T.C. M em o . 2 0 1 7 -1 9 9

UNITED STATES TAX COURT

JOHN V. HAWKBEY, Pet i ti o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 1 0 99 -1 6
. Fi l edOct o b er 1 0 , 2 0 1 7
.
J o h n V. Hawk

b ey , p ro s e. Bri an S. J o n es an dIn a Su s an W ei n er, fo r res p o n d en t .

M EM ORANDUM OPINION LAUBER, J u d g e: Th e In t ern al Rev en u e Serv i ce (IRS o r res p o n d en t ) d et erm i n ed a d efi ci en cy

o f $ 4 ,9 14 i n p et i t io n er’ s Fed eral i n co m e t ax fo r 2 0 1 4
. Inan effo rtt o g en erat e a refu n dfo r th aty ear, p et i t i o n er cl ai m eda fi ct i t i o u s l o s s d edu ct i on o n Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i n es s , b as edo n h i s co n t en t i on th ath e i s ex em p tfro m Fed eral i n co m e t ax u n d er t he Em an ci p at i o n Pro cl am at i o n o f 1 8 6 2
.- 2
-

[* 2 ] Res po n den th as m o v edfo r s u m m ary ju d g m en t. Fi n di n g n o m at eri al fact s i n d i s p u t e an dco n cl u d i n g t h atp et i t i o n er’ s co n t en t i o n s are fri v o l o u s , we wi ll g ran tres p o n den t ’ s m o t i on fo r s u m m ary ju d g m en tan d s us t ai n th e d efi ci en cy . Back gro u n d Th e fo l l o w i n g fact s are d eri vedfro m th e p art i es ’ p l ead i n g s an dm ot i o n p ap ers , i n cl u di n g th e at t ach edd ecl arat i o n s an dex h i b i t s . Pet i t i o ner res i d edi n Pen n s y l v an i a wh en h e fi ledh i s p et i t i o n . Pet i t i o ner t i m el y

fi l edfo r 2 0 1 4 a Fo rm

1 0 4 0 , U.S. In d iv idu al In co m e Tax Retu rn , rep o rt in g wag es o f $ 4 6 8 an dt ax ab l e p en s i o n d i s tri b u t i o n s o f $ 2 8 ,4 8 4 . He rep o rt edth ath e h adrecei vedSo ci al Secu ri ty b en efi ts o f $ 2 1 ,8 2 9 b u t cl ai m edth at th e “ tax ab l e am o u n t ” o f t hes e b en efi t s was zero . Pet i t i o ner i n cl ud edwi th h i s retu rn a Sch edu le C fo r a b u s i nes s p u rp o rt ed l y en g ag edi n “ m ark et i n g , i n v es t in g , h i s to ri cal res earch an dd ev el o p m en t .” He rep o rt edg ro s s recei p t s o f $ 76 an dco s to f g o o d s s ol d o f $ 2 9 7 , 0 0 0 ,7 4 5
. Th e p ri n ci
p al i np u t s t o h is “ co sto f g o o d s s o l d ” were “ co sto f l ab o r,” “ m at eri al s an ds up p l i es , ” an d “ o th er co st s ,” each i n th e am o u n t o f $ 98 ,9 9 9 , 9 9 9 . He rep o rt edzero ex p en s es fo r h i s p u rp o rt edb u s i n es s . Pet i t i o ner cl ai m eda Sch edu l e C l os s d edu ct i o n o f $ 2 9 7 ,0 00 ,6 6 9 an d rep o rt edad ju s tedg ro ss i n co m e o f ($ 2 9 6 ,9 7 1 ,7 1 7 ) an dt ax o f zero o n l i ne 5 6 . He- 3
-

