                        T.C. Memo. 2009-223



                      UNITED STATES TAX COURT



                  RODNEY JORDAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 2555-00, 12938-01.   Filed September 29, 2009.



     Rodney Jordan, pro se.

     Rebecca Dance Harris, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:    By notice of deficiency, respondent

determined deficiencies in and penalties on petitioner and Carmen

Jordan’s Federal income taxes as reported on their joint returns

as follows:
                              - 2 -


                                           Penalty
               Year      Deficiency     Sec. 6662(a)

               1988       $24,599          $4,920
               1991       187,288          37,458

     By separate notices of deficiency, respondent determined

deficiencies in and penalties on petitioner’s Federal income

taxes as reported on his and Carmen Jordan’s joint tax returns as

follows:

                                          Penalty
               Year      Deficiency     Sec. 6662(a)

               1993        $8,477          $1,695
               1994         2,019             404
               1995        52,693          10,289
               1996        82,320          16,464

     After concessions, the issues remaining for decision are:

(1) Whether for taxable years 1991 and 1992 petitioner had

unreported income from certain alleged withdrawals or payments

from Earth Construction, Inc. (ECI), and its profit-sharing plan;

(2) whether for taxable year 1991 petitioner had unreported

income from a sale of gravel rights to ECI; (3) whether for

taxable year 1993 petitioner had unreported rental income and

income from other unidentified sources; (4) whether for taxable

year 1994 petitioner had unreported income from discharge of

indebtedness; (5) whether for taxable year 1995 petitioner had

unreported income from his gravel pit business; (6) whether for

taxable year 1995 petitioner is entitled to certain deductions

claimed with respect to his gravel pit business; (7) whether for
                               - 3 -

taxable year 1996 petitioner understated his income on Schedule

C, Profit or Loss From Business; (8) whether for taxable years

1993, 1994, and 1995 petitioner had taxable income attributable

to payments to Carmen Jordan by her wholly owned S corporation,

Green Mountain Custom Crushing, Inc. (GMCC), and from flow-

through adjustments to GMCC’s income tax returns; (9) whether

petitioner’s reported losses from horse activities for taxable

years 1991 through 1994 are limited by section 469; and (10)

whether petitioner is liable for the section 6662 accuracy-

related penalty for all years at issue.1

     When he filed his petition at docket No. 2555-00, petitioner

resided in New Hampshire.   When he filed his petition at docket

No. 12938-01, he resided in Tennessee.     The parties have

stipulated that any appeal of these consolidated cases will lie

with the U.S. Court of Appeals for the Sixth Circuit.

     The parties have stipulated some facts, which we incorporate

herein by reference.   For purposes of order and clarity, we have

set forth below separately our Findings of Fact and Opinion for

each issue.

     The burden of proof is generally upon the taxpayers, except

as may be otherwise provided by statute or determined by the



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 4 -

Court.   See Rule 142(a).2   The U.S. Court of Appeals for the

Sixth Circuit, to which any appeal of these cases would lie, has

held that the Commissioner’s determination of unreported income

must be based on a “minimal evidentiary foundation” in order for

the presumption of correctness to attach.    United States v.

Walton, 909 F.2d 915, 919 (6th Cir. 1990).    Once the Commissioner

meets his initial burden of production, the taxpayers bear the

“burden of producing credible evidence that they did not earn the

taxable income attributed to them or of presenting an argument

that the IRS deficiency calculations were not grounded on a

minimal evidentiary foundation.”    Id.; see Olmos v. Commissioner,

T.C. Memo. 2007-82.




     2
      Sec. 7491(a) shifts the burden of proof to the Commissioner
in certain circumstances with respect to any factual issue
relevant to ascertaining the taxpayer’s liability for tax imposed
by subtit. A or B of the Code. See sec. 7491(a)(1); Rule
142(a)(2). Sec. 7491 is effective with respect to court
proceedings arising from examinations commenced after July 22,
1998. See Internal Revenue Service Restructuring and Reform Act
of 1998, Pub. L. 105-206, sec. 3001(c)(1), 112 Stat. 727.
Similarly, sec. 7491(c) places the burden of production on the
Commissioner with respect to the liability of any individual for
any penalty, addition to tax, or additional amount, in court
proceedings arising in connection with examinations commencing
after July 22, 1998. The parties have stipulated that
respondent’s audit of the years at issue commenced before July
22, 1998. Consequently, the provisions of sec. 7491(a) and (c)
are inapplicable to these cases.
                                 - 5 -

Issue 1.     Petitioner’s Alleged Withdrawals in 1991 and 1992

                           FINDINGS OF FACT

     In 1979 petitioner, Carmen Jordan, and David Shields started

Earth Construction, Inc. (ECI).     This company primarily

constructed roads and bridges for the State transportation

departments of Vermont and New Hampshire.     During periods

relevant to these cases, petitioner owned 51 percent of ECI,

Carmen Jordan owned 15 percent, and David Shields owned 34

percent.     Petitioner served as ECI’s president and director.

A.   Petitioner’s Takings From ECI’s Profit-Sharing Plan

     In 1985 ECI started a profit-sharing plan.     Petitioner,

Carmen Jordan, and David Shields were named trustees of the ECI

profit-sharing plan.     By 1991, however, petitioner had taken over

complete control of the profit-sharing plan and handled its

financial affairs.     A.G. Edwards & Sons, Inc. (A.G. Edwards),

handled ECI’s investments, although petitioner made all

decisions.     As of the end of 1992, the plan had about 31

participants.3

         On July 31, 1991, petitioner withdrew $100,000 from ECI’s

profit-sharing plan and deposited it into a personal bank

account.     On December 27, 1991, petitioner withdrew an additional

$48,677 from ECI’s profit-sharing plan and deposited it into his



     3
      The record does not indicate the number of plan
participants on other dates.
                                - 6 -

personal account.   These two withdrawals nearly depleted the

profit-sharing plan’s assets.

     On January 31, 1992, the last day of the profit-sharing

plan’s fiscal year, ECI wrote a check for $150,000 to the profit-

sharing plan’s account, effectively replenishing the funds that

petitioner had taken.4   The replenishment, however, was to be

short lived.   On February 18, 1992, petitioner withdrew $140,000

from the profit-sharing plan and deposited the check into his

personal bank account.   On February 21, 1992, petitioner wrote a

check on this same personal bank account to purchase a cashier’s

check for $140,000, payable to First Vermont Bank and Trust Co.

This cashier’s check was deposited in ECI’s line of credit

account at First Vermont Bank and Trust Co.   The proceeds were

used to underwrite ECI’s purchase of a gravel pit from a company

in Tilton, New Hampshire.

     On February 28, 1992, petitioner withdrew another $10,000

from the profit-sharing plan and deposited it into his personal

account, thereby depleting all but $1,298.45 of the plan’s

assets.

     In 1996 the U.S. Department of Labor brought suit against

petitioner for improper takings from ECI’s profit-sharing plan.

See Metzler v. Jordan, No. 1:96-cv-117 (D. Vt., Apr. 4, 1996).


