Court Opinion

ID: 9962102
Source: CourtListenerOpinion
Date Created: 2024-04-22 19:02:05.083735+00
Date Added: 2024-06-11T08:19:50.766225
License: Public Domain

United States Tax Court

                               T.C. Memo. 2024-49

                          JOSEPH BELCIK, ET AL., 1
                                Petitioners

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     __________

Docket Nos. 32770-21, 11750-22,                                Filed April 22, 2024.
            11753-22.

                                     __________

Joseph Belcik, pro se in Docket Nos. 32770-21 and 11753-22.

Kaylyn Belcik, pro se in Docket No. 11750-22.

Miriam C. Dillard and A. Gary Begun, for respondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

       GOEKE, Judge: In these consolidated cases respondent issued
two notices of deficiencies to petitioner Joseph Belcik, the first for
2008–16 and the second for 2017 and 2018, determining deficiencies
totaling approximately $2.7 million and additions to tax under section
6651(f) 2 for fraudulent failure to file, under section 6651(a)(2) for failure
to pay tax, and under section 6654 for failure to pay estimated tax.
Respondent also issued a notice of deficiency to petitioner Kaylyn Belcik

       1 Cases of the following petitioners are consolidated herewith: Kaylyn Belcik,

docket No. 11750-22; and Joseph Belcik, docket No. 11753-22.
        2 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the
Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and
Rule references are to the Tax Court Rules of Practice and Procedure. Some dollar
amounts are rounded.

                                 Served 04/22/24
                                       2

[*2] for 2017 and 2018 determining deficiencies of $15,933 and $11,458,
respectively, and the same additions to tax. For each year at issue
respondent alternatively determined a section 6651(a)(1) failure-to-file
addition to tax for both petitioners.

       The issues for consideration are (1) whether Mr. and Mrs. Belcik
(collectively, petitioners) had unreported income. We hold they did as
set forth herein; (2) whether Mr. Belcik is liable for self-employment tax.
We hold he is liable for 2008–16; and (3) whether petitioners are liable
for the additions to tax listed above. We find Mr. Belcik is liable and
Mrs. Belcik is not liable.

                          FINDINGS OF FACT

       Some facts have been deemed stipulated pursuant to Rule 91(f).
When the Petitions were timely filed, petitioners resided in Florida.
Petitioners are married. For much of their marriage including 2008–16
Mrs. Belcik was a homemaker who was busy raising their four children
and did not earn income. Petitioners filed joint returns for 1993 and
1994 and paid the tax shown as owed on the returns. Neither petitioner
has filed a return since the 1994 return. Nor has either petitioner paid
any income tax for any year since 1994.

I.    Sources of Income

      A.     Mr. Belcik’s Activities

      During 2008–16 Mr. Belcik operated and earned income from a
business called Direct Results Marketing (Direct Results), a printing
and marketing business. In 2012 he listed his annual income on a loan
application as $100,000. During 2008–18 he had signature authority
over two bank accounts in the name Joseph A. Belcik DBA Direct
Results Marketing at Regions Bank and Bank of America. He deposited
Direct Results’ gross receipts into these bank accounts and used the
deposited funds to pay household and personal expenses as well as
business expenses.

       Mr. Belcik operated the business in a warehouse that he jointly
owned with Mrs. Belcik. He hired individuals to work for his business
but did not pay employment taxes on the compensation he paid them.
Nor did he issue Forms W–2, Wage and Tax Statement, or Forms
1099–MISC, Miscellaneous Income, for the compensation. Some
individuals who worked for Direct Results formed entities, and Mr.
Belcik paid the entities for the services that the workers performed.
                                    3

[*3] Sometime before or during 2008 Mr. Belcik formed Blowing Rock
Ltd. (Blowing Rock) in a foreign country and opened a bank account at
Regions Bank in the name Joseph A. Belcik DBA Blowing Rock Ltd.
(Blowing Rock account). During 2008–18 Mr. Belcik had signature
authority over that account. Blowing Rock did not have a business
purpose. Mr. Belcik also used money from the Blowing Rock account to
pay personal and household expenses. He transferred money among the
three bank accounts. In March 2013 Mr. Belcik received $90,000 from
the sale of a condominium (condo) that he had helped his father
purchase, which Mr. Belcik deposited into the Blowing Rock account.

       During 2006 and 2007 Mr. Belcik purchased 66,907 ounces of
silver at different prices in a series of transactions for a total price of
$1,053,633. In 2009 he began selling the silver and received sale
proceeds in 2009, 2010, 2011, 2013, 2014, 2015, 2016, 2017, and 2018, of
$52,170, $51,510, $75,498, $31,360, $92,100, $187,030, $127,959,
$331,528, and $192,081, respectively, for total sale proceeds of
$1,141,236, which he deposited in the Blowing Rock account.

       Around 2016 Mr. Belcik stopped operating Direct Results. During
2017 and 2018 he rented out the warehouse and received rents of
$90,250 and $75,734, respectively, which he deposited into a Direct
Results bank account. During 2017 and 2018 Mr. Belcik bought real
properties for rental or resale purposes. Around October 2017 he
purchased real property on Cypress Lane, Oldsmar, Florida, which he
refers to as Cypress Lake, for $12,300. In March 2018 a mortgagee
foreclosed on the mortgage resulting in a judicial sale of the property. In
2018 Mr. Belcik purchased a condo on Holiday Drive, Fort Lauderdale,
Florida, which he refers to as Coconut Grove, for $25,100. Later that
year a mortgagee foreclosed on the mortgage, and the property was sold
in a judicial sale. Mr. Belcik did not receive any proceeds from the two
foreclosure sales. In 2017 and 2018 Mr. Belcik purchased two other real
properties on Covina Way, Lake Worth, Florida, and Covina Way, Boca
Raton, Florida, respectively. In addition to the warehouse rents and
silver sale proceeds, Mr. Belcik deposited $48,720 in the Blowing Rock
account in 2018.