[* 3 ] rep o rt edFed eral i n co m e t ax wi th h el do f $ 1 ,6 5 5 an d t o t al t ax l iab i l i ty o f $ 36 (at tri bu t ab l e t o u n co l l ect ed So ci al Secu ri ty t ax o n t i p s rep o rt edo n l i n e 6 2 ). He
acco rd i n g l y

req u es t ed a refu n do f $ 1 ,6 1 9
. Pet i t i o ner at t ach edt o h i s Fo rm 1 0 4 0 a l et t er t o th e IRS d em an d i ng “ em erg en cy res t o rat i o n o f t ax ex em

p ts t atu s .” He b as ed h is d em an dfo r t ax -ex em p ts t atu s o n Pres i d en tLi n co l n ’ s Em an ci p at i on Pro cl am at i o n o f Sep t em b er 2 2 , 1 8 6 2 . He
as s ert ed th atth e IRS h adi m p ro p erl y rev o k edh i s t ax -ex em

p t s t atu s i n 1 9 8 4 , n o t i n g th ath e h adthereaft er b een co n v i ct edo n fo u r co u n t s o f t ax ev as i o n aft er a ju ry tri al i n the U.S. Di s tri ctCo u rtfo r t h e Eas t ern Di s tri cto f Pen n s y l v an i a. OnAp ri l 1 5 , 2 0 1 6, the IRS s en t p et it i o n er a Let t er 5 2 5 , n o t i n g thati twas ex am i n i n g h i s 2 0 14 retu rn an d“ n eed edi n fo rm at io n fro m * * * [h im ] .” Th i s l et t er ex p lai n edth at th e IRS p ro p o s edt o d is al l o w h i s cl ai m edSch edu l e C l o s s d edu ct i o n i n i ts en ti ret y

an d treat $ 1 8 ,7 78 o f h i s rep ort edSo ci al Secu ri ty b en efi t s as t ax ab l e. Pet i t io n er rep l i ed t o th i s co m m u n i cat i o n b y

l et t er d at edJ u n e 9 , 2 0 1 6 , en cl o s i n g a p ack ag e o f d o cu m en t s th ath e “ req u es t [ed ] t o b e i n cl u dedi n y o ur ev al u at i o n o f m y 2 0 1 4 t ax retu rn .” Th es e d o cu m en t s d o n o ts ub s t an t i at e an y co s to f g o od s s o l dfo r an y Sch edul e C b u si n es s . OnJ u ne 2 9 , 2 01 6 , th e IRS s en tp et i t i o ner a t i m el y n o t i ce o f d efi ci en cy

fo r 2 0 1 4 . Onth e b as i s o f t h e ad j u s t m en t s s etfo rt h ab o v e, t h e n o t ice d et erm i n eda co r-- 4
-

[* 4 ] rect edt ax l i ab i l it y

o f $ 4 ,9 5 0 , “ t o t al t ax s h o wno n retu rn ” o f $ 3 6 , an da d efi ci en cy

o f $ 4 ,9 1 4
. Pet i t i on er t i m el y

p et i t i o n edth i s Co urt . He d i d n o tal l eg e t h atth e IRS h ad erred i n treat i n g $ 1 8 , 7 7 8 o f h i s rep o rt edSo ci al Secu ri ty b en efi t s as t ax ab l e, o th er th an t o as s ertthath e was t ax ex em p tu n d er t h e Em an ci pat i o n Pro cl am at io n . He al l eg edas erro r t h e d i s al l owan ce o f h i s Sch edu l e C l os s d edu ct i o n , as sert i n g th at th e d o cu m en t s h e h ads en tth e IRS o n J u ne 9 , 2 0 16 , were s u ffi ci en t t o s ub s t an t i at e a l os s l arg e en ou g h t o el im i n at e an y t ax ab l e i n co m e. OnJ u ly 2 6 , 2 0 17 , res p o nd en tfi l ed a m o t i on fo r s u m m ary ju d g m en tacco m p an iedb y a d ecl arat i o n u n d er p en al t i es o f p erju ry b y res po n den t’ s co u n sel . Res p o n den t ’ s co u n s el av erredth ati n a m eet i n g wi th p et it i o n er o n J u n e 6 , 2 0 1 7 , p et i
t i on er ad m i t t edth ath e h ad n o ti n cu rredan y actu al ex p en s es fo r co s to f g o od s s o l d i n 2 0 1 4. Rat h er, p et it i on er s t at edth atthe $ 2 9 7 ,0 00 ,7 4 5 h e rep o rt edas co sto f g o o d s s o l drefl ect edh i s es t i m at e o f t h e v al u e o f t h e t im e h e s p en t du ri n g 2 0 1 4 o n

