d n otpro vi de su ffi ci en t i nf orm at io n abo utth ei r in co m e. Furth erm or e, ev enth e b an k re co rd s tha t the rev enue ag en t o bt ai ne d wer e in co m pl et e. The re ve nu e ag en t was un ab le to ob ta in reco rd s o f al l o f th e d ep os it s to th e Mo tt ah ed eh s’ acco un ts . For t he se reas on s, fo cu si ng ex cl us iv el y on th e in co m e ref

le ct edinth ei r ba nkreco rd s wo ul d u nd eres ti m at e th e Mo tt ah ed eh s’ in co m e. The re ve nu e ag en t h adto fin d o th er m etho ds of e st im at in g t he ir i nc om e. 1 5 The rev enue ag en t ch os e to us e av erag e sp en di ng st at is ti cs supp le m en te d b y
es ti m at es of a ctua l s pe nd in g am ou nt s. Th e co urts ha ve pe rm it te d t he IRS t o re ly
on th e u se of a ve rag e sp en di ng st at is ti cs when , as h ere, the tax pa y er fa il s t o

The li m it edba nkreco rd s l edth e rev enue ag en t t o re ject the us e o f th e 1 5 ba nk -d ep os it s m etho d fo r rec on st ru ct in g i nc om e. Und er the ba nk -d ep os it s m etho d, a t ax pa y er’s i nc om e fo r a y ear i s g en eral ly calcu la te d b y : (1 ) de te rm in in g th e to ta l am ou ntof d ep os it s i nt o t he tax pa y er’s b an k a cco un t dur in g t he y ear, Cal ho un v. Un it edSta te s, 5 91 F.2d12 43 , 12 45 (9t h C ir. 1 97 8) ; an d (2 ) subt ract in g de po si ts th atare n ottax ab le , id ., su chas g ift s re cei ve d, l oa n p ro ceed s, an d tra ns fers be twee n a cco un ts .-1 9-

[* 19 ] co op erat e wit h t he IRS. InPal m er v . Uni te d S tate s, 1 16 F.3d13 09 , 13 12 (9 th Cir . 19 97 ), th e Co urt o f App eal s fo r th e Nin th Cir cu itst at ed :

Co urts ha ve lo ng he ldth atth e IRS m ay rat io na ll y

us e st at is ti cs to reco ns tru ctin co m e whe re t ax pay ers fai l t o o ffer accu rat e rec or ds
. Rea so nabl e m etho ds in cl ud e th e u se of c os t-o f-l iv in g s ta ti st ic s fo r a pa rti cu lar lo cal e, Whe el in g v . Comm is si on er, * * * [T.C. Mem o. 19 82 -2 46 ], or ave rag e lo cal in co m e st at is ti cs fora pa rti cu lar pr of es si on .” [All othe r ci ta ti on s o m it te d.] Inpa rti cu lar, th e co urts ha ve pe rm it te d t he us e o f sp en di ng st at is ti cs fro m th e Bu reauof Lab orSta ti st ic s. See Hane l v . Commis si on er, 6 Fed . App x. 4 52 , 45 3 (7 th Cir . 20 01 ) (p erm it ti ng us e o f Bu reauof Lab orSta ti st ic s l iv in g- ex pe ns e st at is ti cs with m od ifi cat io ns forex pe ns e cat eg or ie s fo r whi chIRS h ad in fo rm at io n) ; Po ll ardv. Co m m is si on er, 7 86 F.2d10 63 , 10 66 (11 th Cir . 19 84 ) (p erm it ti ng us e o f reg io na l l iv in g- ex pe ns e st at is ti cs fro m Bureauof Lab or st at is ti cs ), aff’g T.C. Me m o. 1 98 4- 53 6, 4 8 T.C.M . (CCH) 1 30 3, 1 32 6 (1 98 4) ; Gid di o v . Comm is si on er, 5 4 T.C. 1 53 0, 1 53 2- 15 33 (19 70 ) (p erm it ti ng us e o f li vi ng -ex pe ns e st at is ti cs fro m Bureauof Lab orSta ti st ic s) . The Mo tt ah ed eh s
co nt en d t ha t the sp en di ng st at is ti cs us edby the rev enue ag en t d idno t ac tu al ly
co m e fro m

th e Bu reauof Lab orSta ti st ic s b utfro m so m e o th er s ou rce. Th e Mo tt ah ed eh s n ot e th atth e rev enue ag en t’s es ti m at es of the ir ann ua l s pe nd in g-2 0-

