TAX COURT OPINION

Case: Andrew D. Scott
Docket Number: 26392-06
Judge: Colvin
Opinion Type: bench
Filed: 06/20/2008
Pages: 13

&i j cep -Y(' UNITED STATES TAX COURT WASHINGTON, D .C . 2021 7 ANDREW D . SCOTT, Petitioner, v . COMMISSIONER OF INTERNAL REVENUE , Respondent . SERV,.C Docket No . 26392-06 O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial of the above case before Judge Diane L . Kroupa at Hartford, Connecticut on June 4, 2008, containing her oral findings of fact and opinion rendered at the conclusion of trial . In accordance with the oral findings of fact and opinion, an appropriate order and decision will be entered for respondent . (Signed) Diane L . Kroupa Judg e Dated : Washington, D .C . June 20, 2008 SERVED JUN 2 0 2008 3 1 Bench Opinion by Judge Diane L . Kroupa June 4, 2008 2 Andrew D . Scott 26392-0 6 3 The Court has decided to render oral findings of 4 fact and opinion in this case , and the following represents 5 the Court ' s oral findings of fact and opinion . These oral 6 findings of fact and opinion shall not be relied upon a s 7 precedent in any other case . 8 This bench opinion is made pursuant to the 9 authority granted by Section 7459 ( b) and Rule 152 . All 10 section references are to the Internal Revenue Code, a s 11 amended and in effect for 2004, the year at issue, and all 12 rule references are to the Tax Court Rules of Practice and 13 Procedure . 14 This is a deficiency case in which Petitione r 15 asserts he is not an "employee " and did not receive "wages," 16 as defined in the Code , although he acknowledges that he 17 received earnings in exchange for his services in 2004 . 18 This deficiency case is before the Court on Respondent's 19 motion for summary judgment , filed on May 2, 2008 . 20 Andrew D . Scott appeared on his own behalf, and 21 John R . Mikalchus appeared on behalf of Respondent . 22 Findings of Fact . Some of the facts have been 23 stipulated and are so found . The stipulation of facts and 24 accompanying exhibits are incorporated by this reference . 25 Petitioner resided in Vermont at the time he filed th e Heritage Reporting Corporation (202) 628-4888 4 1 petition . 2 Petitioner was a mortgage broker for the Manhattan 3 Mortgage Company during 2004 and earned $61,072, from which 4 Petitioner's employer withheld, as required by law , 5 $8,828 .55 of federal income tax . Also required by law , 6 Petitioner's employer issued Petitioner a Form W-2 entitled 7 "Wage and Tax Statement" reflecting that Petitioner received 8 $61,072 of wages, tips, and other compensation during 2004 . 9 Petitioner filed a return for 2004 and reporte d 10 "zero" on the line specified for "wages , salaries, tips , 11 etc ." In addition, Petitioner attached a Form 4852 entitled 12 "Substitute for Form W- 2, Wage and Tax Statement, or Form 13 1099-R, Distributions from Pensions , Annuities, Retirement 14 or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc ." 15 Petitioner prepared the substitute to report tha t 16 Petitioner's employer paid him zero in wages while $8,828 .55 17 was withheld for federal income tax . Petitioner signed this 18 form, under penalties of perjury, as well as the return for 19 the year 2004 . 20 Respondent issued Petitioner a statutory notice of 21 deficiency, dated October 16, 2006, determining tha t 22 Petitioner was liable for a $10,031 deficiency in federal 23 income tax and determining that Petitioner was liable for a 24 $2,941 accuracy-related penalty, under Section 6662, fo r 25 2004 . The deficiency was based on the unreported $61,072 of Heritage Reporting Corporation (202) 628-4888 5 1 wage income from the Manhattan Mortgage Company and $16 of 2 interest from the United States Treasury . 