TAX COURT OPINION

Case: William McGarvin
Docket Number: 14615-22
Judge: Buch
Opinion Type: bench
Filed: 03/25/2025
Pages: 12

WILLIAM MCGARVIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent United States Tax Court Washington, DC 20217 Docket No. 14615-22. ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at St. Louis, Missouri, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155. (Signed) Ronald L. Buch Judge Served 03/25/25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bench Opinion by Judge Ronald L. Buch March 11, 2025 3 William McGarvin v. Commissioner of Internal Revenue Docket No. 14615-22 THE COURT: The following represents the Court's oral findings of fact and opinion in this case. These findings of fact and opinion may not be relied upon as precedent in any other case. They are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code, in effect at all relevant times. For the reasons discussed below, we reach the same result in this case on two independent grounds, one procedural and the other on the merits. Procedurally, Mr. McGarvin failed to follow the Court's Rules or orders. In such a situation, the Court can hold a petitioner in default or dismiss the case. See Rule 123(a) and (b). Default and dismissal yield much the same result, entry of decision against the petitioner. Id.; see, also, sec. 7459(d). On the merits, the Commissioner provided evidence connecting Mr. McGarvin to the income determined in the Notice of Deficiency that underlies this case. As with default and dismissal, the result is a decision 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 against Mr. McGarvin. But because of a scrivener's error 4 in the Notice of Deficiency, the Commissioner must recompute the amount of the deficiency. FINDINGS OF FACT The Commissioner's records establish that Mr. McGarvin did not file a tax return for 2018. The Commissioner prepared a substitute for return (see section 6020(b)) and mailed a Notice of Deficiency to Mr. McGarvin on March 7, 2022. That Notice of Deficiency determined tax of $255,091 plus additions to tax for failure to file (section 6651(a)(1)), failure to pay (section 6651(a)(2)), and failure to pay estimated income tax (section 6654). The deficiency in tax was predicated on information reported by third parties. Most notably, SWN Production (Arkansas) LLC reported paying Mr. McGarvin $772,928 in royalties. The Social Security Administration reported paying $27,048 to Mr. McGarvin. The notice of deficiency only included $22,990 of that amount in Mr. McGarvin's income. See sec. 86(a)(2). In addition to the foregoing, third parties reported comparatively insignificant other amounts, including $60 of interest and $209 of net capital loss. The latter item is of note because the Notice of Deficiency showed net capital gains in the tax calculation. But that gain was inconsistent with the income reported by others as shown on the Notice 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 of Deficiency and in the Wage and Income Transcript. 5 Netting the cost or other basis against the proceeds reveals a $209 capital loss. As for the royalty income, records produced by Flywheel Energy Production, LLC detail the royalty income allocated to Mr. McGarvin. Those records show royalties of $772,928 having been allocated to Mr. McGarvin by SWN Production (Arkansas) LLC. Other records produced by Flywheel Energy identify "SWN" as Southwestern Energy. The records identify amounts for royalties, taxes, interest, and deductions. The gross royalties and interest match the amounts included in the Notice of Deficiency. The records also show the dates and amounts of checks that correspond to the royalties net of taxes and deductions. Nothing in the record establishes the nature of the taxes or deductions. On May 31, 2022, while residing in Missouri, Mr. McGarvin mailed a petition to the Court thus giving rise 19 to this case. 20 Procedural History 21 22 23 24 25 In his Petition, Mr. McGarvin alleged that he never received a Notice of Deficiency for 2018. But the issuance of a valid Notice of Deficiency is a predicate for invoking our jurisdiction in a deficiency case. See sec. 6213(a). Because Mr. McGarvin alleged that he did 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 not receive a Notice of Deficiency, he failed to state a 6 claim upon which relief could be granted. The Court dismissed his case. Mr. McGarvin sought to vacate the Court's Order of Dismissal. Mr. McGarvin claimed that the filed his initial Petition protectively without a copy of the Notice of Deficiency, but within the time