McPherson v. Commissioner

MEMORANDUM FINDINGS OF FACT AND OPINION

By statutory notice of deficiency dated August 11, 1989, respondent determined deficiencies in and additions to Larry D. McPherson's (petitioner) Federal income tax and self-employment tax, as follows:

*570 Following concessions by respondent, the remaining issues for decision are: (1) Whether the statute of limitations bars assessment with respect to taxable years 1978 through 1984; (2) whether respondent's determination of deficiency was arbitrary; (3) whether section 66(b) or (c) applies to the years in issue, except 1986, when petitioner was no longer married; and (4) whether petitioner is liable for additions to tax pursuant to sections 6651(a)(1), 6653(a), and 6654.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated herein by this reference. Petitioner lived in Pocatello, Idaho, at the time the petition in this case was filed. From 1976 to 1985 petitioner was married to Susan McPherson (Susan), and they resided on a farm in Pocatello for most of the years of their marriage. Petitioner and Susan separated in November 1984 and were divorced in June 1985.

Petitioner owned L&M Maintenance (L&M), a car and truck wash business, for at least some of the years at issue. Susan assisted in the business until 1980, at which time she ceased working, to give birth to the couple's third child. *571 One of L&M's customers was United Parcel Service (UPS), and in 1978 business from UPS accounted for over $ 21,000 in revenue. L&M had other accounts as well. Over the years the business with UPS declined. At times during the years at issue, petitioner also worked outside his business. Petitioner and his wife supplemented their income by growing vegetables and raising animals on their farm.

For 1976 and 1977, petitioner and Susan filed joint Federal tax returns. They submitted joint tax return forms for taxable years 1978 through 1981 on which they claimed that revealing information regarding income violated their right against self-incrimination. Petitioner did not file any returns for 1982 through 1986. Susan filed separate returns for 1981 through 1985.

Respondent reconstructed petitioner's income for the years at issue, since petitioner's records were determined to be inadequate. Petitioner no longer possessed his business records, having had all of them removed from his home, except for certain documents dealing with 1978. Respondent initially attempted to reconstruct petitioner's taxable income by determining the net income L&M generated for the years at issue, and*572 the income petitioner had received from other sources. However, respondent was unable to determine how many customers petitioner had, nor was he able to obtain the cooperation of petitioner's outside employer.

Respondent computed petitioner's taxable income for the years at issue by averaging petitioner's income for 1976 and 1977, the last 2 years in which petitioner had filed completed returns, and by adjusting that amount for inflation according to the Bureau of Labor's consumer price index.

Respondent further determined, as to the years petitioner was married to Susan, that all of the taxable income arising from L&M and petitioner's employment was the income of petitioner pursuant to section 66(b) for 1985, and pursuant to section 66(c) for the years 1978 through 1984, and thus all the community income (under Idaho law) was to be included in the gross income of petitioner. Respondent conceded on brief that the provisions of section 66(c) did not apply to the years 1978, 1979, and 1980.

Respondent incorporated within the deficiency the self-employment tax under section 1401 for each of the years at issue. Respondent also determined that petitioner is liable for an addition*573 to tax for failure to file a tax return pursuant to section 6651(a)(1); for negligence or disregard of rules or regulations under section 6653(a); and for failure to pay estimated income tax according to section 6654. Respondent determined that section 6661 applied to the years 1982 through 1986; however, he conceded this matter on brief.

OPINION

Petitioner has failed to file any brief within the time period prescribed by the Court, nor has he filed a brief up to the date of this opinion. Notwithstanding these circumstances, this Court will resolve this case based upon the issues raised in the petition and amended petition to the extent the record allows.

Petitioner asserted in his amended petition that the period of limitations expired with respect to the years 1978 through 1984 prior to issuance of the notice of deficiency covering those years. In general, respondent must assess income tax within 3 years after a return was filed. Sec. 6501(a). However, the statute of limitations allows assessment at any time where no tax return has been filed. Sec. 6501(c)(3). Moreover, "Tax forms that do not contain information upon which tax liability may be computed are not returns *574 within the meaning of the Internal Revenue Code." Edwards v. Commissioner, 680 F.2d 1268, 1269-1270 (9th Cir. 1982) and cases cited therein. The forms, as completed for the years 1978 through 1981, failed to apprise respondent of the facts necessary to determine petitioner's tax. Thus, since petitioner's "returns" for 1978 through 1981 fail to constitute valid returns and petitioner did not file any returns for 1982 through 1986, the period of limitations had not expired at the time the notice of deficiency for this case was issued.

Petitioner contends that respondent's determination of income, based upon averaging the taxable income reported on his 1976 and 1977 returns and adjusting that figure to reflect changes in the cost of living, is arbitrary. Pursuant to section 446(b), respondent has broad discretion in determining income "particularly where the taxpayer files no returns and refuses to cooperate in the ascertainment of his income." Giddio v. Commissioner, 54 T.C. 1530, 1533 (1970). Petitioner's records were either missing or incomplete, and respondent was unable to obtain information from petitioner's employer. Based upon these*575 facts and the record as a whole, we find that respondent's method of income reconstruction is not arbitrary. See Edwards v. Commissioner, supra; Miller v. Commissioner, T.C. Memo 1983-73, affd. without published opinion 745 F.2d 67 (9th Cir. 1984). As this Court said in Figueiredo v. Commissioner, 54 T.C. 1508, 1513 (1970), affd. without opinion (9th Cir. 1973):

If the determined deficiencies are excessive, it is the petitioners who prevented a more accurate determination. In these circumstances they do not have a just ground for complaint. [Citations omitted.]Furthermore, petitioner failed to present any evidence showing that respondent's determinations are erroneous. See Rule 142(a).

In his amended petition, petitioner asserted that only one-half of the income determined by respondent to have been earned by him as an employee or in his business is attributable to him. Idaho is a community property state, and all property other than separate property, acquired before or during marriage, is community property. Idaho Code sec. 32-906 (1983). Where a spouse living in a community property*576 state files a separate return, he or she must generally report one-half of all community income. See United States v. Mitchell, 403 U.S. 190, 29 L. Ed. 2d 406, 91 S. Ct. 1763 (1971); United States v. Malcolm, 282 U.S. 792, 75 L. Ed. 714, 51 S. Ct. 184 (1931).

Susan filed separate tax returns for the years 1981 through 1984. Respondent determined that pursuant to the provisions of section 66(c), all the gross community income was attributable to petitioner for 1978 through 1984. On brief, however, respondent conceded that the provisions of section 66(c) did not apply to the years 1978, 1979, and 1980, so that the usual division of community income between spouses would apply, and petitioner would be chargeable with only one-half of such income. Section 66(c) provides:

(c) SPOUSE RELIEVED OF LIABILITY IN CERTAIN OTHER CASES. -- Under Regulations Prescribed by the Secretary, if --