3 Petitioner timely filed a petition with this Court 4 asserting that "[he] submitted under penalty of perjury and 5 in accordance with the law as mandated in the Interna l 6 Revenue Code, Sections 3401 and 3121, that not only doe he 7 NOT owe $10 , 031 in taxes plus interest and penalties fo r 8 2004, but he is OWED A REFUND OF $ 13,500 as per hi s 9 submitted Forms 1040 and 4852 ." Petitioner ' s claim fo r 10 refund appears to be the sum of $8,828 .55 of federal income 11 tax withheld , $ 3,786 .46 of Social Security tax withheld, and 12 $885 .55 of Medicare tax withheld from Petitioner' s 13 "earnings . " 14 Petitioner informed Respondent that he is a 15 follower of a book entitled Cracking the Code : The 16 Fascinating Truth about Taxation in America by Peter Eric 17 Hendrickson , in which the author takes the position tha t 18 "income " is not defined in the Code and that wages earned by 19 non-federal employees are not subject to federal income tax . 20 Petitioner also stated , in a letter , dated November 8, 2007, 21 to Respondent , that his earnings are his property , not that 22 of the State of Vermont or the Department of Treasury . He 23 is not an employee , as defined BY LAW in the Code . 24 Petitioner asserts that he had no taxable activity in 2004 25 and, therefore, has no tax consequences . Petitioner has a Heritage Reporting Corporatio n (202) 628-4888 6 1 four-year college degree but no graduate degree . Petitioner 2 did not consult with any tax attorney in filing the retur n 3 for 2004 or in checking Mr . Hendrickson's position in the 4 book . 5 Respondent warned Petitioner, in a letter, date d 6 October 10, 2007, that Mr . Hendrickson' s arguments have been 7 repeatedly rejected by the courts and gave Petitioner cites 8 to five different federal cases in which the courts rejected 9 Mr . Hendrickson's arguments . Respondent also warne d 10 Petitioner, in the letter, that he was at risk that this 11 Court might impose a penalty, under Section 6673, up to 12 $25,000 if he continued to maintain such frivolou s 13 arguments . The Court also reminded Petitioner, at calendar 14 call on June 2, 2008, and at trial, that he was at risk of 15 the $25,000 penalty if he continued to maintain hi s 16 misguided arguments . 17 Respondent contacted Dominick Savino, controller 18 at the Manhattan Mortgage Company, to confirm that the W-2 19 issued to Petitioner for 2004 was correct . Petitioner was, 20 indeed, employed there during 2004 and was paid $61,072 in 21 wages . 22 Respondent timely served Respondent's request for 23 admission on Petitioner, in accordance with Rule 90(c ) 24 before its amendment on March 1, 2008 . The requests for 25 admissions stated that Petitioner received $16 in interest Heritage Reporting Corporation (202) 628-4888 7 1 from the Treasury Department and $61,072 from the Manhattan 2 Mortgage Company . In addition, Petitioner was employed by, 3 and worked for , the Manhattan Mortgage Company during 2004 4 and was paid $61,072 by the Manhattan Mortgage Company i n 5 2004 for services rendered . The Court granted Respondent's 6 motion, ruling that the statements set forth in the requests 7 for admissions were deemed admitted . 8 Respondent also filed a motion for leave to fil e 9 an amendment to the answer to affirmatively allege the fraud 10 penalty against Petitioner under Section 6663 . Petitioner 11 asserts that the only fraud in this case is the fraud th e 12 Internal Revenue Service (referred to as the IRS) ha s 13 perpetrated against him for the 40-some years he has filed a 14 return and paid taxes . Petitioner has been "enlightened" by 15 Mr . Hendrickson's book and has filed zero returns for 2004, 16 the year at issue ; 2005 , 2006, and 2007 ( that is, the years 17 after Petitioner read Mr . Hendrickson's book) . Transcripts 18 of his account for the tax years 2002 and 2003 ( that is, the 19 two years before the year at issue) indicate that Petitioner 20 was aware that his wages constituted income, and he wa s 21 required to file a return . 