     4
      The profit-sharing plan’s annual reports are prepared at
the end of each plan year for submission to the IRS and issuance
to the plan participants.
                                - 7 -

As a result of this suit, in 1997 a judgment of $238,894.78 was

entered against petitioner, representing a principal amount of

$150,000 plus interest.5

B.   Petitioner’s Withdrawals on ECI’s Line of Credit

     On August 1, 1991, petitioner withdrew $330,000 on ECI’s

line of credit at First Vermont Bank & Trust Co.    He deposited

the funds in his personal bank account.6   The same day, he used

these funds, plus some of the funds he had withdrawn from ECI’s

profit-sharing plan, to purchase seven convenience stores

operating under the name of H-OUR Mart, Inc. (H-OUR Mart), in

which he owned a 50-percent interest.7

C.   Suit Brought by David Shields

     On February 23, 1992, David Shields filed a complaint in the

Superior Court of Caledonia County, Vermont, against petitioner,

Carmen Jordan, and ECI.    He alleged, among other things, that


     5
      The record does not conclusively identify which of
petitioner’s withdrawals made up the $150,000 principal amount.
The record also does not reflect whether petitioner has paid this
judgment.
     6
      The parties have stipulated that petitioner withdrew
$300,000. Facts disclosed by the record clearly show, however,
that the actual amount of the withdrawal was $330,000 and that
the income adjustment in the notice of deficiency is predicated
upon this figure, which petitioner does not dispute.
Consequently, we disregard the stipulation insofar as it
indicates that the amount of the withdrawal was $300,000 rather
than $330,000. See Cal-Maine Foods, Inc. v. Commissioner, 93
T.C. 181, 195 (1989).
     7
      The other 50-percent owner was Gilles W. Desjarlais; the
record does not reveal the amount, if any, of his investment.
                               - 8 -

petitioner had improperly caused $150,000 to be withdrawn from

ECI’s profit-sharing plan and had diverted about $500,000 of

ECI’s working capital to purchase an interest in H-OUR Mart.    By

summary order dated December 20, 1994, the Caledonia superior

court entered a judgment of $200,000 in favor of David Shields.8

D.   Bankruptcy Proceedings

     On May 3, 1993, petitioner and Carmen Jordan filed for

chapter 11 bankruptcy.   On January 5, 1994, petitioner and Carmen

Jordan’s second amended plan under chapter 11 was confirmed by

the bankruptcy court.

     On November 25, 1997, Carmen Jordan filed for chapter 13

bankruptcy.   On March 31, 1998, her chapter 13 plan was confirmed

by the bankruptcy court.

E.   Tax Returns and Notice of Deficiency

     Respondent determined that in 1991 petitioner received

$478,677 of unreported taxable wages from ECI.   Although the

notice of deficiency does not detail the manner in which this

number was derived, the parties appear to agree that it

represents the sum of the $100,000 that petitioner withdrew from

ECI’s profit-sharing plan on July 31, 1991, the additional

$48,677 that petitioner withdrew from ECI’s profit-sharing plan

on December 27, 1991, and the $330,000 that petitioner drew



     8
      The damages were apparently calculated taking into account
that David Shields owned a 34-percent interest in ECI.
                               - 9 -

against ECI’s line of credit on August 1, 1991, and invested in

H-OUR Mart.   In the same notice of deficiency respondent

determined that in 1992 petitioner received $246,279 of

unreported taxable wages from ECI.     Again, the notice of

deficiency does not detail the manner in which this number was

derived, but the parties appear to agree that it represents the

sum of $150,000 that petitioner allegedly withdrew from ECI’s

profit-sharing plan in February 1992 and an additional $96,279 of

otherwise unidentified payments that ECI made to petitioner in

1992.

                              OPINION

     Petitioner does not dispute that he received funds totaling

at least $478,677 in 1991 and $246,279 in 1992.     He contends,

however, that these receipts represent loans from ECI pursuant to

an open account rather than taxable income and that he actually

repaid greater amounts to ECI than he received in 1991 and 1992.9


     9
      Because no deficiency has been determined for 1992, we lack
jurisdiction with respect to that year. See sec. 6214(b);
Paccon, Inc. v. Commissioner, 45 T.C. 392, 396-397 (1966); Parker
v. Commissioner, 37 T.C. 331, 332 (1961). We may, however,
determine the correct amount of taxable income or NOL for a year
not in issue (whether or not the assessment for that year is time
barred) as a preliminary step in determining the correct amount
of an NOL carryback or carryover to a taxable year in issue. See
sec. 6214(b); Calumet Indus., Inc. v. Commissioner, 95 T.C. 257,
274-275 (1990). The notice of deficiency for 1988 and 1991
states that “the elimination of the 1992 NOL affects the tax
years 1989 and 1990” by increasing petitioner’s taxable income
for those years. Similarly, the notices of deficiency for the
later years disallow amounts characterized as
                                                   (continued...)
                               - 10 -

     1.   Petitioner’s 1991 Withdrawals

     Plainly, the funds that petitioner misappropriated from

ECI’s profit-sharing plan cannot be said to be loans from either

ECI or the plan.10

     Similarly, the record does not show that the $330,000 that

petitioner withdrew on ECI’s corporate line of credit was

properly authorized.   The court judgment awarding damages to

ECI’s former vice president, David Shields, for petitioner’s

unlawful diversion of ECI’s working capital to H-OUR Mart,

suggests strongly otherwise.   Petitioner testified that he



     9
      (...continued)
“carryback/carryover” without explanation of the year of
origination. Petitioner appears to assign as error the
disallowance of at least some of these “carryback/carryforwards”
on the ground that they are properly allowable carryforwards of a
1992 NOL. Both parties have addressed respondent’s adjustments
to petitioner and Carmen Jordan’s 1992 taxable income, from which
we infer that the parties agree that these adjustments are
properly at issue in these cases as affecting the proper amount
of carryback and carryforward of any 1992 NOL carryover. We
expect the parties to address this matter in the Rule 155
computations.
     10
      Petitioner suggests vaguely that some of the money he
withdrew from the profit-sharing plan represented his and Carmen
Jordan’s own contributions. Even if we were to assume for the
sake of argument that petitioner and Carmen Jordan made
contributions to the profit-sharing plan, this would not mean
that the withdrawals were necessarily nontaxable. A profit-
sharing plan is a type of deferred compensation plan. See sec.
1.401-1(b)(1)(ii), Income Tax Regs. Distributions are generally
taxable under rules relating to annuities. Subject to various
exceptions, distributions from a profit-sharing plan are
generally taxable. See sec. 402(a). Petitioner has not
established the applicability of any exception to this general
rule.
                              - 11 -

discussed the $330,000 withdrawal with ECI’s accountant who “set

it up as a loan”.   In support of this testimony petitioner points

to ECI’s financial statements, which show, as of December 31,

1991, a $500,694 loan receivable from H-OUR Mart, which amount

presumably includes the $330,000 in question.   The record,

however, contains no documentation of any loan agreement between

ECI and H-OUR Mart.   To the contrary, the record strongly

suggests that petitioner diverted the $330,000 from ECI to

finance his 50-percent ownership interest in H-OUR Mart.     In the

light of these circumstances, we attach little significance to

the manner in which ECI’s accountant, after the fact and in

collaboration with petitioner, might have chosen to set up the

transaction.

     Petitioner contends that he should not be taxable on any of

the 1991 receipts in question because he repaid ECI even more

than he received.   In support of this contention petitioner

relies upon his own testimony and numerous photocopied documents,

including receipts, personal checks, and portions of ECI’s books

and records.

      We are not persuaded that petitioner repaid any part of the

$148,677 he took from ECI’s profit-sharing plan in 1991 or the

$330,000 he withdrew from ECI’s corporate line of credit.     In the

first instance, according to petitioner’s own contentions, the

$148,677 that he took from the profit-sharing plan was not repaid
                              - 12 -

until January 31, 1992, when he orchestrated ECI’s payment of

$150,000 into the plan.   Similarly, according to petitioner’s own

contentions, the $330,000 that he withdrew from ECI’s corporate

line of credit is reflected in a $500,694 loan receivable from H-

OUR Mart, as shown on ECI’s yearend 1991 financial statements.11

Because the $330,000 ostensibly remained in this balance as of

yearend 1991, the financial statements do not support a

conclusion that petitioner repaid this amount in 1991.