      B.     Information Returns

      During the years at issue Mr. Belcik was issued the following
information returns: (1) for 2013 Form 1099–R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., issued by Ohio Police and Fire Pension Fund
                                   4

[*4] reporting a gross distribution and taxable amount of $1,000; (2) for
2014 Form 1099–B, Proceeds From Broker and Barter Exchange
Transactions, issued by First Energy Corp. reporting proceeds of
$34,372; (3) for 2015 Form 1099–INT, Interest Income, issued by
Youngstown Firefighter Credit Union reporting $144 in interest income;
(4) for 2013, 2014, 2015, 2016, 2017, and 2018 Forms 1099–DIV,
Dividends and Distributions, issued by First Energy Corp. reporting
ordinary dividends of $586, $815, $95, $95, $95, and $95, respectively;
and (5) for 2018 Form 1099–S, Proceeds From Real Estate Transactions,
issued by Hometown Title and Closing Services, LLC, reporting gross
proceeds of $26,500 on the transfer of real property on Phoenix Avenue,
Oldsmar, Florida (Phoenix Avenue property). Mr. Belcik did not report
or pay tax on these items of income.

      C.     Mrs. Belcik’s Partnership Income

       During 2017 and 2018 Mrs. Belcik owned a 49% interest in
UberWorld Travel, LLC (UberWorld), a partnership for federal tax
purposes. UberWorld filed partnership returns for 2017 and 2018 with
Schedules K–1, Partner’s Share of Income, Deductions, Credits, etc.,
that show that Mrs. Belcik’s shares of partnership income for 2017 and
2018 were $461 and $5,055, respectively, and her share of capital gain
for 2018 was $2,511.

II.   Audit and Appeal

       In 2014 the Internal Revenue Service (IRS) initiated an audit for
Mr. Belcik’s 2008–13 tax years and assigned Revenue Agent (RA) John
Clark to the audit. The IRS expanded the audit to include 2014–18 and
also initiated an audit for 2017 and 2018 for Mrs. Belcik. The IRS
transferred the audits for 2017 and 2018 for both petitioners to RA
Jeffery Page.

       From the beginning of the audit Mr. Belcik refused to cooperate
and asserted frivolous tax-protester arguments. In July 2014 RA Clark
issued a summons to Mr. Belcik. After Mr. Belcik provided only minimal
documentation, most of which related to the purchase of a car and car
payments, the IRS filed suit in district court to enforce the summons. In
district court Mr. Belcik asserted that he did not have any records and
that he was not required to keep records of his expenses. He failed to
appear at multiple court-ordered hearings, and in April 2016 the district
court ordered his arrest. United States v. Belcik, No. 8:15-mc-2-T-
23MAP, 2016 WL 836691 (M.D. Fla. Mar. 4, 2016) (order). Mr. Belcik
                                   5

[*5] spent four days incarcerated and agreed to produce evidence to the
IRS to secure his release. He met with RA Clark but claimed the Fifth
Amendment privilege in response to 75% of RA Clark’s questions.
During the course of the summons proceedings Mr. Belcik continuously
defied the district court’s authority and bombarded the court with
“specious,” “oppressive,” “groundless,” “repetitive” motions that were
“contumacious violations” of the court’s orders. Id. at *1. In April 2020
RA Clark issued third-party summonses to Bank of America and
Regions Bank for Mr. Belcik’s bank records. Mr. Belcik moved to quash
the summonses in district court.

       After obtaining the bank records RA Clark and RA Page
conducted bank deposits analyses of the Direct Results and Blowing
Rock bank accounts to reconstruct Mr. Belcik’s income for 2008–16 and
2017 and 2018, respectively. The RAs calculated that Mr. Belcik had
annual gross receipts from 2008–18 as follows: $1,392,167, $900,753,
$977,285, $750,357, $651,270, $615,971, $641,614, $328,021, $222,945,
$335,603, and $240,352, for total gross receipts of approximately $7
million. The RAs eliminated transfers among the three accounts and did
not double count any funds. Included in the gross receipts were deposits
of the proceeds from Mr. Belcik’s sales of silver.

      RA Clark examined the disbursements from the accounts during
2008–16 as potential business expenses. As part of his analysis, he
summarized the amounts of the disbursements on the basis of each
payee’s identity in the bank records. However, he was not able to verify
whether any amounts were deductible business expenses because Mr.
Belcik refused to provide substantiation that the RA requested of the
amounts or business purposes of the disbursements. Accordingly, RA
Clark determined that Mr. Belcik could not deduct any business
expenses for 2008–16. Likewise, RA Page could not verify whether any
disbursements from the bank accounts during 2017 and 2018 were
deductible business expenses and determined that Mr. Belcik could not
claim any deductions.

       In February 2020 RA Clark issued a revenue agent’s report (RAR)
to Mr. Belcik for 2008–16, and in June 2021 RA Page issued an RAR
separately to each petitioner for 2017 and 2018. RA Clark and RA Page
made the initial determinations to assert the additions to tax listed
above and obtained timely written supervisory approval of the additions
pursuant to section 6751(b). Petitioners each filed administrative
appeals with the IRS Independent Office of Appeals (Appeals). Appeals
Officer (AO) Frederick Anderson was assigned to both petitioners’
                                            6

[*6] appeals. He requested that Mr. Belcik provide substantiation for
any business expenses, but Mr. Belcik again refused to provide any
substantiation and failed to cooperate with the AO. In April 2021 the
IRS prepared substitutes for returns (SFR) for Mr. Belcik for 2008–16,
and in July 2021, for each petitioner individually for 2017 and 2018.
Each SFR met all requirements of section 6020(b). Respondent included
the bank deposits in Mr. Belcik’s income for 2013–18 as well as the
warehouse rents and the amounts shown on information returns.

