Portillo v. C.I.R.

• Decision Date: 11 June 1991
• Docket Number: No. 90-4343,90-4343
• Citation: 932 F.2d 1128
• Parties: -1149, 91-2 USTC P 50,304 Ramon PORTILLO and Dolores Portillo, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1128

932 F.2d 1128

67 A.F.T.R.2d 91-1149, 91-2 USTC P 50,304

Ramon PORTILLO and Dolores Portillo, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 90-4343.

United States Court of Appeals Fifth Circuit.

June 11, 1991.

David Leeper, Leeper & Leeper, El Paso, Tex., for petitioners.

Abraham N.M. Shashy, Jr., Chief Counsel, I.R.S., Tax Litigation Div., Elizabeth Wickstrom, Gary R. Allen, Chief, Richard Farber, Appellate Sec., Tax Div., Dept. of Justice, Shirley D. Peterson, Asst. Atty. Gen., Washington, D.C., for respondent.

Appeal from the Decision of the United States Tax Court.

Before GOLDBERG, JOLLY and WIENER, Circuit Judges.

GOLDBERG, Circuit Judge:

Ramon Portillo appeals from the Tax Court's rejection of his challenge to a notice of deficiency from the Internal Revenue Service (the "I.R.S."). Portillo initially argues that the simple computerized matching of Portillo's employer's Form 1099 with Portillo's Form 1040 was not a "determination" as required by section 6212(a) of the Internal Revenue Code (the "Code"). We reject this argument, finding that the I.R.S. adequately linked Portillo to the alleged deficiency. We do agree with Portillo, however, that the notice of deficiency was arbitrary and erroneous because the I.R.S. failed to substantiate in any way its claim that Portillo received unreported income.

We readily affirm, however, the Tax Court's refusal to reconstruct Portillo's expenses for eighteen weeks in which Portillo was not able to document his expenditures. The Tax Court correctly determined that Portillo failed to meet his burden of proof that he actually incurred these expenses.

FACTS AND PROCEEDINGS BELOW

Ramon Portillo is a self-employed painting subcontractor who lived and worked in El Paso, Texas during 1984, the tax year in question. In 1984, Portillo bid for contracts to paint both residential and commercial property. According to Portillo, the general contractor he subcontracted for would pay him weekly, usually by check, for the work his crew performed. Portillo would then record his total receipts in the gross receipt portion of a ledger book he kept for his business. Since Portillo did not have a bank account, he would cash the contractor's check and then pay his workers in cash. Portillo kept a separate ledger to record his payroll expenses.

Typically, Portillo purchased all of his own supplies for his work. Portillo purchased most of these supplies from the Hanley Paint Store. Each Friday he would pay the supply store for the week's supplies and record these payments into the ledger as costs of goods sold. As a favor to Portillo, Hanley Paint Store kept copies of their invoices for these supplies, apparently with the intention that they would return them to Portillo each year end.

At the end of the year, Portillo would meet with Mrs. Rosales, a bookkeeper with Independent Businessman Bookkeeping and Tax Services, Inc., so that she could prepare his taxes. Portillo would total the gross receipts from his ledger and give them to Rosales as a basis for his Form 1040 gross income. Portillo used the Form 1099's from his various employers to confirm the gross receipts amounts. In 1984, however, Portillo had not received a 1099 from one of the contractors, Mr. Navarro On his 1984 federal income tax return, Portillo reported gross receipts in the amount of $142,108.93 ¹ and deductions of $30,917 for costs of goods sold. Included in the amount of gross receipts was $10,800 reported as the amount Navarro paid to Portillo. Sometime in mid-1985, Navarro filed a Form 1099 reporting payments to Portillo in the amount of $35,305, which was significantly more than Portillo had reported receiving from him.

when Rosales was preparing his Form 1040. Therefore, Portillo determined his gross receipts from Navarro solely from his ledger.

In January 1987, the I.R.S. audited Portillo's 1984 tax return. At the time of the audit, Portillo could not produce any records or receipts concerning his gross receipts for 1984 because his ledger was stolen from his truck in 1985. In addition, Portillo was unable to produce invoices for materials and supplies purchased during eighteen weeks in 1984 because he had relied on Hanley Paint Store to save these for him and they apparently lost a portion of these invoices. Portillo claimed he had worked continuously during these eighteen weeks, except for holidays and during inclement weather.

Based on the discrepancy between Navarro's 1099 and Portillo's 1040 forms, I.R.S. Agent Shumate determined that Portillo had not reported $24,505 in income from Navarro. Although Portillo acknowledged that he inadvertently neglected to report $3,125 in income from Navarro, Portillo denied receiving any more than $13,925 from Navarro. Shumate contacted Navarro who could produce copies of checks paid to Portillo in the amount of $13,925, but could not produce records justifying the remaining $21,380 he claims he paid Portillo in cash.