     That said, the record does support petitioner’s contention

that in 1991 he and Carmen Jordan made certain payments to or on

behalf of ECI.   On the basis of all the evidence in the record we

are not convinced, however, that these payments represent

repayments of the withdrawals in question.   By way of example,

the record shows that in the fall of 1991 Carmen Jordan, on

petitioner’s behalf, wrote two checks to ECI totaling $190,000.12


     11
      As previously discussed, we do not view the manner in
which ECI reported these amounts on its financial statements as
dispositive. We refer to the financial statements here only to
evaluate petitioner’s claims to have repaid these amounts.
     12
      In particular, the record contains copies of these
canceled checks: A $175,000 personal check dated Oct. 31, 1991,
and a $15,000 personal check dated Nov. 12, 1991. Both of these
checks are signed by Carmen Jordan and drawn on her and
petitioner’s joint bank account and posted as credits in the
“Accounts Receivable-Officers” account in ECI’s general ledger.
In her request for innocent spouse relief submitted to the
Commissioner on Feb. 23, 2000, Carmen Jordan stated that in the
fall of 1991 petitioner asked her to lend him $175,000 so that he
could repay a portion of debt that he owed ECI and that several
weeks later he sought to borrow an additional $15,000 from her.
                                                   (continued...)
                               - 13 -

These repayments are reflected as credits in ECI’s general ledger

under “Accounts Receivable-Officers”, as are certain other

amounts that petitioner claims to have paid ECI.    This general

ledger account, however, does not reflect the line-of-credit and

profit-sharing plan withdrawals that are at issue; consequently,

the various credits to the account do not support a conclusion

that repayments were made with respect to the withdrawals at

issue.    More fundamentally, the “Accounts Receivable-Officers”

general ledger account shows that in 1991 debits to the account

exceeded credits by about $83,000, suggesting that petitioner and

Carmen Jordan made withdrawals from ECI in addition to the

withdrawals that respondent has determined to be taxable income,

and that those additional withdrawals exceeded the amount of any

repayments that were made in 1991.13    Consequently, after careful

review of the evidence, we are not persuaded that any of the

payments that petitioner and Carmen Jordan allege to have made to




     12
      (...continued)
According to her statement, she issued the checks to ECI as
petitioner had requested but later successfully sued him to
recover these funds.
     13
      This conclusion is bolstered by the notes to ECI’s
financial statements which, under the heading “Related Party
Transactions”, show a similar increase from yearend 1990 to
yearend 1991 in “Loans receivable from stockholder” from $74,262
to $161,584.
                              - 14 -

ECI in 1991 are properly regarded as repayments of the

withdrawals at issue.14

     Petitioner also claims that various other amounts should be

counted as repayments of the withdrawals at issue for 1991.

This amount includes $100,000 of income that he acknowledges

realizing from his sale of gravel rights to ECI during 1991.

Petitioner suggests that the $100,000 should be netted against

the withdrawals in question for 1991 because he received the

$100,000 amount not in cash but as a “set-off” to his “running

balance” with ECI.   Petitioner’s contention is without merit.   As

discussed infra, the sale of gravel rights resulted in $100,000

of taxable income to petitioner in 1991.   Accordingly, it in no

way reduces the taxable income petitioner realized from his

withdrawals from ECI’s profit-sharing plan and ECI’s corporate

line of credit.   Nor do we find any support in the record for

petitioner’s suggestion that the $100,000 is double-counted in

respondent’s determination.




     14
      In the light of this conclusion, it is unnecessary to
describe in detail the extensive evidence that petitioner has
offered to show payments made to ECI in 1991, other than to say
that we find it to be of variable quality and persuasiveness.
While some of the evidence suggests additional payments were made
to ECI in 1991 and recorded in ECI’s books, most of the evidence
relates to purported payments that are not reflected in the
portions of ECI’s books and records that petitioner has
introduced into evidence. Petitioner has offered no convincing
explanation why ECI’s books and records reflect only certain of
the payments he alleges he made.
                              - 15 -

     In sum, we sustain respondent’s determination that in 1991

petitioner had unreported taxable income of $478,677 from the

transactions in question.15

     2.   Petitioner’s 1992 Profit-Sharing-Plan Withdrawals

     On January 31, 1992, ECI wrote a check for $150,000 to the

profit-sharing plan’s account; on February 18, 1992, petitioner

withdrew $140,000 from the profit-sharing plan and deposited it

into his personal bank account at Bradford National Bank; and on

February 21, 1992, petitioner wrote a check on this same personal

bank account to purchase a cashier’s check for $140,000, payable

to First Vermont Bank and Trust Co., to be deposited in ECI’s

corporate line of credit and used to underwrite ECI’s purchase of

a gravel pit.   In substance, then, petitioner orchestrated the

transfer of $140,000 over the course of about 20 days from ECI to

the profit-sharing plan to himself to ECI’s corporate line of

credit.   The end result was that petitioner effectively restored

for ECI’s benefit $140,000 of the funds that he had caused to be

placed temporarily in the profit-sharing plan.   Then, on February

28, 1992, petitioner withdrew another $10,000 from the profit-

sharing plan and deposited it into his personal account.




     15
      Respondent has characterized this unreported income as
“wages” from ECI. Although it seems to us that these withdrawals
might more accurately be characterized as wrongful conversions,
the labeling does not affect the taxation of these amounts as
ordinary income to petitioner.
                                 - 16 -

     For reasons not entirely clear to us, both in the notice of

deficiency and on brief respondent has characterized petitioner’s

withdrawals from ECI’s profit-sharing plan as “wages”.       If we

were to agree with respondent’s characterization, we might

conclude that in 1992 petitioner voluntarily repaid $140,000 of

the $150,000 “wages” and consequently had taxable income of

$10,000.     See Young v. Commissioner, T.C. Memo. 1961-33.

Alternatively, and perhaps more plausibly, viewing the

withdrawals as wrongful conversions, we similarly conclude that

in 1991 petitioner made restitution of $140,000, leaving $10,000

of taxable income.     See Fox v. Commissioner, 61 T.C. 704, 712-714

(1974); Chumbrook v. Commissioner, T.C. Memo. 1977-108.

        3.   Other Payments From ECI to Petitioner in 1992

     In the notice of deficiency issued to petitioner and Carmen

Jordan for taxable years 1988 and 1991 respondent determined that

petitioner’s 1992 unreported taxable income included, in addition

to $150,000 of withdrawals from ECI’s profit-sharing plan,

$96,279 of payments from ECI.     The notice of deficiency provides

no explanation for this determination.     Nor has respondent

offered any evidence or separate argument about this $96,279

item.    Rather, on brief respondent seems inexplicably to lump

together this amount and petitioner’s withdrawals from ECI’s

profit-sharing plan.     Nevertheless, petitioner does not deny

receiving the $96,279 of payments from ECI in 1992.     He contends,
                              - 17 -

however, that these payments simply reflect a “running balance”

between himself and ECI and that the payments are approximately

equal to amounts that he paid in 1992 to ECI or on ECI’s behalf.

In support of this contention petitioner introduced into evidence

copies of many checks written on his personal bank account to

various parties, including ECI, and gave detailed testimony about

these payments.

     Bearing heavily against respondent, who has offered no

reasoned explanation for the basis on which he determined that

the $96,279 was taxable income and has offered no evidence in

this regard, we accept petitioner’s explanation as adequately

supported by the evidence.   We do not sustain respondent’s

determination in this regard.16

Issue 2.   Petitioner’s Sale of Gravel Rights to ECI

                         FINDINGS OF FACT

     In 1991 petitioner sold gravel rights to ECI for $100,000.

The proceeds were not reported on petitioner and Carmen Jordan’s

joint 1991 Federal income tax return.




     16
      In reaching this result we are mindful that petitioner
produced similar evidence and gave similar testimony as to
amounts he alleges to have paid on ECI’s behalf in 1991. In that
instance, however, as previously discussed, we have concluded
that the taxable income was from sources other than from any
“running balance”.
                                - 18 -

                                OPINION

     Petitioner does not dispute that in 1991 he sold gravel

rights to ECI for $100,000 but contends that this income is not

taxable because the proceeds were not paid to him in cash but

instead “came in the form of a setoff or credit expressed in the

running balance of transactions between Petitioner and ECI.”    We

disagree.

     In the first instance, in contradiction of petitioner’s

argument, ECI’s cashflow statement for the year ended December

31, 1991, shows a cash outflow of $100,000 for “Purchase of

mineral rights”, described in more detail in notes to the

financial statements as “Purchase of rights to 100,000 yards of

material located in a gravel pit owned by the Company president”.

But even if we were to assume, for the sake of argument, that

rather than pay $100,000 directly to petitioner, ECI applied this

amount to satisfy debts owed by petitioner, the result would be

the same--for income tax purposes the transaction would be

equivalent to petitioner’s selling the gravel rights to ECI for

$100,000 cash and then using the cash to defray his alleged debt

to ECI.     See Frazier v. Commissioner, 111 T.C. 243, 245 (1998);

Schultz v. Commissioner, 59 T.C. 559, 565 (1973); Bialock v.