III.    Notices of Deficiency

        On July 22, 2021, respondent issued a notice of deficiency to Mr.
Belcik for 2008–16 determining the following deficiencies and additions
to tax:

                                                      Additions to Tax
       Year           Deficiency
                                          § 6651(f)       § 6651(a)(2)         § 6654

       2008            $511,516           $370,849          $127,879          $16,438

       2009             328,426            238,109           82,107            7,863

       2010             356,449            258,426           89,112            7,644

       2011             269,605            195,464           67,401            5,338

       2012             232,553            168,601           58,138            4,169

       2013             244,399            177,189           61,100            4,389

       2014             268,430            194,612           67,108            4,820

       2015             121,285            87,932            30,321            2,184

       2016             77,107             55,903               --- 3          1,843

         3 When the notices of deficiency were issued, the section 6651(a)(2) addition to

tax for failure to pay, if applicable, continued to accrue for 2016 and 2018 for Mr. Belcik
and for 2017 and 2018 for Mrs. Belcik. The addition is calculated from the due date of
the return at a rate of .5% for each month, or fraction thereof, of nonpayment, not to
exceed 25% of the underpayment. When the notices of deficiency were issued, the
accruals had not reached the 25% maximum.
                                          7

[*7] On February 22, 2022, respondent issued a notice of deficiency to
each petitioner for 2017 and 2018 determining deficiencies and
additions to tax as follows:

Mr. Belcik

                                                  Additions to Tax
      Year         Deficiency
                                      § 6651(f)       § 6651(a)(2)         § 6654

      2017          $163,728         $118,703               ---            $3,920

      2018           114,003           82,652               ---            3,697

Mrs. Belcik

                                                  Additions to Tax
      Year          Deficiency
                                      § 6651(f)       § 6651(a)(2)         § 6654

      2017            $15,933         $11,551               ---             $381

      2018            11,458            8,307               ---             372

       For 2017 and 2018 respondent asserted a whipsaw position with
respect to the warehouse rents by including the entire amount in each
petitioner’s gross income. On brief he asserts that the rents should be
equally divided between petitioners for each year. 4

IV.    Court Proceedings

       In the Amended Petitions, petitioners asserted numerous
frivolous arguments, and we struck most paragraphs as meritless. We
advised petitioners that they had a serious misunderstanding of the law

        4 Respondent allowed each petitioner a standard deduction for the filing status

married filing separately and one personal exemption. Petitioners have substantiated
that they paid real estate tax on their personal residence that is allowable as an
itemized deduction for 2008–18 of $5,487, $5,379, $6,723, $6,902, $7,354, $8,040,
$8,152, $8,208, $8,088, $7,884, and $8,204, respectively.
                                           8

[*8] and warned them that if they continued to pursue frivolous
arguments, we would likely impose an additional penalty under section
6673 up to $25,000. See Order (Nov. 4, 2022) in Docket Nos. 32770-21
and 11750-22; Order (Nov. 3, 2022) in Docket No. 11753-22. After our
warning, petitioners continued to file numerous motions and discovery
motions asserting baseless, frivolous arguments including challenging
the Court’s authority and often repeating the same arguments that we
had struck from the Amended Petitions. When we denied petitioners’
groundless discovery motions, they filed new discovery motions
asserting more frivolous arguments the same or the next day. They filed
requests for admissions that did not relate to the issues before the Court
for the apparent purpose of advancing their frivolous arguments in
violation of Rule 90. See Rule 90 (requiring requests for admissions be
warranted by existing law and precluding the parties from using
requests for improper purposes such as to harass the opposing party, to
cause unnecessary delay, or needlessly to increase litigation costs).
Petitioners also refused to stipulate any facts or exhibits. 5

       Before trial we directed Mr. Belcik to identify each specific
canceled check that he intended to offer as an exhibit at trial to
substantiate his business expenses by exhibit and Bates numbers and
warned petitioners that voluminous, disorganized documents might not
be admitted into evidence. See Order (Oct. 6, 2023) in Docket Nos.
32770-21, 11750-22, and 11753-22. Mr. Belcik did not adhere to our
Order. We nevertheless admitted into evidence at trial over 3,000 pages
of unorganized bank statements and canceled checks on the condition
that Mr. Belcik present the documents in an organized, logical fashion
on brief. We directed Mr. Belcik to summarize the business expenses for
each year, to state the amount paid to each payee, and to identify the
exhibit in the record by exhibit and Bates numbers that establish the
amount of each expense. We further directed him to assert the business
purpose for each expense that he identified in this manner. In his briefs
Mr. Belcik did not make any attempt to identify the expenses in the
manner that we directed.

                                      OPINION

      Gross income means “all income from whatever source derived”
including income derived from business. § 61(a); Commissioner v.

        5 Petitioners object to certain exhibits including bank records. The exhibits are

authentic per deemed stipulation. Moreover, Mr. Belcik admitted that the bank
records were his. We overrule petitioners’ objections.
                                    9

[*9] Glenshaw Glass Co., 348 U.S. 426, 429–31 (1955). Gain from the
sale of property equals the amount realized less the taxpayer’s adjusted
basis in the property. § 1001(a). In unreported income cases, the
Commissioner must establish an evidentiary foundation connecting the
taxpayer with an income-producing activity, Llorente v. Commissioner,
649 F.2d 152, 156 (2d Cir. 1981), aff’g in part, rev’g and remanding in
part 74 T.C. 260 (1980), or demonstrate that the taxpayer actually
received income, Edwards v. Commissioner, 680 F.2d 1268, 1270–71
(9th Cir. 1982); Walquist v. Commissioner, 152 T.C. 61, 67 (2019). Once
the Commissioner makes the required threshold showing, the burden
shifts to the taxpayer to prove by a preponderance of the evidence that
the Commissioner’s determinations are arbitrary or erroneous.
Walquist, 152 T.C. at 67–68 (citing Helvering v. Taylor, 293 U.S. 507,
515 (1935)).

I.    Gross Income

      A.     Bank Deposit Analysis

        The IRS reconstructed Mr. Belcik’s income using the bank
deposits method. Taxpayers must maintain and keep accurate records
establishing the amount of their gross income. § 6001. When a taxpayer
fails to do so, the IRS may reconstruct the taxpayer’s income under any
method that, in its opinion, clearly reflects income. § 446(b); Petzoldt v.
Commissioner, 92 T.C. 661, 693 (1989). The IRS’s reconstruction of
income “need only be reasonable in light of all surrounding facts and
circumstances.” Petzoldt, 92 T.C. at 687. Bank deposits are prima facie
evidence of income, and the Commissioner need not show a likely source
of the income. See Parks v. Commissioner, 94 T.C. 654, 658 (1990);
Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Mr. Belcik admitted
that he operated and earned income from a successful direct marketing
business during 2008–16 and engaged in commercial and residential
rental activities during 2017 and 2018. He also admitted that he sold
silver.