[* 20 ] in crea se d 3 7% fr om 20 01 to 20 02
. They argu e th atst at is ti cs fro m th e 1 6 Bu reauof Lab orSta ti st ic s co ul d n otha ve sh own th atav erag e h ou se ho ldsp en di ng in crea se d 3 7% i n o ne y ear. Th ei r arg um en t re st s o n am is co nc ep ti on . The
rev enue ag en t d idno t re ly excl us iv el y on av erag e h ou se ho ldsp en di ng to est im at e th e Mo tt ah ed eh s’ sp en di ng . She als o e st im at edth ei r actua l s pe nd in g o n t he ba si s of in fo rm at io n s he ha d c ol le ct ed . The y ear- to -y ear c ha ng es inth e es ti m at es of t he Mo tt ah ed eh s’ actua l s pe nd in g c au se d m os t o f th e in crea se inth e rev enue ag en t’s sp en di ng est im at es fro m

20 01 to 20 02 . Furt he rm or e, th e rev enue ag en t cr ed ib ly te st ifi edth atth e Bu reauof Lab orSta ti st ic s was th e so ur ce o f th e av erag e-s pe nd in g st at is ti cs th atsh e rel ie d o n. No ta ti on s i n h er wo rk pape rs co rro bo rat e h er te st im on y . W e co nc lu de th atth e rev enue ag en t re li edpa rtl y on av erag e-s pe nd in g st at is ti cs fro m

th e Bu reauof Lab orSta ti st ic s an d p art ly on d ire ctest im at es of t he Mo tt ah ed eh s’ sp en di ng , th atth is co m bi ne d app ro ach was ape rm is si bl e m etho d o f
es ti m at in g t he Mo tt ah ed eh s’ sp en di ng un de r th e ci rcu m st an ces , andth at
es ti m at in g t he Mo tt ah ed eh s’ sp en di ng was ape rm is si bl e m etho d o f rec on st ru ct in g th ei r in co m e und er the cir cu m st an ces . 1 7
The rev enue ag en t d et erm in edth atth e co up le ’s sp en di ng was $ 44 ,75 7 i n 1 6 20 01 an d $ 61 ,53 6 i n 2 00 2, an in crea se of 3 7%. Incal cu la ti ng sel f-em

pl oym en t t ax , see sec . 14 01 (a) and(b) (im po si ng 1 7 (co nt in ue d...)-2 1-

[* 21 ] 2. Und er Ca li fo rn iaco m m un ity -p ro pe rty law th e in co m e is co m m un ity pr op erty , no t Pe ym on Mo tt ah ed eh ’s so le pro pe rty. Afte r de te rm in in g t ha t the Mo tt ah ed eh s ea rn ed$4 4,7 57 for 20 01 , $6 1,5 36 fo r 20 02 , $6 9,6 53 for20 03 , $6 6,9 24 for20 04 , $5 6,8 50 for20 05 , and$8 3,6 29 for 20 06 , th e IRS de te rm in edth atha lf o f eac h o f th es e am ou nt s was attrib ut ab le to Peym onMo tt ah ed ehan d h al f was att rib ut ab le to Apri l M ot tahe de h i n c om pu ti ng (...co nt in ue d) 1 7 se lf- em pl oym en t t ax onth e se lf- em pl oym en t i nc om e o f ev ery pe rs on ); s ec. 14 02 (b ) (d efi ni ng sel f-em pl oym en t i nc om e as th e n etearn in gs fro m sel fem pl oym en t d eri ve d b y

a pe rs on ); s ec. 1 40 2( a) (d efi ni ng ne t ea rn in gs fro m sel fem pl oym en t as th e g ro ss in co m e d eri ve d b y a pe rs on fro m