Commissioner, 35 T.C. 649, 660 (1961).

     Regardless of whether petitioner received the $100,000 of

proceeds in cash or in satisfaction of claims against him, his
                                - 19 -

taxable gain is the amount by which $100,000 exceeds his adjusted

basis in the gravel rights.   See sec. 1001(a); Bialock v.

Commissioner, supra at 660.     The record does not establish the

amount, if any, of petitioner’s adjusted basis in the gravel

rights.    Accordingly, we sustain respondent’s determination that

in 1991 petitioner realized taxable income of $100,000 on his

sale of the gravel rights.

Issue 3.   Petitioner’s Alleged Unreported Income in 1993

                          FINDINGS OF FACT

     Respondent determined that in 1993 petitioner had unreported

rental income of $3,483 from Jay Peak, Inc.    Respondent also

determined that in 1993 petitioner realized $43,986 of unreported

capital losses attributable to transactions in a brokerage

account.   Respondent determined that petitioner therefore had

$43,986 of ordinary income because, as stated in the notice of

deficiency, “the Jordans would have to cover the $43,986 in

losses with deposits to the account.”

                                OPINION

A.   Unreported Rental Income

     The parties have stipulated as follows:    “In 1993, the

petitioner received taxable income from Jay Peak, reported to the

petitioner on a Form 1099-MISC, in the amount of $10,973.00, of

which the petitioner reported only $7,490.00 on his 1993 income

tax return.”   Notwithstanding this stipulation, on reply brief
                                - 20 -

petitioner contends that he correctly reported $7,490 as the

amount of net rental income, after deducting “internal charges

for house keeping, etc.”    He also contends that respondent has

not met his “minimum burden of evidence as to this issue.”      We

reject these contentions as contrary to the parties’ stipulation

and unsupported by any competent evidence.

B.   Imputed Income

     Respondent has determined that because petitioner had an

unreported capital loss of $43,986, he must have had unreported

income of the same amount to cover the loss.    Viewed charitably,

this determination borders on the whimsical.    Setting aside

questions as to why petitioner’s tax liability should reflect

only this conjectural income and not the actual losses upon which

it is improbably predicated, suffice it to say that respondent

has introduced no evidence to show that petitioner actually

covered the unreported losses, much less with unreported income.

This determination is not sustained.

Issue 4.   Discharge of Indebtedness Income--1994

                           FINDINGS OF FACT

     Respondent determined that in 1994 petitioner had $5,005 of

unreported income from discharge of debt.

                               OPINION

     The parties have stipulated as follows:    “In 1994, the

petitioner received taxable discharge of indebtedness income from
                                - 21 -

Chase Manhattan Bank, reported to the petitioner on a Form 1099-

C, in the amount of $5,005.00, which the petitioner did not

report on an income tax return.”    Notwithstanding this

stipulation, on reply brief petitioner contends that the $5,005

is not taxable because “the discharge was part of the bankruptcy

proceedings”.   We reject this contention as contrary to the

stipulation and unsupported by competent evidence.

Issue 5.   Petitioner’s Unreported Schedule C Income--1995

                           FINDINGS OF FACT

     On Schedule C of their joint 1995 Federal income tax return,

petitioner and Carmen Jordan reported $7,974 of gross receipts or

sales from petitioner’s gravel pit business.    Respondent

determined that this amount was understated by $55,935, on the

ground that petitioner had $63,909 of unexplained deposits.      As

explained in the notice of deficiency, this amount reflects

$21,355 that petitioner deposited in the fall of 1995 into his

account at A.G. Edwards and $42,554 that petitioner deposited at

some unspecified time into his personal account at First New

Hampshire Bank.

                               OPINION

     In the absence of adequate recordkeeping by a taxpayer as

mandated by section 6001, the Commissioner is authorized to

reconstruct the taxpayer’s income by any reasonable method that

clearly reflects income.    See, e.g., sec. 446(b); Holland v.
                               - 22 -

United States, 348 U.S. 121, 130-132 (1954).    One acceptable

method is the bank deposits method.     Clayton v. Commissioner, 102

T.C. 632, 645 (1994); DiLeo v. Commissioner, 96 T.C. 858, 867

(1991), affd. 959 F.2d 16 (2d Cir. 1992); Bevan v. Commissioner,

T.C. Memo. 1971-312, affd. 472 F.2d 1381 (6th Cir. 1973).    The

bank deposits method assumes that if a taxpayer is engaged in an

income-producing activity and makes deposits to bank accounts,

then those deposits, less amounts identified as nonincome items,

constitute taxable income.   See Clayton v. Commissioner, supra at

645-646.   Where the Commissioner has used the bank deposits

method to determine deficiencies, the taxpayer bears the burden

of showing that the determinations are incorrect.    See DiLeo v.

Commissioner, supra at 871; Bevan v. Commissioner, supra.

     Petitioner does not dispute making the deposits in question.

He contends, however, that his deposits into his A.G. Edwards

account merely represent transfers from other of his accounts.

The evidence shows that the subject deposits in the A.G. Edwards

account include three interaccount transfers totaling $5,200 that

did not represent items of gross receipts in 1995.    We conclude

that these items should be omitted from respondent’s income

reconstruction.17   Petitioner has failed, however, to establish



     17
      Petitioner also contends that two other deposits of $500
and $800 similarly represent interaccount transfers, but the
evidence in the record is insufficient to substantiate these
claims.
                               - 23 -

that any of the other amounts deposited into his A.G. Edwards

accounts represent items other than gross receipts.   Accordingly,

we hold and conclude that $16,155 of the deposits to petitioner’s

A.G. Edwards account in 1995 represents taxable income.

     Acknowledging that in 1995 he deposited more than $42,554

into his personal account at First New Hampshire Bank, petitioner

has attempted to show that these deposits were from nontaxable

sources.   The evidence in the record does not substantiate these

claims.    By way of example, petitioner claims that $20,121 of his

First New Hampshire Bank deposits in 1995 represents insurance

proceeds relating to a theft loss incurred at H-OUR Mart.

Petitioner suggests that these insurance proceeds are nontaxable

because they represent “repayment from my basis”.   Petitioner has

produced no documentation either of an insurance claim for a

theft loss or of payment on any such claim by an insurance

company; moreover, petitioner has not explained why insurance

proceeds relating to a theft loss incurred by H-OUR Mart should

be paid to petitioner directly or, if they were, why the proceeds

would represent nontaxable return of basis.   Similarly, although

petitioner has offered detailed explanations of the other

deposits into his First New Hampshire Bank, the evidence in the

record does not convince us that these deposits were from

nontaxable sources.
                              - 24 -

Issue 6.   Schedule C Deductions–-1995

                         FINDINGS OF FACT

     On his and Carmen Jordan’s joint 1995 Federal income tax

return petitioner claimed various Schedule C deductions including

a $10,000 “Crushing Cost” which respondent disallowed.18 On Form

886A, Explanation of Items, respondent’s examining agent

explained this adjustment as follows:

     An amount of $10,000 was deducted on the Schedule C of
     Rodney Jordan. This amount was purportedly in payment
     of crushing costs to Green Mountain Custom Crushing.
     Numerous checks are written to and from Rodney, Carmen
     and Green Mountain Crushing. Rodney Jordan has not
     provided all bank statements for all accounts, has not
     provided invoices, and has not provided all cancelled
     checks. Rodney Jordan claims to have paid expenses of
     Green Mountain Custom Crushing in exchange for
     crushing. A listing of amounts totaling $12236 was not
     examined in detail. Rodney Jordan has also been paid
     amounts from Green Mountain Custom Crushing that he
     considers to be reimbursements.

     Examination of the returns has revealed additional
     income and it is impossible to determine at this time
     if expenses are for Green Mountain or in relation to
     the unreported income or to the existing schedule C.

                              OPINION

     Petitioner has the burden of proving he is entitled to the

claimed deduction.   See Rule 142(a); Welch v. Helvering, 290 U.S.