       Under the bank deposits method, we presume that all money
deposited into a taxpayer’s bank account is taxable unless the taxpayer
shows that particular deposits are nontaxable or were previously
reported as income. Price v. United States, 335 F.2d 671, 677 (5th Cir.
1964); Tokarski, 87 T.C. at 77. The IRS must take into account any
nontaxable sources of income that it has knowledge of. Price, 335 F.2d
at 677; DiLeo v. Commissioner, 96 T.C. 858, 868 (1991), aff’d, 959 F.2d
16 (2d Cir. 1992). The IRS eliminated transfers among Mr. Belcik’s three
                                       10

[*10] bank accounts and did not double count any deposits. Through its
bank deposit analysis, the IRS determined that Mr. Belcik received
unreported gross receipts for each year at issue in the amounts set forth
above, which totaled approximately $7 million.

       After the IRS reconstructs a taxpayer’s income, the taxpayer
bears the burden of proving that the IRS’s implementation of the bank
deposits method was unfair or inaccurate. See Clayton v. Commissioner,
102 T.C. 632, 645–46 (1994); DiLeo, 96 T.C. at 871–72. Around 2016 Mr.
Belcik stopped operating Direct Results. Thus, no deposits during 2017
and 2018 were Direct Results’ gross receipts. Deposits in those years
were from rents, silver sales, and real estate activities. Mr. Belcik
credibly identified two sources of deposits other than Direct Results’
gross receipts: silver sales during 2009–11 and 2013–2018 and the sale
of a condo in 2013. He established that he deposited proceeds from silver
sales in the amounts listed above for total sale proceeds of $1,141,236.
He also established that he had a total cost basis in the silver of
$1,053,633. As part of the Rule 155 computations for Docket Nos.
32770-21 and 11753-22, the parties are to match the purchase and sale
of silver using the first in, first out method to determine Mr. Belcik’s
cost basis in the silver that he sold each year and to calculate the amount
of long-term capital gain or loss for each year. 6 See § 1012.

       In 2013 Mr. Belcik received $90,000 from the sale of a condo that
he had helped his father purchase. Mr. Belcik did not provide any
information about the purchase such as whether he lent the money to
his father or whether they co-owned the condo. Nor did Mr. Belcik
present any evidence of his cost basis in the condo even if he did co-own
it for purposes of determining the amount of gain or loss on the sale.
Petitioners did not address the condo sale in their briefs. Accordingly,
we hold that Mr. Belcik is taxable on the $90,000 as long-term capital
gain. Mr. Belcik did not identify any nontaxable sources of the deposits
nor errors in respondent’s calculation of the bank deposits during
2008–16. In 2018 Mr. Belcik deposited $48,720 into the Blowing Rock
account. He admitted that he engaged in real estate activities during
2017 and 2018. Mr. Belcik did not establish a nontaxable source for the
$48,720. Accordingly, we hold that the $48,720 is gross income.
Additionally, in 2018 Mr. Belcik transferred the Phoenix Avenue
property for gross proceeds of $26,500 as shown on Form 1099–S. We

       6 Substantiation for basis and sale proceeds is at Exhibit 27-P, Bates Nos.

00048-00050.
                                        11

[*11] find that $26,500 is included in Mr. Belcik’s 2018 gross income
because he did not establish his basis in the property. 7

       In summary, we find that Mr. Belcik had gross receipts from
Direct Results as determined in the notice of deficiency for 2008–16 less
the proceeds from the silver sales and $90,000 condo sale proceeds. He
also had capital gains or losses from the silver sales and $90,000 in
capital gain from the 2013 condo sale. For 2017 and 2018 Mr. Belcik had
capital gains or losses from the silver sales and gross income of $48,720
in addition to the warehouse rents discussed below. Additionally, he had
income in the amounts reported on the information returns.

       B.      Rental Income

       Respondent argues that the warehouse rents should be equally
divided between petitioners for 2017 and 2018 because they jointly
owned the warehouse. 8 Petitioners argue that the warehouse rents are
attributable solely to Mr. Belcik. We agree with petitioners. Mr. Belcik
had control over the rents and deposited them into the bank accounts
over which he had signatory authority. Accordingly, we find that the
rents were his income. See Price v. Commissioner, T.C. Memo. 2004-103
(holding that a taxpayer’s gross income includes deposits into bank
accounts over which he has dominion and control); see also Zaklama v.
Commissioner, T.C. Memo. 2012-346, at *18 (sustaining a determination
that rent reflected in a deposited check was the income of the taxpayer
to whom the check was written). Accordingly, we find that rents of
$90,250 and $75,734 are includible in Mr. Belcik’s gross income for 2017
and 2018, respectively. No part of the rent is includible in Mrs. Belcik’s
income for those years.

       C.      UberWorld Income

      As she was a partner in UberWorld, Mrs. Belcik’s shares of
partnership income were $461 and $5,055 for 2017 and 2018,
respectively, and her share of capital gain was $2,511 for 2018. These
amounts are Mrs. Belcik’s only income. Her income for each year is less
than the standard deduction for a married person filing separately and
one personal exemption. Accordingly, Mrs. Belcik does not have taxable

       7 On the basis of our review of the record, Mr. Belcik did not establish his

holding period for the Phoenix Avenue property.
      8 The parties stipulated that petitioners jointly owned the warehouse, and

documents in the record indicate joint ownership.
                                    12

[*12] income for 2017 or 2018, and we do not sustain the deficiencies
against her.