“ res earch an d m ark et i n g ” fo r wh i ch h e b el i ev edh e s h o ul d b e co m p en s at ed
. OnAu gu s t3 1 , 2 0 1 7, p et i t i o n er fi l eda 5 9-p ag e res p o ns e t o th e m o t io n fo r s u m m ary ju d g m en tan da 3 1 -p ag e d ecl arat i o n i n s up p o rto f t h atres p o n s e. No
wh ere i n th es e d o cu m en t s d o es p et i t i o n er al leg e t hath e en g ag edi n an actu al trad e o r b u si n es s duri ng 2 01 4 , th ath e i n cu rredan y co s t s o f g o o d s s o l d i n co n n ect i o n- 5
-

[* 5 ] wi th an y

b u s i n es s , o r thath e i n cu rredan y ex p en s es d edu ct i b l e u n d er s ect i o n 1 6 2 (a). 1 Nei ther i n h i s res p on se t o th e s u m m ary ju dg m en tm o t i o n n o r i n h i s d ecl arat i on d o es p et i t i o n er co n tro vert th e av erm en ts o f res p o n d en t ’ s co u n s el co n cern i ng th e ad m is s i o n s h e m ad e du ri n g th ei r J u n e 6 m eet i n g. To the co n trary : He av ers i n h i s d ecl arat i o n th at h e “ cl ai m eda Sch edu l e C l o s s i n th e am o u n to f $ 2 9 7,0 0 0 ,6 6 9 du e t o a d el ay

i n p aym en t s req u es t edb y p et i t i o n er i n th e fo rm

o f t ax ex em

p t i o n fro m res p o n d en t.” He as s ert s t h ath e was en t i tl ed t o t ax ex em p ti on b ecau s e o f h i s effo rt s “ t o fu l fi l l th e act u al freed o m o f p et i t i o n er, M o ro ccan Am eri can s , an dp ers o n s o f Afri can d es cen t ,” wh i ch i n cl u ded h i s “ h i s t ori cal res earch d ev el o p m en tth at p ro duce[d ] h is jo b creat i o n an d res t orat i o n p l an ” p u rs u an tt o “p arag rap h s two an d th ree o f t h e Sep t em

b er 2 2 , 1 8 6 2 , Em an ci p at i o n Pro cl am at i o n .”

Di s cu ss i o n A. Su m

m ary J u dg m en tSt an d ard Th e p u rp os e o f s u m

m ary ju d g m en t i s t o ex p ed it e l i t i g at i o n an d av o i dco st l y , t i m e-co n s u m i n g , an du n n eces s ary tri al s . Fl a. Peach Co rp . v . Co m m i s si on er, 9 0 T.C. 6 7 8 , 6 8 1 (1 9 8 8 ). Un d er Ru l e 1 2 1 (b ) t he Co u rtm ay g ran ts u m

m ary ju d g m en t

1 Al l s t atut o ry

referen ces are t o th e In t ern al Rev en u e Co de i n effect fo r t h e y ear i n i s s u e, an d al l Ru l e referen ces are t o the Tax Co urtRu l es o f Pract ice an d Pro cedure. W e ro u n d al l m o n et ary am o u n t s t o th e n eares td ol l ar.- 6
-

[* 6 ] wh en th ere i s n o g en u i n e d i s p u t e as t o an y m at eri al fact an da d eci s i o n m ay b e ren d eredas a m at t er o f l aw. Su n ds tran dCo rp . v . Co m m i s s i o n er, 9 8 T.C. 5 1 8 , 5 2 0 (1 99 2 ), aff’ d, 1 7 F.3 d9 6 5 (7 th Ci r. 1 9 9 4 ). In d eci d i n g wh et h er t o g ran t
s u m m ary ju d g m en twe co n s tru e fact u al m at eri al s an di n feren ces drawn fro m th em i n the l i g h tm o s t fav o rab l e t o th e n o nm ov i ng p art y . Ib id . Ho wev er, t h e
n o n m o v i n g p art y