111 (1933).   At trial petitioner offered no evidence that he was


     18
      Petitioner also claimed as a Schedule C expense $9,999 of
interest expense. During respondent’s examination of
petitioner’s 1995 tax return, respondent’s allowance of an
additional $68 in interest expenses and disallowance of the
crushing costs of $10,000 for 1995 resulted in a $9,932 net
adjustment to petitioner’s Schedule C deductions.
                              - 25 -

entitled to deduct crushing costs.     Instead, petitioner contends

that during the audit he submitted to respondent’s examining

agent documentation to substantiate even more than the $10,000

deduction claimed on his Schedule C but she refused in bad faith

to consider the documentation.   In support of this contention,

petitioner focuses on the above-quoted language from the Form

886A:   “A listing of amounts totaling $12236 was not examined in

detail.”

     Because a trial before the Tax Court is a de novo

proceeding, “our determination of a petitioner’s tax liability

must be based on the merits of the case and not any previous

record developed at the administrative level.”     Jackson v.

Commissioner, 73 T.C. 394, 400 (1979) (citing Greenberg’s

Express, Inc. v. Commissioner, 62 T.C. 324, 328 (1974)).     Having

offered no competent evidence in support of this claimed

deduction, petitioner has failed to establish that he is entitled

to the claimed deduction for crushing costs.    In any event, the

Form 886A suggests that respondent’s examining agent declined to

examine petitioner’s “listing of amounts” in detail partly

because it was impossible to tell whether GMCC had reimbursed

petitioner for the amounts he was claiming as deductions.       We

take into account this same consideration in concluding that

petitioner has failed to establish entitlement to the claimed
                                - 26 -

deduction.   Respondent’s determination as to this issue is

sustained.

Issue 7.   Unreported Schedule C Income--1996

                           FINDINGS OF FACT

     On Schedule C to their 1996 joint Federal income tax return,

petitioner and Carmen Jordan reported $9,945 gross income from a

“Gravel Pit/Logging Operation”.    On the basis of a bank deposits

analysis, respondent determined that this Schedule C income was

understated by $228,519.    In particular, respondent determined

that in 1996 these bank deposits, totaling $238,464, represented

taxable income of:   (1) $85,417.82 deposited into petitioner’s

personal accounts at Merchants Bank; (2) $61,276 deposited into

the bank account of Sodalitan Mayer, a woman with whom petitioner

was then living; and (3) $91,740 deposited into petitioner’s

account at A.G. Edwards.

                               OPINION

     The issue is whether respondent correctly determined that in

1996 petitioner and Carmen Jordan understated Schedule C income

by $228,519.19




     19
      On reply brief petitioner contends that after trial
respondent conceded all but $92,774 of this amount and that on
brief respondent has improperly failed to abide by this alleged
concession. The record does not reflect any such concession.
                              - 27 -

A.   The Merchants Bank Deposits

     Petitioner has stipulated that in 1996 he received

$82,764.92 from “various Schedule C sources” which he deposited

into his Merchants Bank accounts but did not report on an income

tax return.   He has also stipulated that in 1996 he received

$2,652.90 of Schedule C income from a lumber company which he did

not report on an income tax return; the notice of deficiency

reflects this item as an additional deposit into one of

petitioner’s Merchants Bank accounts.   Petitioner has failed to

show that respondent erred in treating these Merchants Bank

deposits as taxable income.   We conclude that $85,417.82 of

petitioner’s 1996 deposits to his Merchants Bank accounts

represent taxable income to him.

B.   Deposits to Sodalitan Mayer’s Account

     The parties have stipulated that in 1996 checks payable to

petitioner and totaling $57,760.55 were deposited into Sodalitan

Mayer’s account.   Petitioner has offered neither argument nor

evidence to show that respondent erred in determining that these

$57,760.55 of deposits represent taxable income to him.   This

$57,760.55 amount as to which the parties have stipulated is

$3,515.90 less than the $61,276.45 described in the notice of

deficiency as having been deposited into Sodalitan Mayer’s

account.   The notice of deficiency indicates that this remaining

$3,515.90 of alleged deposits was transferred by petitioner from
                                - 28 -

another of his bank accounts.    On the basis of all the evidence,

we conclude that this interaccount transfer does not represent an

item of gross receipts in 1996.    We conclude and hold that

petitioner is taxable on $57,760.55 of the deposits he made into

Sodalitan Mayer’s account.

C.   Deposits to Petitioner’s A.G. Edwards Account

     Petitioner has stipulated that in 1996 checks made payable

to him and totaling $91,740 were deposited into his A.G. Edwards

account.   The evidence of record persuades us that two of the

underlying deposits, one for $5,000 and another for $6,500,

represent petitioner’s interaccount transfers rather than

unreported income.   Petitioner has failed, however, to show that

respondent erred in treating the other $80,240 of deposits into

his A.G. Edwards account as taxable income.20   We conclude that

$80,240 of the deposits to petitioner’s A.G. Edwards account

represents taxable income.


     20
      Petitioner alleges that $44,000 of these deposits was
generated by a payment from a “wealthy entrepreneur” in
consideration of an option to purchase a one-half interest in a
gravel pit that petitioner owned. Petitioner contends that this
option expired in 1998, at which time he declared the amount “as
a capital gain on my 1998 income taxes”. Petitioner has provided
no documentary evidence to support these contentions and has
offered no explanation for failing to do so. We draw an adverse
inference from these lapses, see Wichita Terminal Elevator Co. v.
Commissioner, 6 T.C. 1158, 1164 (1946), affd. 162 F.2d 513 (10th
Cir. 1947), and find petitioner’s testimony insufficient to
establish that the deposits did not represent taxable income as
respondent charged, see Sharwell v. Commissioner, 419 F.2d 1057,
1060 (6th Cir. 1969), vacating and remanding on other issues T.C.
Memo. 1968-89.
                                  - 29 -

Issue 8.      Items Pertaining to Carmen Jordan and GMCC

      In 1990 Carmen Jordan incorporated her wholly owned S

corporation, GMCC.21      Some of the deficiencies in dispute arise in

part from respondent’s determinations that Carmen Jordan had

unreported income from GMCC or from flow-through adjustments to

GMCC.      As a threshold matter, petitioner contends that these

issues are “void” because Carmen Jordan’s debts were discharged

in bankruptcy.      His brief states:   “It is common knowledge that

the IRS failed to file proof of claim and therefore their debt

was discharged in the confirmed bankruptcy plan(s).”        The record

does not establish whether any of Carmen Jordan’s tax liabilities

were discharged in bankruptcy.      But whether they were discharged

or not is irrelevant to the determination of petitioner’s tax

liability.      Spouses who file joint returns are jointly and

severally liable for the entire tax liability, which may be

collected from either spouse.      See sec. 6013(d)(3).    Carmen

Jordan’s bankruptcy case has no effect on petitioner’s liability

under section 6013(d)(3).

A.    Carmen Jordan’s 1993 and 1994 Payments From GMCC

                             FINDINGS OF FACT

      During 1993 and 1994 GMCC was in financial straits.       It had

little cash and no available sources of outside credit.        In an



      21
           For the periods at issue, GMCC’s taxable years ended Dec.
31.
                                - 30 -

effort to keep the company going Carmen Jordan advanced funds to

GMCC from time to time as necessary to allow it to pay its bills.

These advances were in the form of numerous checks or cash

deposits, of varying, relatively small amounts, totaling $29,575

in 1993 and $16,205 in 1994.     From time to time, as it had funds

available, GMCC would make payments to Carmen Jordan of varying,

relatively small amounts.     These payments from GMCC to Carmen

Jordan totaled $29,295 in 1993 and $37,595 in 1994.

     On their 1993 joint Federal income tax return petitioner and

Carmen Jordan reported $8,218 of wages which, according to an

attached Form W-2, Wage and Tax Statement, all represented wages

to petitioner from GMCC.     On their 1994 joint return petitioner

and Carmen Jordan reported $13,200 of wages, which according to

an attached Form W-2, all represented wages to Carmen Jordan from

GMCC.     Respondent determined that Carmen Jordan had unreported

wages of $29,295 in 1993 and $24,395 in 1994 (representing total

wages of $37,595 less the $13,200 reported on the return).