II.   Deductible Expenses

      Taxpayers may deduct ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business.
§ 162(a). Deductions are a matter of legislative grace, and taxpayers
have the burden of proving that they are entitled to business expense
deductions; they must prove the amount and the business purpose of
each expense. Rule 142(a); see INDOPCO, Inc. v. Commissioner, 503
U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). Technically speaking, the cost of goods sold (COGS) is not a
deduction; it is an adjustment subtracted from gross receipts in
determining gross income. Treas. Reg. § 1.61-3(a); see Metra Chem Corp.
v. Commissioner, 88 T.C. 654, 661 (1987). Taxpayers cannot claim an
immediate deduction for capital expenditures. § 263(a); see Woodward
v. Commissioner, 397 U.S. 572, 575 (1970) (explaining that taxpayers
cannot deduct a capital expenditure under section 162). Rather, the
taxpayer may deduct capital expenditures over time through
depreciation or amortization. See, e.g., §§ 167, 195(b).

       To obtain deductions, taxpayers must keep sufficient records to
substantiate the amounts and business purposes of business expenses
and provide them to the IRS to enable the IRS to determine the correct
tax liability. See § 6001; Treas. Reg. § 1.6001-1(a). They are also required
to maintain sufficient records to substantiate the amount of COGS. See
Nunn v. Commissioner, T.C. Memo. 2002-250. When a taxpayer does not
adequately substantiate an expense, the Court is permitted to estimate
the amount of the expense when the Court is persuaded from the record
that the taxpayer has incurred the expense for business purposes.
Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). However,
the Court “bear[s] heavily if it [so] chooses upon the taxpayer whose
inexactitude is of his own making.” Id. For the Court to estimate the
amount of the allowable deduction, the taxpayer must present some
credible evidence that provides a rational basis for the estimate. Vanicek
v. Commissioner, 85 T.C. 731, 742–43 (1985). We are not obligated to
make an estimate under the Cohan rule where there is insufficient
evidence to allow us to make a rational estimate. See Lerch v.
Commissioner, 877 F.2d 624, 627–29 (7th Cir. 1989) (refusing to apply
the Cohan rule where the taxpayer failed to present evidence to support
claimed deductions), aff’g T.C. Memo. 1987-295. The taxpayer must
supply some factual basis for an estimate; otherwise, the allowance
                                          13

[*13] would amount to “unguided largesse.” Williams v. United States,
245 F.2d 559, 560 (5th Cir. 1957).

       Section 274(d) imposes heightened substantiation requirements
that override the Cohan rule for certain types of business expenses
including     automobiles      and     entertainment     expenses. 9   See
§ 280F(d)(4)(A)(i), (iii); Sanford v. Commissioner, 50 T.C. 823, 827–28
(1968) (holding that we may not apply the Cohan rule to approximate
expenses covered by section 274(d)), aff’d per curiam, 412 F.2d 201 (2d
Cir. 1969); Treas. Reg. § 1.280F-6(b)(1)(i), (iii). Taxpayers must
substantiate automobile expenses by adequate records or sufficient
evidence that corroborates their own statements, the amount, time and
place, and business purpose for each expenditure. Temp. Treas. Reg.
§ 1.274-5T(c). Taxpayers must maintain a record in the form of an
account book, a diary, a log, a statement of expenses, trip sheets, or a
similar record as well as evidence documenting the amounts of the
expenditures. Id. subpara. (2). An actual contemporaneous log is not
strictly required, but records made at or near the time of the expenditure
have greater probative value than records created subsequently. Id.
subpara. (1).

        A.      Direct Results’ Business Expenses: 2008–16

       Mr. Belcik asserts that he is entitled to deduct disbursements
from the Direct Results bank accounts as business expenses. He did not
substantiate most disbursements except through the bank records that
the RAs obtained through third-party summonses, which we find wholly
insufficient to substantiate most of the alleged business expenses.
Significantly, he did not introduce any documentation to substantiate
the business purpose of the disbursements. He asserts that some
disbursements were for entertainment and automobile expenses but
wholly failed to satisfy the section 274(d) substantiation requirements.
Accordingly, he may not deduct any automobile or entertainment
expenses for the years at issue.

       Mr. Belcik ran a successful business during 2008–16 and clearly
incurred legitimate business expenses. Had he filed returns or produced
documentation for the expenses during the audit, appeal, or trial, it is
likely that he would have been able to deduct more business expenses.
However, he refused to cooperate with the IRS and fought the summons

       9 Section 274(d) was amended by the Tax Cuts and Jobs Act of 2017, Pub. L.

No. 115-97, § 13304(a)(2)(A), 131 Stat. 2054, 2124. The amendment was made effective
for amounts paid or incurred after December 31, 2017. Id. § 13304(e), 131 Stat. at 2126.
                                    14

[*14] of his substantiation documentation in district court for over five
years with baseless, frivolous arguments. During this litigation he failed
to cooperate with respondent. At trial he stated that he had additional
records to substantiate the disbursements but did not offer them into
evidence. He failed to follow the Court’s instructions in our pretrial order
and at trial to organize and summarize the bank records. Instead,
substantial parts of his briefs consist of frivolous arguments. The briefs
make minimal references to the record; and when they do cite the record,
it is a blanket citation of exhibits that consist of approximately 3,500
pages including 3,000 pages of the disorganized bank records and
canceled checks. Such references to the record are unhelpful, and we
may treat Mr. Belcik’s failure to address the specific expenses for
deduction as a concession. See Ernest S. Ryder & Assocs., Inc., APLC v.
Commissioner, T.C. Memo. 2021-88, at *173–74.

        Nevertheless, we have attempted to sift through the voluminous,
disorganized documents. Many checks were for personal and household
expenses, which Mr. Belcik acknowledged at trial and conceded were not
deductible. Some checks were made out to Mr. Belcik or to “cash.” Mr.
Belcik testified that some disbursements were for equipment purchases,
i.e., they were for capital expenditures. He testified about the business
purpose of some payments on the basis of the payees’ identities, and we
instructed Mr. Belcik to summarize this testimony and further provide
such explanation as to other payees on brief. In the light of Mr. Belcik’s
failure to make any attempt to follow our instructions, we find that he
lacks credibility in his testimony as to the business purpose of the
payments evidenced by the canceled checks. He failed to point
specifically to the documents in the record that substantiate the
amounts of his claimed expenses. He admitted that he hired workers
and failed to issue any information returns reporting their
compensation to the IRS. He also admitted that he did not pay
employment taxes. We find that the canceled checks are insufficient to
substantiate the business purpose of the disbursements and hold that
the disbursements were not deductible business expenses except to the
extent stated below.