any bu si ne ss carr ie d o n by suc h p ers on m in us th e d educ ti on s at tri bu tabl e to th e b us in es s) , th e IRS de te rm in edth atforeach y ear P eym on Mo tt ah ed ehearn edth e am ou ntof s el fem pl oym en t i nc om e th atitde te rm in edwas e arn edby the Mo tt ah ed eh s i n t he ag gr eg at e fo r pu rp os es of t he ir i nc om e ta x. Fo r th e rea so ns ex pl ai ne d i n thi s p art , we su st ai n t he se de te rm in at io ns as t o t he ag gr eg at e am ou nt s o f se lf- em pl oym en t in co m e. As fo r th e IRS ’s det erm in at io n t ha t fo r eac h year th e ag gr eg at e am ou ntof se lf- em pl oym en t i nc om e was earn eden ti rel y by Peym on Mo tt ah ed eh , th e Mo tt ah ed eh s d o n otco nt es t thi s d et erm in at io n. Se e se c. 14 02 (a)( 5) (effe ct iv e Mar . 2, 2 00 4) (if

in co m e d eri ve d fr om

a bu si ne ss joi nt ly ope rat edby a m arri ed co up le is co m

m un ity pro pe rty, the gro ss in co m e an d d educ ti on s at tri bu tabl e to th e bu si ne ss are treat edas t he gro ss in co m e an d d educ ti on s o f eac h s po us e o n t he ba si s o f th ei r res pe ct iv e d is tri bu ti ve sh are o f th e g ro ss in co m e an d d educ ti on s) ; se c. 14 02 (a)( 5) (effe ct iv e b efo re Mar. 20 04 ) (i f in co m e d eri ve d fr om a bu si ne ss is co m m un ity pro pe rty, all o f th e g ro ss in co m e an d d educ ti on s at tri bu tabl e to th e bu si ne ss is tre at edas t he gro ss in co m e an d d educ ti on s o f th e hus ba ndun le ss th e wife ex erci se d s ub st an ti al ly all o f th e m an ag em en t an d c on tro l o f th e b us in es s, i n whi chcas e al l o f th e g ro ss in co m e an d d educ ti on s i s treat edas t he gro ss in co m e an d d educ ti on s o f th e wif e). The refo re, we n eedno t re achth e que st io n o f whe th er th e ag gr eg at e se lf- em

pl oym en t i nc om e is att rib ut ab le to Peym on Mo tt ah ed ehor Apr il Mo tt ah ed eh
.-2 2-

[* 22 ] th e in co m e ta x i m

po se d o n e ach of t he Mo tt ah ed eh s. Forfed eral -in co m e- 1 8 ta x p ur po se s, i nc om e th atis co m m un ity pro pe rty un de r st at e la w is ge ne ral ly tre at edas i f ha lf t he in co m e was earn edby one sp ou se an d h al f by the ot he r. Uni te d S tate s v . Mit ch el l, 4 03 U.S. 19 0, 1 96 -1 97 (19 71 ); s ec. 1 .66 -1 (a), In co m e Tax Reg s. (e ffec ti ve Ju ly 10, 2 00 3) . Und er the laws of C al ifo rn ia , pro pe rty acqui redby a m arri edpe rs on is ge ne ral ly comm un ity pro pe rty. Cal. Fam . Cod e
se c. 76 0 (West20 04 ); s ee al so id . sec . 77 0 (d efi ni ng sep arat e p ro pe rty of a m arri ed pe rs on ); Han f v. Su m

m ers (Inre Su m

m ers ), 33 2 F .3d12 40 , 12 42 -1 24 3 (9 thCir
. 20 03 ) (n ot in g t he ge ne ral pre su m pt io n t ha t p ro pe rty acqu ire d dur in g t he m arri ag e is m ari ta l p ro pe rty andid en ti fy in g e xc ep ti on s) . Howev er, the m arri edco up le can by agre em en t h av e co m

m un ity pro pe rty treat edas s ep arat el y own edpro pe rty. Cal. Fam . Cod e se c. 85 0 (West20 04 ); i d. s ec. 8 52 (a). Th e Mo tt ah ed eh s h av e st ip ul at edth atth ey

were m arri eddurin g a ll th e y ears at i ss ue . There fo re, al l 1 9
Fo r 20 01 , th e IRS di vi de d t he $4 4,7 57 be twee n t he Mo tt ah ed eh s (u nd er 1 8 co m m un ity -p ro pe rty pri nc ip le s) bu t at tri bu te d t he $1 1,4 69 inwage s earn edby Apr il Mo tt ah ed ehen ti rel y to he r. The M ot tahe de hs co nt en d t ha t n on e o f th e in co m e sh ou ldbe attrib ut edto Apri l M ot tahe de h e xc ep t the $1 1,4 69 inwage s. The Mo tt ah ed eh s s ti pu la te d: “ Pet it io ne rs were m arri eddu rin g t he y ears at 1 9 is su e.” The m os t s en si bl e in te rp ret at io n o f th is st at em en t i s tha t the Mo tt ah ed eh s were m arri edth ro ug ho utth e en ti re p eri odJanua ry 1, 2 00 1, thr ou gh Decem

be r 31 , 20 06 . Oth erwi se , on e wou ldsupp os e th e p art ie s wo ul d h av e st ip ul at edth atth e Mo tt ah ed eh s wer e m arri eddu rin g o nl y part o f th e y ears at i ss ue . (co nt in ue d...)-2 3-