“ m ay n o tres tup o n th e m ere al l eg at i o n s o r d en i al s ” o f h is p l ead i n g s b u ti n st ead“ m

u s ts etfo rt h s p eci fi c fact s s h o wi n g thatth ere i s a g en u i n e d i s p u t e fo r t ri al .” Ru l e 1 2 1 (d ); s ee Su n d s tran dCo rp ., 9 8 T.C. at5 2 0
. Pet i t i o ner h as s etfo rt h n o fact s s h o wi n g t h atth ere i s a g en u in e d i s p u t e fo r tri al . He ad m i t s th ath e recei v edSo ci al Secu ri ty b en efi t s o f $ 2 1 ,8 2 9 du ri n g 2 0 1 4 , an d h e d o es n o td i s p u t e th at$ 1 8 ,7 7 8 o f t h es e b en efi t s was t ax ab l e u n l es s i m m u n i zedfro m

t ax at i o n u n d er t he Em an ci p at io n Pro cl am at i o n. An dh e h as al leg edn o fact s t o s u g g es tth ath e en g ag edi n a Sch edu l e C b u s i n es s o r t hath e i n cu rredan y co s t s i n co n n ect i o n wi th s u ch a b u s i nes s . W e co n cl u d e t h at there are n o m at eri al fact s i n d i s p u t e an dth atth i s cas e i s ap p ro p ri at e fo r s umm ary ad j u d icat i o n . B. An al y s i s Sect io n 1 6 2 (a) p erm it s a t ax p ay er t o d edu ct“ o rd i n ary an dn eces s ary ” ex
p en ses p ai do r i n cu rredi n carry i n g o n an y “ trad e o r b u si n es s .” Pet i t io n er h as ad
m i t t edth ath e d i dn o tcarryo n a t rad e o r b us i n es s fo r p ro fi tduri n g 2 01 4 an dth at- 7
-

[* 7 ] h e d i dn o ti ncu r an y

co s t s o f g o o d s s ol do r o ther ex pen s e i n co n n ect i o n wi t h
an y b u s i n es s . Rat h er, h e ad m i ts i n h i s d ecl arat i o n th atth e $ 29 7 ,0 0 0,6 6 9 l o s s d educt i o n h e cl ai m edo n h i s Sch edu le C was at tri b u t ab l e en t i rel y “ to a d el ay

i n p aym en t s req u es t edb y

p et i ti on er i n th e fo rm o f t ax ex em p t i o n fro m

res p o n d en t .” It is u n cl ear wh eth er p et i t i o n er i s co n t en d i n g th ath e i s p ers o nal l y en t i t l edt o rep arat io n s fro m

the Go v ern m en to f $ 2 97 ,0 0 0 , 7 4 5 o r t h at th i s fi g u re rep res en t s th e
v al u e o f s erv i ces th ath e p erfo rm eddu ri n g 2 0 1 4 i n an effo rt t o s ecu re rep arat i o n s fo r o th ers . Inei th er ev en th i s co n t en ti o n s are fri v ol o u s as a m at t er o f l aw, an d th ey can n o ts ubs t an t i at e a Sch edu l e C n eto p erat i n g l o s s . See W i l k i n s v . Co m m i s s i on er, 1 2 0 T.C. 1 0 9 , 1 1 2 -1 1 3 (2 00 3 ) (“ T h e In t ern al Rev en u e Co d e s i m p l y d o es
n o tp ro v i d e a t ax d edu ct i o n , cred i t , o r o ther al l o wan ce fo r s l av ery rep arat i o n s .”); Hy ler v . Co m

m i s s i on er, T.C. M em o . 2 0 05 -2 6
. Hi s co nt en t i o n th at th e Em an ci pat i o n Pro cl am at io n i m m u ni zes h i s wag es , p en si o n d i s tri b u t io ns , an d/o r So ci al Secu ri ty b en efi t s fro m t ax at i o n i s co m