      We find that Mr. Belcik may deduct amounts paid to the United
States Postal Service, Tampa Envelop, JK&M Ink, and Mac Paper
during 2008–16 to the extent that there are canceled checks in the
                                          15

[*15] record that establish the amounts of the expenses. 10 Mr. Belcik
has also substantiated to our satisfaction payments of property tax on
the warehouse for 2008–18 of $15,515, $13,556, $11,846, $11,559,
$11,335, $11,862, $11,636, $12,886, $12,291, $13,730, $16,992, and
$15,913, respectively. Apart from these expenses, we have no means to
determine the business purposes of the disbursements. We do not know
whether the payments were made for legitimate, currently deductible,
business expenses, capital expenditures, or personal expenses. We are
not bound to accept his unverifiable, undocumented testimony.

        Mr. Belcik’s ineligibility to claim business expenses is his own
fault because of his willful behavior including his continued refusal to
cooperate during the audit, the appeals, and this litigation and his
decision to continuously assert frivolous arguments in this litigation in
his effort to avoid paying tax for nearly two decades. 11 Before trial we
told Mr. Belcik that we would not accept disorganized records into
evidence, but at trial we ended up giving him another opportunity to
organize the canceled checks and to explain the business purposes of the
disbursements on brief. We gave Mr. Belcik ample opportunity to
provide his business records in an organized manner during and after
trial, and he failed to take advantage of that opportunity just as he failed
to take advantage of the numerous opportunities that the IRS gave him
to provide the records during the audit and the appeals.

       We will not estimate deductible expenses under the Cohan rule
in these circumstances particularly in the light of Mr. Belcik’s lack of
credibility. 12 See Ernest S. Ryder & Assocs., Inc., APLC, T.C. Memo.
2021-88, at *173–74 (finding that where the taxpayer made general
references to the record, using the Cohan rule to estimate expenses is
not warranted). We are “not obligated to protect taxpayers from the

        10 For Mr. Belcik to deduct these expenses, we direct him to identify each
payment to these payees by exhibit number, Bates number, and check number as part
of the Rule 155 computation. His failure to identify the expenses in this precise manner
will result in the disallowance of deductions for the expenses in the Rule 155
computation.
        11 In their briefs petitioners also repeat their argument that respondent did

not send the notices of deficiency by certified or registered mail. We already rejected
this argument when we denied petitioners’ motion to dismiss.
        12 Mr. Belcik seeks to rely on the disbursement summary that RA Clark

prepared during the audit. However, RA Clark credibly testified that he could not
verify the business purpose of any disbursements in the summary or determine
whether the disbursements were for deductible business expenses because Mr. Belcik
refused to cooperate during the audit. RA Clark testified that he included in the
summary expenses that Mr. Belcik did not substantiate.
                                        16

[*16] results of their own obstinacy, and there is no duty to invoke the
Cohan rule in aid of taxpayers who willfully disobey the Tax Court.”
Lerch v. Commissioner, 877 F.2d at 629. Mr. Belcik did not provide a
credible evidentiary basis of business purpose to allow us to apply the
Cohan rule except for the expenses identified above. See Vanicek, 85 T.C.
at 742–43. Moreover, it is not clear to us that Mr. Belcik may deduct any
other disbursements because of his use of the bank accounts to pay
personal and household expenses and his admission that some expenses
were capital expenditures.

       B.      Business Expenses and Losses: 2017 and 2018

       For 2017 and 2018 Mr. Belcik asserts that he is entitled to deduct
expenses incurred to renovate real property, depreciation on the fair
market value of the warehouse, and the purchase price of a new
automobile. We hold that he may not deduct these expenses. Generally,
taxpayers may not immediately deduct amounts paid for permanent
improvements to property or the costs of a capital asset, i.e., property
that will last for more than one year. See § 263; Woodward v.
Commissioner, 397 U.S. at 575 (explaining that a taxpayer cannot
deduct a capital expenditure under section 162). Rather, taxpayers may
deduct depreciation of property “used in the trade or business” or “held
for the production of income” for exhaustion, wear and tear, and
obsolescence. § 167(a). For depreciation deductions, taxpayers must
establish (1) the existence of a trade or business; (2) the use of property
in the trade or business; and (3) a depreciable basis in the asset by
showing the cost of the property and its useful life, as well as any
previously allowable depreciation. See Cluck v. Commissioner, 105 T.C.
324, 337 (1995).

       Mr. Belcik may not deduct depreciation for the warehouse
because he has not established his cost basis. 13 Moreover, depreciation
is based on the taxpayer’s cost basis in the property, not the property’s
fair market value. § 167(c)(1). Likewise, Mr. Belcik has not established
that the purported renovation expenses are currently deductible. We
find that the expenses are capital expenditures that would be part of his
basis in the real property for purposes of determining gain or loss on the
property’s sale to the extent he can substantiate the expenditures in the
year of sale. Finally, Mr. Belcik may not deduct the purchase price of
the automobile because an automobile is a capital asset. Taxpayers can

      13 As stated above, Mr. Belcik may deduct real estate tax that he paid on the

warehouse for 2017 and 2018.
                                          17

[*17] depreciate an automobile if they establish that they used it for
business purposes. Mr. Belcik may not deduct depreciation for the
automobile because he did not establish his business use of the
automobile through adequate records. See § 274(d); Finney v.
Commissioner, T.C. Memo. 1980-23 (holding that the taxpayer has the
burden to prove business use).