[* 23 ] pr op erty

acqui redby the m

du rin g t he y ears at i ss ue is co m m un ity pro pe rty
un le ss th ey

ha ve ag reedot he rwis e. InOcto be r 20 01 , th e Mo tt ah ed eh s en te redin to
anag reem en t tha t co nt ai ne d t he fol lo win g p ro vi si on : Tha t M rs . Apri l Lo ve Mo tt ah ed ehhe reb y , vo lu nt ari ly andwitho ut res erv at io n, co nv ey s t o h er h us ba ndas t he pe rs on al an d s ep arat e pr op erty of M r. Peymon Mo tt ah ed ehan d t he reb y di ve st s fr om

he rs el f an y rig ht , in te res t o r cl ai m

to , or i n, the co m

m un ity pro pe rty as s et fo rth he rei n, ef

fect iv e fro m

th e d at e o f th is ag reem en t an d fo rward ; an d t ha t al l i nt eres t i nc om e, st oc ks , bo nd s, d iv id en ds , wage s, i nc om e, ren ta l i nc om e o r ot he r earni ng s, an d re al ty andpe rs on al ve hi cl es whi chMr. Peym on Mo tt ah ed ehacqui redby andth ro ug h h is own labo r an d/ orin it ia ti ve , or a cqui res inth e fu tu re, i s n ow an d fo rev er he reaf te r tr an sm

ut edfro m th e st atus of c omm

un ity pro pe rty to t he se pa rat e an d d is ti nc t p ers on al pro pe rty of Mr . Peym on Mo tt ah ed eh , di sp os ab le by Mr. Peym on Mo tt ah ed eh , with re sp ectto Cal ifo rn ia Fam il y Co de Sect io n 7 70 , witho utth e co ns en t o f an d re co ur se to th e adve rs e sp ou se . (...co nt in ue d) 1 9 The tri al reco rdsu gg es ts th atth e Mo tt ah ed eh s wer e n otm arri edun ti l the m id dl e o f th e y ear 2 00 1. Th e st at e co urt ju dg m en t tha t d is so lv edth e m arri ag e be twee n Ap ril Mo tt ah ed ehan d h er p rev io us hu sb an d was no t fi le d u nt il Ju ne 13 , 20 01 . A comm

un ity -p ro pe rty agre em en t b etweenth e Mo tt ah ed eh s, s ig ne d i n Octo be r 20 01 , st at es th atth e Mo tt ah ed eh s h ad“ ex ecu te d v ows of m atrimony” on Ju ne 24 , 20 01 . If th e Mo tt ah ed eh s wer e m arri edfor on ly partof 2 00 1, as th es e do cu m en ts su gg es t, the Mo tt ah ed eh s m ig htha ve arg ue d t ha t co m m un ity -p ro pe rty pr in ci pl es , i.e., th ata sp ou se own s o ne ha lf o f th e o th er s po us e’s earn in gs , cou ld no t af fectPeym onMo tt ah ed eh ’s own ers hi p o f in co m e h e earne d dur in g t he pa rt o f 20 01 forwhi chhe was u nm arri ed . There fo re, the y m ig htha ve arg ue d, n on e o f hi s in co m e fo r th is pe rio d c ou ldbe att rib ut edto Apri l M ot tahe de h u nd er co m m un ity pr op erty pri nc ip le s. Ho wev er, the y di d n otm ak e th is arg um en t. Fu rth erm or e, th ey st ip ul at edth atth ey

were m arri eddu rin g t he y ears at i ss ue . Und er the ci rcu m st an ces , th ey