to file a Motion to Vacate, he located a copy of the Notice. The Court vacated its dismissal. With his Motion to Vacate, Mr. McGarvin lodged his First Amended Petition, which the Court promptly filed. In that amended petition, Mr. McGarvin disputes having received the income attributed to him. This case was twice set for trial. It was initially set for trial in April 2024. But both the IRS Independent Office of Appeals and IRS Counsel had been unsuccessful at reaching Mr. McGarvin to discuss his case. The Commissioner sought a continuance to gather third- party documents. The Court granted the continuance. The case was next set for trial at the March 10, 2025, session of the Court. The Court issued a Notice of Trial and Standing Pretrial Order on October 17, 2024. The latter document contains a series of pretrial deadlines. While this case was pending, there was some confusion over requests for admissions. The Commissioner 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 sent a request for admissions to Mr. McGarvin but did not 7 file it with the Court. Mr. McGarvin filed a response to the request for admissions, but because no request was pending on the Court's records, the Court deemed it stricken. Shortly after the Court deemed the response stricken, the Commissioner filed his request for admissions. For purposes of this opinion, the Court deems each of the admissions to be denied. As to the substance of the requested admissions and responses, Mr. McGarvin's responses did not appear to be made in good faith. The Commissioner next turned to discovery. She filed with the Court a Motion to Compel Production of Documents and a Motion to Compel Responses to Interrogatories. The Court ordered Mr. McGarvin to respond to the Motions. He did not respond. The Court granted the Motions to Compel and ordered Mr. McGarvin to respond to the discovery by February 24, 2025. That date corresponded with the deadline in the Standing Pretrial Order for parties to exchange documents they may use at trial. On February 21, 2025, Mr. McGarvin filed a motion seeking an extension of that deadline. The Court did not grant that Motion, but instead, set it for hearing at the call of the case. The Court cautioned, "The Court will set Mr. McGarvin's Motion for Extension of Time for hearing. To the extent Mr. McGarvin has not complied with 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the Court's February 18, 2025, Order, he can address what 8 relief, if any, the Court should provide." Mr. McGarvin did not appear; he filed a Rule 50(c) statement. The Commissioner anticipated that this case would go to trial. She filed a Pretrial Memorandum indicating "definite trial." And to allow witnesses to plan their schedules, the Commissioner filed a motion asking the Court to set this case for trial at a date and time certain. This Motion, like several other documents filed by the Commissioner, recited that Mr. McGarvin's views were unknown. The Court attempted to arrange a conference call with the parties, but was unable to reach Mr. McGarvin. Given Mr. McGarvin's apparent unresponsiveness, the Court denied the Motion, further stating, "We caution Mr. McGarvin that failure to appear at the call of his case may result in dismissal and entry of decision in favor of the Commissioner. See Rule 123." While this was occurring, counsel for the Commissioner filed a Motion for Continuance due to circumstances unrelated to preparation of the case. As detailed in the Court's Order served February 21, 2025, the Court's review of the record in this case made it unclear whether Mr. McGarvin intended to pursue his case. Rather than continue the case, the Court set the Motion for Continuance for hearing at the scheduled trial 1 2 3 4 5 6 7 8 9 10 11 12 13 14 session. Again, the Court wrote, "We caution Mr. McGarvin 9 that that failure to appear at the call of his case may result in dismissal and entry of decision in favor of the Commissioner. See Rule 123, I.R.C. § 7459(d)." Mr. McGarvin did not appear; he filed another Rule 50(c) statement. At the scheduled date and time, the Court called this case for trial and for hearing on the pending motions. Mr. McGarvin did not appear. Rather than dismiss this case, the Court reached out to Mr. McGarvin by phone and left a message that it would be recalling his case later in the day. Mr. McGarvin did not return the Court's call or appear when his case was recalled. The Commissioner entered exhibits into evidence and the case 15 was submitted. 