       Mr. Belcik also asserts that he lost $12,300 and $21,500,
respectively, in the foreclosures of the Cypress Lake and Coconut Grove
properties, which he seeks to deduct. Taxpayers are entitled to deduct
losses sustained during the taxable year that were not compensated for
by insurance or otherwise. § 165(a). We find that Mr. Belcik may deduct
these losses. 14 A foreclosure is a sale or exchange of the foreclosed
property from which gain or loss is realized for purposes of section
1001(a). See Helvering v. Hammel, 311 U.S. 504, 510–11 (1941).
Accordingly, Mr. Belcik is treated as having disposed of his interests in
the Cypress Lake and Coconut Grove properties and has established
losses equal to the purchase prices. See § 1001(a) (providing that gain or
loss recognized on a sale or exchange is the difference between the
amount realized from the disposition and the taxpayer’ s adjusted basis
in the property).

III.    Self-Employment Tax

       Section 1401 imposes self-employment tax on self-employment
income. See Treas. Reg. § 1.1401-1(a). Section 1402(a) defines net
earnings from self-employment as the gross income derived by an
individual from the carrying on of any trade or business by such
individual less allowable deductions attributable to such trade or
business. During 2008–16 Mr. Belcik operated Direct Results. He did
not address whether he is liable for self-employment tax on his income
from Direct Results on brief. We deem that he has conceded respondent’s
determination that he is liable for self-employment tax. See Collins v.
Commissioner, T.C. Memo. 2002-115 (stating that we may deem a
taxpayer to have conceded an issue where he made no argument at trial
or on brief relating to that issue). Accordingly, we find that Mr. Belcik’s
income from Direct Results is subject to self-employment tax for
2008–16. See § 1402(a); Price, T.C. Memo. 2004-103.

         14 Mr. Belcik has not established that he was engaged in a trade or business of

real property rental or resale. However, this does not affect the amount or character of
his loss deductions.
                                    18

[*18] Mr. Belcik did not operate Direct Results and did not earn income
from it during 2017 and 2018. Rather, his bank deposits were the
warehouse rents and silver sale proceeds as well as some deposits from
unknown sources but possibly related to his real estate activities.
Accordingly, we find that Mr. Belcik is not subject to self-employment
tax for 2017 and 2018. See § 1402(a)(1) (excluding rent from self-
employment income), (3)(A) (excluding gain or loss on the sale of a
capital asset).

IV.   Additions to Tax

       Having found that Mrs. Belcik is not liable for a deficiency for
2017 or 2018, we address only Mr. Belcik’s liability for additions to tax.
For each year at issue respondent determined that Mr. Belcik is liable
for additions to tax under section 6651(f) for fraudulent failure to file,
under section 6651(a)(2) for failure to pay, and under section 6654 for
failure to pay estimated tax. We sustain each addition to tax.

      A.     Fraudulent Failure to File

       Section 6651(a)(1) provides for an addition to tax of 5% of the tax
required to be shown on a return for each month for which there is a
failure to file a tax return, up to 25% in the aggregate. Section 6651(f)
increases the addition to tax for fraudulent failure to file to 15% of the
tax required to be shown on the return for each month, up to 75% in the
aggregate. An SFR prepared by the Commissioner under section 6020(b)
is not a return for purposes of section 6651(f). See § 6651(g)(1).

       The Commissioner bears the burden of proving that the taxpayer
had a filing obligation and fraudulently failed to file a return. See
§ 6651(a)(1), (f). The Commissioner must prove fraud by clear and
convincing evidence. See § 7454(a); Rule 142(b); DiLeo, 96 T.C. at 873.
Fraud is established by showing that a “taxpayer intended to evade tax
believed to be owing by conduct intended to conceal, mislead, or
otherwise prevent the collection of such tax.” Clayton, 102 T.C. at 647.
Fraud may be established by circumstantial evidence. Petzoldt, 92 T.C.
at 699. The same factors relevant to determining fraudulent intent
under section 6663 are relevant to determining fraudulent intent for
failure to file. See Clayton, 102 T.C. at 653.

      The Court looks to the following nonexclusive badges of fraud to
determine fraudulent intent: (1) failure to file tax returns; (2) failure to
report income over an extended period; (3) failure to furnish the IRS
with access to records or to cooperate with taxing authorities; (4) failure
                                     19

[*19] to keep adequate books and records; (5) concealment of bank
accounts or assets from IRS agents; (6) willingness to defraud another
in a business transaction; (7) implausible or inconsistent explanations
of behavior or arguments; (8) failure to make estimated tax payments;
and (9) engaging in illegal activities. See Bradford v. Commissioner, 796
F.2d 303, 307–08 (9th Cir. 1986), aff’g T.C. Memo. 1984-601; Gould v.
Commissioner, 139 T.C. 418, 446 (2012), aff’d, 552 F. App’x 250 (4th Cir.
2014); Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992); Recklitis
v. Commissioner, 91 T.C. 874, 910 (1988). Fraudulent intent is
determined by looking at the entire record and the taxpayer’s conduct.
DiLeo, 96 T.C. at 874. No single factor is determinative for establishing
fraud; the existence of several factors is persuasive circumstantial
evidence of fraud. Niedringhaus, 99 T.C. at 211; Petzoldt, 92 T.C. at 700.

       Respondent has carried his burden of showing that Mr. Belcik
was required to file a return, and failed to file one, for each year at issue.
See Simmons v. Commissioner, T.C. Memo. 2009-283, slip op. at 9–11.
Respondent produced certified SFRs for the years at issue, and Mr.
Belcik admitted that he operated a business during 2008–16 and
received rents and engaged in real estate activities during 2017 and
2018. Respondent has established that Mr. Belcik had a filing obligation
and failed to file. See Gates v. Commissioner, 135 T.C. 1, 14 (2010).