ha ve waiv edan y

su charg um en t.-2 4-

[* 24 ] Und er the qu ot edpro vi si on , Apri l M ot tahe de h d is cl ai m edan y co m m un ity pr op erty rig htto in co m e earne d b y Peym on Mo tt ah ed ehth ro ug h h is “ own lab or
an d/ orin it ia ti ve .” Bu t the ag reem en t co nt ai ne d n o p ro vi si onreg ard in g o wne rs hi p of in co m e g en erat edby the co up le ’s join t ef fo rts . Andth e rec or d e st ab li sh es th at th e co up le ’s bu si ne ss es were joi nteffo rts of b ot h s po us es . See s up ra p p. 1 2- 14
. Acco rd in gl y , we ho ldth atth e in co m e fro m th e co up le ’s bu si ne ss es was
co m m un ity pro pe rty andsu st ai n t he IRS’s d et erm in at io n wi th reg ardto th is is su e. 3. The Mo tt ah ed eh s ar e li ab le forad di ti on s t o t ax . The IRS h as th e b ur de n o f pr oduc ti on with re sp ectto ad di ti on s t o t ax . Sec. 74 91 (c). Th e IRS sat is fie s thi s b ur de n b y pro du ci ng su ffi ci en t ev id en ce tha t i t i s ap pr op ria te to im

po se th e rel ev an t ad di ti on to tax . Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). Once th e IRS sat is fie s i ts bu rd enof p ro du ct io n, the ta xp ay er h as th e b ur de n o f pe rs ua di ng th e Co urt tha t h e o r sh e is no t l iabl e fo r th e ad di ti on to tax or p en al ty. Id. at 4 46 -4 47 . If th e ta xp ay er wi sh es to rai se an
ex cep ti on (orde fen se ) to anad di ti on to tax , th e ta xp ay er b ears th e b ur de n o f pr oduc in g e vi de nc e fo r th e ex cep ti on an d p ers ua di ng th e Co urt tha t the ex cep ti on ap pl ie s. See id . at 4 46 (st at in g t ha t the IRS “ ne edno t i nt ro du ce ev id en ce reg ard in g re as on ab le cau se , subs tant ia l au th or ity , or s im il ar p ro vi si on s” ).-2 5-

[* 25 ] a. Sect io n- 66 51 (a)( 1) fai lu re-t o- fil e ad di ti on s t o t ax The IRS d et erm in edth atth e Mo tt ah ed eh s ar e li ab le forsec ti on 66 51 (a)( 1) ad di ti on s t o t ax for

fai li ng to ti m el y

fil e ta x re tu rn s fo r th e si x t ax y ears fro m 20 01 th ro ug h 2 00 6. Se ct io n 6 65 1( a)(1 ) im po se s an “ ad di ti onto th e ta x” for fai li ng to fil e a return b y

th e fi li ng de ad li ne (ta ki ng acco un t o f an y ex te ns io ns ), un le ss th e fai lu re i s due to reas on ab le cau se an d n otdu e to wil lfu l n eg le ct . The l at e-fi li ng ad di ti on to tax is 5% o f th e n etam ou ntof t ax du e o n t he da te pre sc rib edfor pa ym en t fo r eac h m on th th e fai lu re t o fi le co nt in ue s fo r up to fiv e m on th s. Sec
. 66 51 (a)( 1) , (b) (1 ). Sub st itut es for returns m ad e b y

th e IRS un de r se ct io n 6 02 0( b) are d is reg ard ed . Sec. 6 65 1( g) (1 ). The Mo tt ah ed eh s s ti pu la te d t ha t the y di d n otfil e returns forth e ta x years 20 01 th ro ug h 2 00 6. Th is sat is fie s the IRS’s b ur de n o f pr oduc in g e vi de nc e th atth e fai lu re-t o- fil e ad di ti on to tax sh ou ldbe im po se d fo r eac h o f th e si x t ax y ears at is su e. See s ec. 7 49 1( c); Hig be e v . Comm is si on er, 1 16 T.C. at 4 47 . The IR S’s bu rd enof p ro du ci ng ev id en ce d oe s n otrequi re i t t o p ro ve th atth e ta xp ay er d idno t ha ve reas on ab le cau se for fai li ng to fil e th e return. Hi gb ee v . Comm is si on er, 1 16 T.C. at 4 46 . The Mo tt ah ed eh s d o n otarg ue , no r do es th e rec or d s ho w, th atth ey ha d re as on ab le cau se forfai li ng to fil e th ei r ta x re tu rn s. We con cl ud e th atth e Mo tt ah ed eh s ar e li ab le forth e se ct io n- 66 51 (a)( 1) fai lu re-t o- fil e ad di ti on s t o t ax .-2 6-