                                OPINION

        Although the notice of deficiency is not explicit in this

regard, the parties appear to agree that the determination

relates to unreported wages allegedly paid to Carmen Jordan by

GMCC.     Petitioner does not expressly deny that in 1993 and 1994

Carmen Jordan received payments from GMCC as determined in the
                                - 31 -

notice of deficiency.22   Petitioner contends, however, that Carmen

Jordan paid into GMCC more than it paid out to her during these

years, and that the payments at issue represent nontaxable “loan

repayments” on open account.

     Petitioner has introduced into evidence numerous canceled

checks and deposit tickets showing that, as we have found, Carmen

Jordan made payments or cash deposits to GMCC totaling $29,575 in

1993 and $16,205 in 1994.23    These canceled checks and bank

deposit tickets generally indicate that the amounts paid are a

“temp loan” or a “cash loan”.    In one instance, a canceled check

for $8,000 in October of 1993 indicates that it is for a “loan

payback”.




     22
      Petitioner has introduced into evidence copies of canceled
checks showing payments from GMCC to Carmen Jordan during 1993
and 1994. The amounts of GMCC’s payments evidenced by these
canceled checks are less than the payments determined in the
notice of deficiency. We are not convinced, however, that the
canceled checks in evidence represent the totality of all checks
issued by GMCC to Carmen Jordan in 1993 and 1994. In any event,
as mentioned in the text supra, petitioner has not expressly
disputed that GMCC paid Carmen Jordan the amounts indicated in
the notice of deficiency.
     23
      Petitioner also suggests that we should take into account
payments and deposits that Carmen Jordan allegedly made to GMCC
in 1995 and 1996, which he contends greatly exceeded payments to
her from GMCC during those years and resulted in a greater
“surplus” in Carmen Jordan’s favor. Because the determinations
at issue involve only 1993 and 1994, we limit our analysis to
those years.
                                - 32 -

     Respondent does not expressly dispute that in 1993 and 1994

Carmen Jordan made substantial payments to GMCC.24   Respondent

suggests, however, that those payments should be disregarded

because petitioner has produced no “loan documentation” to show

any loans between Carmen Jordan and GMCC.

     Particularly in a circumstance like this involving

transactions between a corporation and its sole shareholder on an

open account, formal indicia of indebtedness are not necessarily

essential to the existence of bona fide debt; rather, the

question is whether there is a bona fide expectation of

repayment.   “Advances are an additional contribution of capital

if they are intended to enlarge the stock investment, but not if

they are intended as a loan.”    Edward Katzinger Co. v.

Commissioner, 44 B.T.A. 533, 536 (1941) (open-account cash

advances by taxpayer to wholly owned corporation constituted

loans), affd. 129 F.2d 74 (7th Cir. 1942); cf. Am. Processing and

Sales Co. v. United States, 178 Ct. Cl. 353, 371 F.2d 842, 851-

857 (1967) (corporation’s advances to its subsidiary, taking the

form of non-interest-bearing open accounts and made with a

reasonable expectation of repayment, were loans); Byerlite Corp.



     24
      Counting only the amounts indicated on the canceled checks
and disregarding the amounts shown on the deposit tickets,
respondent contends that Carmen Jordan’s deposits into GMCC were
less than the amounts indicated supra. Respondent has offered no
explanation for disregarding cash deposits as indicated on the
deposit tickets.
                              - 33 -

v. Williams, 286 F.2d 285, 290-291 (6th Cir. 1960) (advances on

open account by a parent corporation to its subsidiary were

loans).

     Indeed, the regulations contemplate that such open-account

transactions between a shareholder and an S corporation may

constitute indebtedness.   The regulations provide that

“shareholder advances not evidenced by separate written

instruments and repayments on the advances (open account debt)

are treated as a single indebtedness.”25    Sec. 1.1367-2(a), Income

Tax Regs.   The basis of a shareholder’s open account debt is

properly determined by netting shareholder advances and

repayments that occur during the S corporation’s tax year.

Brooks v. Commissioner, T.C. Memo. 2005-204; cf. Cornelius v.

Commissioner, 494 F.2d 465 (5th Cir. 1974) (advances and

repayments that constitute separate transactions are not properly

netted), affg. 58 T.C. 417 (1972).     As a corollary, a shareholder

has gain on repayments of open account debt during a year only to

the extent that the repayments exceed advances during the year

plus the basis of the debt as of the beginning of the year.

     On the basis of all the evidence, we are convinced that

Carmen Jordan intended that GMCC would repay the advances at

issue and that GMCC intended to repay and did in fact repay them.


     25
      The regulations have been modified with respect to
shareholder advances made to an S corporation on or after Oct.
20, 2008. See T.D. 9428, 2008-2 C.B. 1174.
                                - 34 -

We conclude that the advances are properly treated as open

account debt rather than as separate transactions.

     In 1993 Carmen Jordan’s advances to GMCC of $29,575 exceeded

by $280 the $29,295 of payments that GMCC made to her, leaving

her a basis of $280 in the open account debt.    Consequently, in

1993 GMCC’s payments to Carmen Jordan gave rise to no taxable

income to her.

     In 1994 the $37,595 of payments that GMCC made to Carmen

Jordan exceeded by $21,110 the sum of Carmen Jordan’s $16,205 of

advances to GMCC and her $280 carryover basis in the open account

debt.     We conclude that this $21,110 of net repayments represents

ordinary income to her in 1994.26    We conclude that petitioner and

Carmen Jordan’s joint 1994 return underreported ordinary

income by $7,910 ($21,110 less the $13,200 reported on the joint

return as wages).

B.   Disallowed Losses From GMCC–-1993, 1994, and 1995

                           FINDINGS OF FACT

     On their joint Federal income tax returns, petitioner and

Carmen Jordan reported losses from GMCC of $62,369 for 1993,

$62,409 for 1994, and $46,599 for 1995.




     26
      Petitioner does not expressly dispute respondent’s
characterization of the payments as ordinary income. To the
contrary, on their joint 1994 Federal income tax return,
petitioner and Carmen Jordan characterized $13,200 of the
payments from GMCC to Carmen Jordan as ordinary wage income.
                                 - 35 -

     Respondent determined that as of yearend 1992 Carmen

Jordan’s adjusted basis in her GMCC stock was $33,754.

Respondent determined that Carmen Jordan’s 1993 GMMC loss was

limited to this amount of adjusted basis and accordingly

disallowed $28,885 ($62,639 minus $33,754) of the claimed 1993

loss.    Determining that this partial allowance of the 1993 loss

eliminated any remaining basis in Carmen Jordan’s GMCC stock,

respondent disallowed in its entirety the claimed 1994 loss of

$62,409.

     In addition, respondent disallowed the claimed 1995 loss,

determining on the basis of flow-through adjustments to GMCC’s

1995 income tax return, that in 1995 Carmen Jordan actually had

ordinary income from GMCC of $92,189, resulting in an adjustment

of $138,788 ($92,189 plus the $46,599 disallowed loss).    The

notice of deficiency indicates that these flow-through

adjustments resulted from adjustments to expense accounts.

                                 OPINION

        1.   The 1993 and 1994 Losses

     Generally, an S corporation shareholder determines his or

her tax liability by taking into account a pro rata share of the

S corporation’s income, losses, deductions, and credits.    Sec.

1366(a)(1).     The shareholder may not take into account, however,

S corporation losses and deductions for any taxable year in
                                - 36 -

excess of the shareholder’s adjusted basis in the S corporation’s

stock and debt.    Sec. 1366(d)(1).27

     Petitioner bears the burden of establishing Carmen Jordan’s

basis in her GMCC stock.     See Rule 142(a); Welch v. Helvering,

290 U.S. 111 (1933).    Petitioner has failed to establish that

Carmen Jordan’s basis in GMCC as of yearend 1992 was any greater

than determined in the notice of deficiency.28    We sustain



     27
      More exactly, with respect to taxation of a shareholder of
an S corporation, sec. 1366(a)(1) provides:

     there shall be taken into account the shareholder’s pro
     rata share of the corporation’s–-

               (A) items of income (including tax-
          exempt income), loss, deduction, or credit
          the separate treatment of which could affect
          the liability for tax of any shareholder, and

                  (B) nonseparately computed income or
          loss.