       After thorough review of the record, we conclude that most badges
of fraud apply to demonstrate that Mr. Belcik acted with fraudulent
intent. Mr. Belcik’s business experience further supports a
determination of fraudulent intent. He is a successful businessman who
operated a business for over two decades. During 2008–16 his business
had gross receipts of approximately $6 million. The fact that he filed
returns for 1994 supports an inference that he knew that he had a filing
obligation and his failure to file was fraudulent. See Niedringhaus, 99
T.C. at 211; Tooke v. Commissioner, T.C. Memo. 1977-91, aff’d, 595 F.2d
1229 (9th Cir. 1979) (unpublished table decision). He failed to file
returns on the basis of frivolous, tax-protester reasons. Petitioners have
not paid tax for any year since 1994. This nearly 20-year pattern of
failing to file returns and failing to report income from a successful
business is strong evidence of fraud. See Holland v. United States, 348
U.S. 121, 139 (1954); Beaver v. Commissioner, 55 T.C. 85, 93 (1970);
Vanover v. Commissioner, T.C. Memo. 2012-79, slip op. at 12. Mr.
Belcik’s failure to pay estimated tax also indicates fraudulent intent. See
Miller v. Commissioner, 94 T.C. 316, 336 (1990); Putnam v.
Commissioner, T.C. Memo. 2015-160, at *23. Mr. Belcik had a pattern
of tax avoidance and concealment in which he paid workers for the
                                   20

[*20] services that they provided to Direct Results and failed to issue to
them Forms W–2 or Forms 1099–MISC for their compensation that he
now seeks to deduct. See Petzoldt, 92 T.C. at 701–02. His actions could
have enabled his workers to avoid reporting and paying tax on their
compensation.

       Additionally, Mr. Belcik attempted to conceal income and assets
by opening the Blowing Rock account. He transferred over $900,000 to
it during the years at issue. He used the Blowing Rock account to buy
and sell silver from a foreign-based mint. He paid household and
personal expenses through his business bank accounts. He failed to
maintain adequate books and records of his business operations. He
failed to cooperate during the audit and appeal and fought the
summonses that the IRS issued to him for over five years with a series
of baseless motions asserting the same frivolous arguments including 15
motions after the district court warned him to stop filing such motions.
He failed to comply with the district court’s orders to provide
information to the IRS and failed to appear before the court on multiple
occasions. The magistrate judge described the motions as “specious,”
“oppressive,” and “contumacious violations” of the court’s order. Belcik,
2016 WL 836691, at *1. Mr. Belcik provided records only to secure his
release from incarceration on contempt charges. However, after his
release, he continued to assert frivolous arguments in his dealings with
the IRS and refused to answer most of RA Clark’s questions or provide
substantiation for any expenses.

       We conclude that respondent has established by clear and
convincing evidence that Mr. Belcik’s failures to file were due to fraud
and sustain respondent’s determination that Mr. Belcik is liable for a
section 6651(f) increased addition to tax for each year at issue.

      B.     Failure to Pay

        Section 6651(a)(2) provides for additions to tax when a taxpayer
fails to pay timely the tax shown on a return unless the taxpayer proves
that the failure was due to reasonable cause and not due to willful
neglect. Taxpayers have reasonable cause for their failures to pay if they
exercised ordinary business care and prudence in providing for payment
and were nevertheless either unable to pay the tax or would suffer an
undue hardship. Treas. Reg. § 301.6651-1(c)(1).

      Respondent must produce evidence of a tax return for Mr. Belcik
showing a tax liability. See §§ 7491(c), 6651(a)(2); Wheeler v.
                                    21

[*21] Commissioner, 127 T.C. 200, 210–12 (2006), aff’d, 521 F.3d 1289
(10th Cir. 2008). An SFR prepared by the IRS pursuant to section
6020(b) is treated as a return filed by the taxpayer for purposes of
section 6651(a)(2). See § 6651(g). Respondent has met his burden of
production by producing copies of the SFRs that the IRS prepared for
Mr. Belcik for the years at issue. Mr. Belcik did not pay the tax shown
on the SFRs. He has not established, or even argued, that he had
reasonable cause for his failure to pay or that the failure to pay was not
due to willful neglect. Accordingly, we sustain the section 6651(a)(2)
addition to tax for each year at issue.

      C.     Failure to Pay Estimated Tax

       Section 6654(a) imposes an addition to tax on an individual who
underpays his estimated tax. The addition to tax is calculated with
reference to four required installment payments of the taxpayer’s
estimated tax liability. § 6654(c) and (d). Each required quarterly
installment is equal to 25% of the taxpayer’s “required annual payment,”
which is defined as the lesser of 90% of the tax required to be shown on
the current year’s return or (2) 100% of the tax shown on the prior year’s
return. § 6654(c) and (d)(1). When a taxpayer did not file a return for the
year at issue or the immediately preceding year, the required annual
payment is 90% of tax due for the year at issue. § 6654(d)(1)(B).

       Respondent produced evidence that Mr. Belcik had an obligation
to pay estimated tax for each year at issue, i.e., he had a required annual
payment, and that he did not pay any estimated tax. See Wheeler, 127
T.C. at 211–12. Further, nothing in the record indicates that a statutory
exception applies. See § 6654(e). Accordingly, we sustain the section
6654(a) addition to tax for Mr. Belcik for 2008–18.

V.    Penalties for Maintaining Frivolous Positions

       Section 6673(a)(1) authorizes the Court to impose a penalty up to
$25,000 payable to the United States whenever it appears to the Court
that the taxpayer instituted or maintained the proceeding primarily for
delay or that the taxpayer’s position in the proceeding is frivolous or
groundless. The purpose of section 6673 is to compel taxpayers to
conform their conduct to settled tax principles and to deter the waste of
judicial and IRS resources. Salzer v. Commissioner, T.C. Memo.
2014-188.

      Although not requested to do so by respondent, we will require
Mr. Belcik to pay a section 6673 penalty of $2,000. We warned Mr. Belcik
                                  22

[*22] that he would be subject to a section 6673 penalty if he continued
to repeat frivolous arguments that we struck from his Amended
Petition. Nevertheless, he repeated the same frivolous arguments in
numerous baseless motions and in his posttrial briefs, wasting the
Court’s and respondent’s time and resources. Mr. Belcik’s conduct
throughout his case has been inconsistent with that of any taxpayer who
wants to truthfully and efficiently resolve his tax liability. We again
warn Mr. Belcik that further assertion of frivolous arguments in any
future documents filed in his cases may result in an additional penalty
of a higher amount.

      In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we conclude
they are moot, irrelevant, or without merit.

      Decisions will be entered under Rule 155 in Docket Nos. 32770-21
and 11753-22.

      Decision will be entered for petitioner in Docket No. 11750-22.