Shumate used an indirect method of reconstructing Portillo's income and made an adjustment to incorporate the increased amount into Portillo's income for the year. An I.R.S. reviewer, Glenda Jackson, analyzed Shumate's report. She did not believe the indirect method of confirming the income supported Shumate's adjustment. Jackson stated that there appeared to be several ways to follow up to check if the taxpayer could have received the cash, and she recommended that Shumate check Navarro's tax return.

Shumate replied to this review by stating that it was Portillo's burden to prove that he did not get the payments. The I.R.S. took the position that Navarro's Form 1099 was presumed correct. Therefore the I.R.S. issued a statutory notice of deficiency for federal income taxes of $8,473 for the taxable year 1984, plus penalties assessed under Code sections 6653(a)(1), (a)(2), and 6661(a).

The Portillos filed a petition for redetermination of this alleged tax deficiency in Tax Court. The Tax Court held for the government, finding that Portillo had not met his burden of proving that he had not received the additional income from Navarro. The Tax Court also found that Portillo failed to demonstrate that he was entitled to a deduction for costs of goods sold in excess of the amount allowed. In addition, the Tax Court upheld the penalties assessed under sections 6653(a)(1) & (2) and section 6661(a) of the Code. Portillo appeals these findings of the Tax Court. The Tax Court did, however, find that Mrs. Portillo was an innocent spouse for purposes of the tax and penalties.

DISCUSSION

A. Unreported Income

The Tax Court's interpretation of section 6212(a) of the Code is reviewable de novo. See Rutter v. Commissioner, 853 Although there is no prescribed form for a deficiency notice, the notice must at a minimum (1) advise the taxpayer that the I.R.S. has determined that a deficiency exists for a particular year, and (2) specify the amount of the deficiency or provide the information necessary to compute the deficiency. Donley v. Commissioner, 791 F.2d 383 (5th Cir.1986). As Portillo correctly points out, in order for a notice of deficiency to be valid, the I.R.S. must have made a "determination" of a tax deficiency. See 26 U.S.C. Sec. 6212(a). Portillo argues that in this case the I.R.S. failed to make such a "determination" and therefore the notice was invalid and the tax court consequently lacked jurisdiction.

                F.2d 1267 (5th Cir.1988);  Scar v. Commissioner, 814 F.2d 1363 (9th Cir.1987).  Section 6212(a) states in part:  "If the Secretary determines that there is a deficiency in respect of any tax imposed ... he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail."    Section 6213(a) provides in part:  "Within 90 days ... after the notice of deficiency authorized in section 6212 is mailed ... taxpayer may file a petition with the Tax Court for a redetermination of the deficiency."    Therefore, the Tax Court only has jurisdiction when the Commissioner issues a valid deficiency notice and the taxpayer files a timely petition for redetermination.  Stamm Int'l Corp. v. Commissioner, 84 T.C. 248, 252 (1985)
                

Remarkably few cases have considered what requirements must be met before the I.R.S. can say that it has made a "determination." The courts which have dealt with this issue have held that a determination as contemplated by section 6212(a) means "a thoughtful and considered determination that the United States is entitled to an amount not yet paid." Scar, 814 F.2d at 1369 (quoting Couzens v. Commissioner, 11 B.T.A. 1040, 1159-60 (1928)). In Terminal Wine Co. v. Commissioner, 1 B.T.A. 697, 701 (1925), the Board of Tax Appeals construed the meaning of the term "determine" as applied to deficiency determinations as follows: "By its very definition and etymology the word 'determination' irresistibly connotes consideration, resolution, conclusion, and judgment."

Portillo argues that in this case the I.R.S. failed to make a "determination" because the I.R.S. merely matched Navarro's Form 1099 with Portillo's Form 1040 without ever attempting to establish the reliability of Navarro's 1099 filing. According to Portillo, this lacked any indicia of a "thoughtful and considered determination" and therefore was insufficient under section 6212(a). The I.R.S. maintains, however, that all that is required for a determination is that the Commissioner consider information relating to the particular taxpayer. See Scar, 814 F.2d at 1368; see also Abrams v. Commissioner, 787 F.2d 939, 940-41 (4th Cir.), cert. denied, 479 U.S. 882, 107 S.Ct. 271, 93 L.Ed.2d 248 (1986); Benzvi v. Commissioner, 787 F.2d 1541, 1543 (11th Cir.), cert. denied, 479 U.S. 883, 107 S.Ct. 273, 93 L.Ed.2d 250 (1986).

In Scar, one of the few cases finding that the I.R.S. failed to make a determination, the Ninth Circuit held that the tax court should have dismissed the action for want of jurisdiction because...