     The aggregate amount of losses and deductions taken into
account by such shareholder for a taxable year cannot exceed the
sum of: “(A) the adjusted basis of the shareholder’s stock in
the S corporation * * *, and (B) the shareholder’s adjusted basis
of any indebtedness of the S corporation to the shareholder”.
Sec. 1366(d)(1).
     28
      Petitioner contends that Carmen Jordan’s adjusted basis in
GMCC should be increased by $60,000 to reflect equipment
purchases she made in 1990 and 1991. The evidence introduced in
support of this claim indicates that GMCC, not Carmen Jordan, was
the purchaser of the equipment. Although Carmen Jordan testified
that the equipment was purchased with her cash, no documentation
was offered into evidence to corroborate this claim. In any
event, the record does not establish that Carmen Jordan’s
adjusted basis in GMCC as of yearend 1992 as determined by
respondent does not include any equipment purchases Carmen Jordan
might have made on behalf of GMCC in 1990 or 1991.
                                  - 37 -

respondent’s determination disallowing the claimed GMCC losses

for 1993 and 1994 in excess of that basis.29

     2.    Unreported 1995 GMCC Income

     Petitioner contends that the notice of deficiency issued to

him with respect to the flow-through adjustments resulting from

respondent’s examination of GMCC’s 1995 income tax return “failed

to adequately notify Petitioner of the specifics in which to

defend”.    He alleges:    “The IRS has failed to notify Petitioner

of the examination results, which would have been essential for

Petitioner to know in order to prepare and appropriately defend

the IRS position.”30      As to this issue, petitioner suggests that

respondent should have the burden of proof, contending that

respondent “failed to establish the minimum burden pursuant to

this issue.”

     Insofar as petitioner’s contentions may be construed as

attacking the validity of the notice of deficiency in this

regard, they must fail.      Section 7522(a) provides that a notice

of deficiency “shall describe the basis for, and identify the



     29
      Respondent concedes that these disallowed losses from 1993
and 1994 will be available to offset a portion of Carmen Jordan’s
unreported GMCC income for 1995, as discussed infra.
     30
      At trial respondent’s counsel asserted that petitioner was
not entitled to challenge the adjustments of GMCC’s 1995 tax
return, suggesting that only GMCC or Carmen Jordan would be
entitled to challenge the adjustment. Respondent has not pursued
this argument on brief; we deem respondent to have conceded or
waived it.
                               - 38 -

amounts (if any) of, the tax due, interest, additional amounts,

additions to the tax, and assessable penalties included in such

notice.”   The statute goes on to provide, however, that an

“inadequate description * * * shall not invalidate such notice.”

The purpose of section 7522 is to give the taxpayer notice of the

Commissioner’s basis for determining a deficiency.   See Shea v.

Commissioner, 112 T.C. 183, 196 (1999).    The notice of deficiency

apprised petitioner in at least general terms of the basis for

respondent’s determination and identified the amount of tax due

as a result of the flow-through adjustments from GMCC.

     Insofar as petitioner’s contentions may be construed as

seeking to shift the burden of proof to respondent, they must

also fail.    The U.S. Court of Appeals for the Sixth Circuit has

held that the Commissioner cannot rely on the presumption of

correctness to support a determination of unreported income “‘in

the absence of a minimal evidentiary foundation’”.    United States

v. Walton, 909 F.2d at 919 (quoting Weimerskirch v. Commissioner,

596 F.2d 358, 361 (9th Cir. 1979), revg. 67 T.C. 672 (1977)).     By

contrast, it is well established that the taxpayer bears the

burden of proof with regard to claimed losses or other

deductions.   See, e.g., Time Ins. Co. v. Commissioner, 86 T.C.
                                - 39 -

298, 313-314 (1986); Chaum v. Commissioner, 69 T.C. 156, 163-164

(1977).31

     We do not believe that the holding of Walton has any

applicability to the determination in question, which ultimately

is predicated on respondent’s disallowance of expenses claimed by

GMCC.     But even if we were to assume, for sake of argument, that

the item in issue is properly regarded as stemming from alleged

unreported income, we believe that the requisite minimal

evidentiary foundation has been established.     In Weimerskirch v.

Commissioner, supra, upon which Walton is predicated, there was

no evidence connecting the taxpayer with the activity allegedly

producing the unreported income.    By contrast, in the instant

cases there is no question as to the relationship of Carmen

Jordan to the income-producing activity of GMCC.    Because

petitioner is jointly and severally liable for the taxes

resulting from the GMCC flow-through adjustments, Carmen Jordan’s



     31
      As the Court of Appeals stated in United States v. Walton,
909 F.2d 915, 918 (6th Cir. 1990) (quoting Moraski, Note,
“Proving A Negative--When the Taxpayer Denies Receipt”, 70
Cornell L. Rev. 141, 141 (1984)): “When, for example, the IRS
bases an assessment on the disallowance of deductions, ‘placing
the burden of proof on the taxpayer is reasonable because the
taxpayer has better access to evidence of the underlying
transactions.’” There would appear to be some tension between
this observation and subsequent dicta in Walton suggesting that
the Court of Appeals might also require the Government to provide
a “minimal evidentiary foundation” where the issue in dispute is
the taxpayer’s “payment of expenses”. Id. at 919. For the
reasons explained in the text supra, we need not attempt today to
resolve any such tension.
                               - 40 -

connection with GMCC’s income-producing activity provides a

minimal evidentiary foundation, if any be required, to support

respondent’s deficiency determination against petitioner.

     Petitioner complains that respondent failed to notify him

adequately of the specific adjustments to GMCC’s return.     He does

not expressly dispute, however, that respondent communicated with

Carmen Jordan about the GMCC adjustments in her capacity as

GMCC’s sole shareholder.   In fact, according to Carmen Jordan’s

testimony, she previously petitioned this Court to challenge the

flow-through adjustments of GMCC.32     Testifying as petitioner’s

witness, she expressed familiarity with issues underlying the

flow-through adjustments in question.     We are not persuaded that

petitioner lacked access to, or through discovery could not have

obtained, information about the GMCC adjustments as necessary to

defend against them.

     In fact, on brief, having complained about lack of access to

the specifics of the GMCC adjustments, petitioner identifies

“With conjecture” the makeup of the disputed S corporation

adjustments to within $77.18 of the $138,788 total adjustments at

issue.    Although petitioner makes various assertions as to why he

believes these adjustments were in error, he has failed to


     32
      We take judicial notice that on Feb. 10, 2000, Carmen
Jordan petitioned this Court and that on June 23, 2000, this
Court granted respondent’s unopposed motion to dismiss the case
on the ground that the petition was filed in violation of the 11
U.S.C. sec. 362(a)(8) automatic bankruptcy stay.
                              - 41 -

support these contentions with competent evidence.     Petitioner

has failed to carry his burden of proving that respondent erred

in this determination.

Issue 9.   Passive Losses From Horse Activities

                         FINDINGS OF FACT

     In 1990 Alice Stockwell wrote petitioner a letter inquiring

whether he was interested in investing in a business of breeding

and raising Morgan horses.   She represented that she had the

knowledge, experience, time, and facilities but lacked the

financial resources.

     In 1991 Alice Stockwell, Chet Stockwell, Phillip Pierce, and

petitioner formed Chalice Farms, Inc. (Chalice Farms), for the

purpose of breeding and raising Morgan horses.33    The business

started with just a couple of horses that Alice Stockwell already

had on her property.   Petitioner provided funds to buy another

three horses.   In the winter of 1991 petitioner helped finance

the construction of an addition to a barn on Alice Stockwell’s

property for the horse operations.     Before that, beginning in

September 1991 and continuing for 4 or 5 months, petitioner kept

three or four of the Chalice Farms horses at his own property,



     33
      Chalice Farms, Inc., was registered with the secretary of
state of Vermont as a corporation. Nevertheless, the parties
have stipulated that “for purposes of this case, the petitioner
and Alice Stockwell will be considered partners in the reporting
of the income and loss from Chalice Farms, Inc. for the taxable
years 1991, 1992, 1993 and 1994”.
                               - 42 -

which was distant from Alice Stockwell’s property.    Alice

Stockwell testified that she initially visited the horses only

intermittently, but finding them poorly cared for, eventually

ended up going every day to take care of them.