16 17 18 19 20 21 22 23 24 25 Default and Dismissal OPINION Rule 123(a) provides, "If any party has failed to plead or otherwise proceed as provided by these Rules or as required by the Court, then such party may be held in default by the Court either on motion of another party or on the initiative of the Court. Thereafter, the Court may enter a decision against the defaulting party, upon such terms and conditions as the Court may deem proper, or may impose such sanctions (see, e.g., Rule 104) as the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Court may deem appropriate." Likewise, Rule 123(b) 10 provides, "For failure of a petitioner properly to prosecute or to comply with these Rules or any order of the Court or for other cause which the Court deems sufficient, the Court may dismiss a case at any time and enter a decision against the petitioner." After being twice cautioned about the consequences of failing to appear when his case is called, Mr. McGarvin failed to appear. We need not further recount Mr. McGarvin's failures to proceed by the Court's Rules or failures to follow the Court's orders. He is in default. However, because the Commissioner's notice of deficiency characterized a $209 capital loss as income, the Commissioner must recalculate the amount of the deficiency to correct this error. 16 Merits 17 18 19 20 21 22 23 24 25 Although Mr. McGarvin's default is sufficient to resolve this case, the Court required the Commissioner to put sufficient evidence into the record to support the deficiency determinations. We will address that evidence. Generally, the Commissioner's determinations in a Notice of Deficiency are presumed correct, and taxpayers bear the burden of proving error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Determinations of unreported income must be supported by a "minimal 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 evidentiary foundation" before the presumption of 11 correctness applies. Weimerskirch v. Commissioner, 596 F.2d 358, 361 (9th Cir. 1979), rev'g 67 T.C. 672 (1977). The United States Court of Appeals for the Eighth Circuit has likewise written, "it is generally accepted that the Commissioner also must provide evidence linking a taxpayer to a legal tax-generating activity before being entitled to the presumption of correctness." Day v. Commissioner, 975 F.2d 534, 537 (8th Cir. 1992); see Golsen v. Commissioner, 54 T.C. 742, 756-58 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971). But, as noted and distinguished in Day, Weimerskirch involved a naked assessment. Id. This case involves no such naked assessment. Each of the income items attributed to Mr. McGarvin were reported to the Commissioner by third parties, thus linking Mr. McGarvin to income producing activities. Further, evidence introduced at trial showed a clear connection between Mr. McGarvin and SWN Production (Arkansas) LLC, the source of the bulk of the income. Regarding the additions to tax, the Commissioner introduced records establishing that Mr. McGarvin did not file a return or pay tax for 2018 and that the Commissioner prepared a substitute for return pursuant to section 6020(b). In instances where a taxpayer such as Mr. McGarvin fails to file a return and a return is 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 prepared by the Secretary under section 6020(b), the 12 substitute for return is treated as the return filed by the taxpayer for purposes of determining an addition to tax for failure to timely pay. Sec. 6651(g)(2); Wheeler v. Commissioner, 127 T.C. 200, 208-209 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008). Conclusion Mr. McGarvin's failure to appear and failure to comply with the Court's orders place him in default. The appropriate remedy is to enter a decision for the Commissioner. However, the Commissioner's Notice of Deficiency contains a $418 error (treating a $209 capital loss as $209 of capital gain). Accordingly, a decision will be entered under Rule 155, so that the Commissioner may correct this error. Alternatively, the Commissioner would prevail on the merits. The Notice of Deficiency is entitled to a presumption of correctness. The Commissioner has connected Mr. McGarvin with all of the income that is attributed to him in the Notice of Deficiency. The Commissioner has also provided sufficient records to establish the applicability of the additions to tax. Mr. McGarvin did not appear and present any conflicting evidence. Accordingly, Decision will be entered under Rule 155. This concludes the Court's oral findings of fact 13 and opinion in this case. (Whereupon, at 9:14 a.m., the above-entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25