[* 26 ] b. Sect io n- 66 51 (a)( 2) fai lu re-t o- pa y ad di ti on s t o t ax The IRS d et erm in edth atth e Mo tt ah ed eh s ar e li ab le forsec ti on -6 65 1( a)(2 ) ad di ti on s t o t ax for

fai li ng to ti m el y

pa y tax sh ownon a return fo r th e ta x years fro m 20 01 th ro ug h 2 00 6. Se ct io n 6 65 1( a)(2 ) im po se s an“ ad di ti on to tax ” fo r fai lu re t o t im el y

pa y th e am ou ntof t ax sh ownon a return u nl es s the fai lu re i s due to reas on ab le cau se an d n otwil lfu l n eg le ct . The ad di ti on to tax un de r se ct io n 66 51 (a)( 2) is im

po se d o nl y

if an a m ou ntof t ax is sh own on a return, Cabi rac v . Co m m is si on er, 1 20 T.C. 16 3, 1 70 (20 03 ), an d the IRS h as th e b ur de n o f pr oduc ti on to sh ow a r eturn was fil ed . A sub st itut e fo r return i s treat edas areturn

“ fo r pu rp os es of d et erm in in g t he am ou ntof t he ad di ti on ” und er s ect io n 6 65 1( a)(2 ). Sec. 6 65 1( g) (2 ). The tria l re co rdsh ows th atth e IRS pre pa redsubs ti tu te s fo r returns forth e Mo tt ah ed eh s i n c om pl ianc e wit h s ect io n 6 02 0( b) . Cf. Whe el er v . Co m m is si on er, 1 27 T.C. 20 0, 2 10 (20 06 ), aff’d, 5 21 F.3d12 89 (10 th Cir . 20 08 ). The Mo tt ah ed eh s d o n otco nt en d o th erwi se . The IR S h as th us carr ie d i ts bu rd en 2 0 of pro du ct io n u nd er s ect io n 7 49 1( c) t o s ho w th atth e Mo tt ah ed eh s ar e li ab le for th e ad di ti on to tax un de r se ct io n 6 65 1( a)(2 ). The M ot tahe de hs ha ve no t m ad e an y de fen se , andth ey

are l iabl e fo r th e ad di ti on s t o t ax .
Nordo th ey

di sp ut e th atth ey

fai le d t o p ay

th e ta x s ho wn o n t he subs ti tu te s 2 0 fo r returns .-2 7-

[* 27 ] c. Sect io n- 66 54 fai lu re-t o- pa y -es ti m at ed -ta x a dd it io ns to tax The IRS d et erm in edinit s n ot ic es of d efi ci en cy th atth e Mo tt ah ed eh s ar e li ab le forsec ti on -6 65 4 a dd it io ns to tax forfai li ng to pa y est im at edin co m e ta x fo r th e ta x years 2 00 1, 2 00 2, 2 00 3, 2 00 4, 2 00 5, an d 2 00 6, ex cep t tha t the IRS d idno t de te rm in e (n ordo es itno w ass ert ) a s ect io n- 66 54 ad di ti onto tax ag ai ns t Ap ril Mo tt ah ed ehforth e ta x years 2 00 3 a nd20 04 . The IR S h as si nc e co nc ed edth at
ne ithe r of th e Mo tt ah ed eh s i s l iabl e fo r th e ad di ti on for20 01
. Und er s ect io n 6 65 4, an “ ad di ti on to tax ” is im po se d o n atax pa y er wh o d oe s
no t m ak e qua rte rly paym en ts of e st im at edin co m e ta x. Se c. 66 54 (a), (b )(1 ), (c). Eachqu art erl y

pa y m en t i s 2 5% o f th e “ requi redan nu al pa ym en t.” Se c. 66 54 (d )(1 ). To s at is fy

it s b ur de n o f pr oduc in g e vi de nc e th atth e Mo tt ah ed eh s ar e li ab le forth e se ct io n- 66 54 ad di ti on to tax , th e IRS m us t ata m in im

um est ab li sh th atth ey ha d a“ requi redan nu al pa ym en t” . See s ec. 6 65 4( d) (1 )(A); Whe el er v . Co m m is si on er, 1 27 T.C. at 2 11 -2 12 . The “ requi redannu al pa ym en t” for a ta xabl e y ear i s d efi ne d i n s ect io n 6 65 4( d) (1 )(B) as- - th e le ss er o f--