     In 1992 petitioner and Alice Stockwell began to have

problems jointly operating Chalice Farms.   In June 1993

petitioner filed a complaint in State court seeking the

liquidation of the assets of Chalice Farms and demanding an

accounting of all income and expenses.   In her answer Alice

Stockwell denied that petitioner had been involved in the

breeding, raising, training, and sale of horses for Chalice

Farms.   In her counterclaim she sought damages, alleging that in

consideration of her agreeing to work full time on the breeding,

raising, training, and sale of horses, petitioner had agreed to

pay her a weekly salary and to provide working capital to run the

business but had failed to do so.   In an order dated February 24,

1995, the Vermont Superior Court ordered petitioner to pay $5,700

to Alice Stockwell, representing $300 per month for her past care

of the horses from July 1993 and also to pay her $300 per month

for the continuing care and feeding of the horses.    In 1995

Chalice Farms was dissolved.

     On his and Carmen Jordan’s joint Federal income tax returns,

petitioner claimed these losses from Chalice Farms:
                                 - 43 -

                     Year                     Loss

                     1991                  $28,816
                     1992                   30,475
                     1993                    9,726
                     1994                    5,076

     Respondent disallowed these claimed losses as being

attributable to a passive activity.

                                 OPINION

     Section 469(a) limits the deductibility of losses from

certain passive activities of individual taxpayers.     Passive

losses disallowed in one year generally may be carried over to

the next year.   See sec. 469(b).    Generally, a passive activity

is a trade or business in which the taxpayer does not materially

participate.   Sec. 469(c)(1).    Material participation is defined

generally as regular, continuous, and substantial involvement in

the business operations.    Sec. 469(h)(1).   The regulations

identify these seven situations in which an individual will be

treated as materially participating in an activity:

          (1) The individual participates in the activity
     for more than 500 hours during such year;

          (2) The individual’s participation in the activity
     for the taxable year constitutes substantially all of
     the participation in such activity of all individuals
     (including individuals who are not owners of interests
     in the activity) for such year;

          (3) The individual participates in the activity for
     more than 100 hours during the taxable year, and such
     individual’s participation in the activity for the taxable
     year is not less than the participation in the activity of
     any other individual (including individuals who are not
     owners of interests in the activity) for such year;
                              - 44 -

          (4) The activity is a significant participation
     activity (within the meaning of paragraph (c) of this
     section) for the taxable year, and the individual’s
     aggregate participation in all significant participation
     activities during such year exceeds 500 hours;

          (5) The individual materially participated in the
     activity (determined without regard to this paragraph
     (a)(5)) for any five taxable years (whether or not
     consecutive) during the ten taxable years that immediately
     precede the taxable year;

          (6) The activity is a personal service activity (within
     the meaning of paragraph (d) of this section), and the
     individual materially participated in the activity for any
     three taxable years (whether or not consecutive) preceding
     the taxable year; or

          (7) Based on all of the facts and circumstances (taking
     into account the rules in paragraph (b) of this section),
     the individual participates in the activity on a regular,
     continuous, and substantial basis during such year.

     [Sec. 1.469-5T(a), Temporary Income Tax Regs., 53 Fed. Reg.
     5725-5726 (Feb. 25, 1988).]

     The regulations also provide that the last-described “facts

and circumstances” test requires that the individual’s

participation in the activity exceed 100 hours during the taxable

year.   Sec. 1.469-5T(b)(2)(iii), Temporary Income Tax Regs., 53

Fed. Reg. 5726 (Feb. 25, 1988).

     Although the regulations permit a taxpayer to establish the

extent of his participation by “any reasonable means”, sec.

1.469-5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727

(Feb. 25, 1988), a postevent “ballpark guesstimate” does not

suffice, see Lee v. Commissioner, T.C. Memo. 2006-193; Bailey v.

Commissioner, T.C. Memo. 2001-296; Carlstedt v. Commissioner,
                                - 45 -

T.C. Memo. 1997-331; Speer v. Commissioner, T.C. Memo. 1996-323;

Goshorn v. Commissioner, T.C. Memo. 1993-578.

     Petitioner has not provided us even a ballpark estimate of

the number of hours he allegedly spent in his Chalice Farm

activities.     Nor does the record otherwise establish the number

of hours petitioner might have spent in those activities.

Consequently, he has not established that he meets the

quantitative requirements of the first, third, fourth, or seventh

test described above.     The record does not provide any basis for

concluding that he meets the requirements of any of the other

seven tests for material participation.     On the basis of all the

evidence, we conclude and hold that petitioner has failed to

establish that he materially participated in the Chalice Farms

activity.34    Respondent’s determination is sustained.

Issue 10.     Accuracy-Related Penalty

     Respondent has determined that the section 6662(a) accuracy-

related penalty applies against petitioner for each of the years

in issue.     Section 6662(a) authorizes the Commissioner to impose

a penalty in an amount equal to 20 percent of the portion of the

underpayments that are attributable to the items set forth in

section 6662(b).     Section 6662(b)(1) includes any underpayment


     34
      On brief petitioner contends that as a consequence of the
dissolution of Chalice Farms in 1994 he is entitled to “carry
back the unused portion of his $173,300 contributions” in Chalice
Farms. Petitioner has failed to establish the existence or
amount of any such loss.
                               - 46 -

attributable to negligence or disregard of rules or regulations.

Negligence is defined as “any failure to make a reasonable

attempt to comply with the provisions of * * * [the Internal

Revenue Code]”.   Sec. 6662(c); see also Neely v. Commissioner, 85

T.C. 934, 947 (1985) (negligence is lack of due care or failure

to do what a reasonable and prudent person would do under the

circumstances).   Negligence also includes any failure by the

taxpayer to keep adequate books and records or to substantiate

items properly.   See sec. 1.6662-3(b)(1), Income Tax Regs.

     No penalty shall be imposed under section 6662(a) with

respect to any portion of an underpayment if it is shown that

there was reasonable cause and that the taxpayer acted in good

faith.   See sec. 6664(c).   Whether a taxpayer acted in good faith

depends upon the facts and circumstances of each case.    See sec.

1.6664-4(b)(1), Income Tax Regs.   Reliance on a professional

return preparer may be reasonable and in good faith if the

taxpayer establishes:   (1) The return preparer had sufficient

expertise to justify reliance; (2) the taxpayer provided

necessary and accurate information to the return preparer; and

(3) the taxpayer actually relied in good faith on the return

preparer’s judgment.    Neonatology Associates, P.A. v.

Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir.

2002).
                              - 47 -

     Petitioner suggests that he is not liable for the negligence

penalty because he properly relied in good faith on his tax

return preparer.   Petitioner has not, however, pursued this

defense in any meaningful way.   Apart from passing references in

his testimony to his tax return preparer, the record is devoid of

evidence to support petitioner’s contentions.   Petitioner did not

call his tax return preparer as a witness.   There is no evidence

in the record as to the advice his tax return preparer might have

given him; no evidence to support a determination that petitioner

acted reasonably or in good faith in relying upon it; no evidence

as to his tax return preparer’s qualifications; no evidence that

petitioner disclosed to his tax return preparer all relevant

facts and circumstances; and no evidence that the advice was

based on reasonable factual or legal assumptions.

     Petitioner also contends that he was not negligent as to any

of the items pertaining to Carmen Jordan or GMCC because “he had

no personal knowledge in which to be negligent.”    Because

petitioner made joint returns with Carmen Jordan, his liability

for penalties is joint and several.    See sec. 6013(d)(3); Pesch

v. Commissioner, 78 T.C. 100, 129 (1982).    Petitioner has

introduced no evidence to show that the underpayments arising

from items pertaining to Carmen Jordan or GMCC were not the

result of negligence or that he and Carmen Jordan acted with
                             - 48 -

reasonable cause and in good faith in reporting these items on

their joint returns.

     We conclude that petitioner’s underpayments are attributable

to negligence or disregard of rules or regulations.   We hold that

petitioner is liable for accuracy-related penalties under section

6662(a) based on the amount of his underpayments for the years at

issue, to be determined in the Rule 155 computations.

     To reflect the foregoing and the parties’ concessions,


                                   Decisions will be entered

                              under Rule 155.