p l et el y wi th o u tm eri t . See Pel l et i er v . Co m m i ss i o n er, T.C. M em o . 1 99 7 -3 9 1, 7 4 T.C.M
. (CCH) 4 1 2 , 4 1 4 (reject i n g cl ai m fo r t ax ex em

p ti o n b as edo n th e th eo ry th at“ [t ] h e Em an ci p at i o n Pro cl am at i o n * * * g u aran tees t o ev ery p ers o n th e s an ct i ty

o f h i s o wnl ab o r”). W e n o te t h atp et i t i o n er’ s arg u m en tfo r ex em p t i o n h as b een m ad e
n u m ero u s t i m es b y o th er m em bers o f t h e M o o ri sh Sci en ce Tem pl e t o wh i ch h e- 8
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[* 8 ] cl ai m s t o b el o n g . See, e.g ., Hab ers h am -Beyv . Co m m i s s i o ner, 7 8 T.C. 3 0 4 (1 9 8 2); Ezeku nu -Beyv . Co m m i s s i o n er, T.C. M em o . 1 98 4 -9 6 ; Ch erry -El v . Co m m i s s i o n er, T.C. M em o . 1 9 8 2 -4 0 4 ; Brat t o n -Bey v . Co m m i s s io n er, T.C. M em o . 1 9 8 2 -1 9 , aff’ d wi th o u t p ub l i sh edo pi n i o n , 6 9 8 F.2 d8 3 0 (4 th Ci r. 1 98 2 ); W i g g i n s El v . Co m

m is s io n er, T.C. M em o . 1 9 8 1 -4 9 5 ; Gai n es -El v . Co m m i s s i o n er, T.C. M em o. 1 9 7 5 -5 4 . W e acco rd i n g l y s u s t ai n res p o n d en t ’ s d et erm i n at i o n that p et i t i o n er du ri ng 2 01 4 recei v edt ax ab l e So ci al Secu ri ty b en efi t s o f $ 1 8,7 7 8 an d th ath e i s n o ten t i t l edt o an y Sch edu le C l o s s d edu ct io n . C. Fri v ol o u s Po s i t i o n Pen al ty Sect io n 6 6 7 3 (a)(1 ) au tho ri zes th i s Co urtt o i m po s e a p en al ty n o ti n ex ces s o f $ 2 5,0 0 0 “ [w] h en ev er i t ap p ears t o t h e Tax Co u rt ” t h ata t ax p ay er h as i n s t i tu t ed
o r m ai n t ai n eda p ro ceed i n g “p ri m ari l y fo r d el ay ” o r h as t ak ena p o s i t io n th ati s

“ fri v o l o u s o r g ro u n d l es s .” Th e p u rp o se o f s ect io n 6 6 7 3 i s t o co m p el t ax p ay ers t o co n fo rm th ei r co n du ctt o s et t l edt ax p ri n ci p l es an dt o d et er t he was t e o f ju d i ci al
res o u rces . See Co l em an v . Co m m i s s i o ner, 7 9 1 F.2 d6 8 , 7 1 (7 th Ci r. 1 9 8 6 ); Bru h
wi l er v . Co m

m i s s i o n er, T.C. M em o . 2 0 16 -1 8 , 1 1 1 T.C.M . (CCH) 1 0 7 1 , 1 0 7 4
. Th e p o s i t i o ns th atp et i t i o n er h as t ak en are u nqu es ti o n ab l y fri vo l ou s . Bu t b ecau s e th i s ap p ears t o b e h i s fi rs tap p earan ce b efo re thi s Co u rt , we wi ll s h o w- 9
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[* 9 ] l en i en cy

an d refrai n fro m

i m p o s i n g an y

p en al ty n o w. W e are u n l i k el y

t o b e s o g en ero u s n ex t t i m e. To i m p lem en tth e fo reg o i n g , Anap p ro p ri at e o rd er an dd eci s i o n wi l l b e en t eredfo r res p o n d en t .