John D. Shea v. Commissioner of Internal Revenue

Summary

The Tax Court sustained the Commissioner's bank-deposit-based increases to petitioner's gross receipts for 1990-1992 and disallowed nearly all of his Schedule C deductions for lack of substantiation, allowing only conceded items plus telephone expenses of $7,735 (1990) and $6,616 (1991). On the community-property issue, the Court held that the Commissioner's reliance on I.R.C. sec. 66(b) to deny petitioner the benefit of California community property law was a 'new matter' under Rule 142(a) - because the notice of deficiency neither described that basis nor mentioned community property at all, and sec. 7522's command that a notice 'describe the basis' forecloses the Ninth Circuit's broader 'not inconsistent' formulation - placing the burden of proof on the Commissioner, who failed to carry it; petitioner may therefore report only one-half of his consulting business's 1992 net income. Judge Ruwe wrote for the reviewed majority opinion. Judge Halpern, joined by Judges Chabot, Whalen, and Chiechi, concurred in the result but objected to importing sec. 7522 into the definition of 'new matter' and to any role for the Commissioner's drafting intent; Judge Beghe concurred separately to defend using sec. 7522(a) as a burden-shifting sanction for vague notices.