(i) 90 pe rcen t o f th e ta x s ho wn o n the return fo r th e ta xabl e y ear ( or , if n o re tu rnis fil ed , 90 pe rcen t o f th e ta x fo r su chy ear) , or-2 8-

[* 28 ] (ii ) 10 0 p erce ntof t he tax sh own on th e return o f th e

in di vi du al forth e p rece di ng tax ab le y ear. Cl au se (ii ) sh al l n otap pl y if * * * th e in di vi du al di d n ot fil e a return fo r su chpre ced in g t ax ab le y ear. Fo r eac h o f th e ta xabl e y ears for whi chth e IRS see ks to im po se th e se ct io n- 66 54 ad di ti on to tax (y ears 20 02 , 20 03 , 20 04 , 20 05 , and20 06 ), an d fo r eac h o f
res pe ct iv e ta xabl e y ears pre ced in g t he se res pe ct iv e y ears , th e Mo tt ah ed eh s d idno t fil e a return a ndth e IRS fil eda subs ti tu te forreturn. Subs ti tu te s fo r returns ha ve
no t b eenco ns id eredto be returns forth e p ur po se of s ect io n 6 65 4( d) (1 )(B) . See Dum a v . Comm is si on er, T.C. Mem o. 2 00 9- 30 4, 9 8 T.C.M . (CCH) 6 61 , 66 5 n .6 (2 00 9) ; Ni no v. Co m

mis si on er, T.C. Mem o. 2 00 9- 29 3, 9 8 T.C.M . (CCH) 6 21 , 62 4 (2 00 9) . The Mo tt ah ed eh s d o n otco nt en d t ha t the subs ti tu te s fo r returns sh ou ldbe
co ns id eredreturns . There fo re, cl au se (ii ) do es no t ap pl y an d t he requi redan nu al pa ym en t fo r eac h o f th e y ears forwhi chth e IRS see ks to im po se th e se ct io n- 66 54 ad di ti on to tax is 90 % of t ax foreach of t he y ears . The IR S h as carr ie d t he bu rd en of pro du ct io n u nd er s ect io n 7 49 1( c) wi thres pe ctto th e se ct io n- 66 54 ad di ti on s t o ta x. The re ar e ex cep ti on s, s etforth insec ti on 66 54 (e), u nd er wh ic h t he tax pa y er is rel ie ve d o f th e se ct io n- 66 54 ad di ti on to tax . The Mo tt ah ed eh s d o n otco nt en d,
no r do es th e rec or d s ho w, th atan y of t he ex cep ti on s ap pl ie s. Th eref or e, Peymon-2 9-

[* 29 ] Mo tt ah ed ehis li ab le forth e se ct io n- 66 54 ad di ti on s t o t ax for 20 02 , 20 03 , 20 04 , 20 05 , and20 06 , andApri l M ot tahe de h i s l iabl e fo r th e se ct io n- 66 54 ad di ti on s t o t ax for

20 02 , 20 05 , and20 06
. 4. W e rejectth e Mo tt ah ed eh s’ othe r arg um en ts . The Mo tt ah ed eh s co nt en d t ha t the IRS au di t was un co ns ti tu ti on al be cau se it
was m ot iv at edby the ir p ub li c cri ti ci sm of t he IRS. The reco rddo es no t de m on st rat e th atth e au di t was m ot iv at edby crit ic is m of t he IRS. The refo re, we rejectth is co nt en ti on . Inreac hi ng ou r ho ld in gs , we hav e co ns id eredall arg um en ts m ad e b y th e Mo tt ah ed eh s an d fi ndth em witho utm eri t. At tria l the IRS o bjec te d o n re le va nc y gro un ds to th e adm is si on of Ex hi bi ts 45 -P, 4 6- P, 47 -P, 4 8- P, an d 4 9- P. The C ou rt r es erv edit s ru li ng s. Th e IRS ha s withd rawnit s o bjec ti on s. Th e Co urt wi ll ord er the ex hi bi ts admitte d. To re fle ctth e fo reg oi ng , An ap pr op ria te ord er an d de ci si on wil l b e en te red
.