22 Respondent filed a motion for summary judgment on 23 May 2, 2008 , and Petitioner filed a response, on May 23 , 24 2008 , to Respondent ' s motion for summary judgment . 25 Petitioner again asserts, in his response, that he was not Heritage Reporting Corporatio n (202) 628-4888 8 1 an "employee" of the Manhattan Mortgage Company, as defined 2 in the Code, nor did he earns " wages," as defined in the 3 Code . He does concede , however, receiving interest from the 4 Treasury Department . 5 Opinion . We are asked to decide whether to grant 6 summary judgment . Summary judgment is intended to expedite 7 litigation and avoid unnecessary and expensive trials . See 8 e .g ., FPL Group, Inc . v . Commissioner , 116 T .C . 73, 7 4 9 (2001) . A motion for summary judgment will be granted if 10 the pleadings, answers to interrogatories, depositions, 11 admissions, and other acceptable materials, together with 12 the affidavits, if any, show that there is no genuine issue 13 as to any material fact and that a decision may be rendered 14 as a matter of law . See Rule 121(b) ; Electric Arts, Inc . v . 15 Commissioner , 118 T .C . 226, 238 (2002) . The moving party 16 has the burden of proving that no genuine issue of material 17 fact exists and that it is entitled to judgment as a matter 18 of law . See e .g ., Rauenhorst v . Commissioner , 119 T .C . 157, 19 162 (2002) . The party opposing summary judgment must set 20 forth specific facts that show that a genuine question of 21 material fact exists and may not rely merely on allegations 22 or denials in the pleadings . Grant Creek Water Works, Ltd . 23 24 v . Commissioner , 91 T .C . 322, 325 (1988) ; Casanova Co . v . Commissioner , 87 T .C . 214, 217 (1986) . 25 Petitioner argues that his income is not taxable Heritage Reporting Corporation (202) 628-4888 9 1 because he is not an " employee " of the Manhattan Mortgage 2 Company , nor did he earn "wages," as defined by the Code . 3 Petitioner ' s argument that withholding applies only t o 4 government workers is frivolous and false . See e .g ., United 5 States v . Sullivan , 788 F .2d 813, 815 (1st Cir . 1986) . 6 Courts consistently have upheld that taxpayers lik e 7 Hendrickson , the author of the book, was an employee within 8 the meaning of Section 3401(c) . United States v . 9 Hendrickson , 2007 WL 238501 ( E .D . Mich .), 100 A .F .T .R .2d 10 2007-5395 . More specifically , with respect to Petitioner's 11 arguments gained from Mr . Hendrickson and his book, we find, 12 as do other courts, where taxpayers like Petitioner argue 13 that earnings are not taxable, he is not an "employee," and 14 that he did not earn " wages," as defined in the Code are all 15 frivolous and false . United States v . Latham , 754 F . 2d 747, 16 750 ( 7th Cir . 1985 )( court characterized argument tha t 17 category of "employee" does not include privately employed 18 wage earners is "a preposterous reading of the statute .") ; 19 Abdo v . United States , 234 F .Supp .2d 553 , 563 (M . D .N .C . 20 2002) affd . 63 Fed . Appx 163 (4th Cir . 2003)(court noted 21 claim that wages are not income " has been rejected as many 22 times as it has been asserted .") We, therefore , find that 23 Petitioner is liable for the $10 , 031 deficiency in federal 24 income taxes for 2004 . 25 We next address whether Petitioner is liable for Heritage Reporting Corporation (202) 628-4888 10 1 the $2,941 accuracy-related penalty, under Section 6662, for 2 2004 . Respondent bears the burden of production with 3 respect to the penalty . Sec . 7491(c) . 4 Section 6662(a) imposes a penalty equal to 2 0 5 percent of any underpayment of tax that is due to either (1) 6 negligence or disregard of rules or regulations, or (2) a 7 substantial understatement of income tax . See Sec . 8 6662(a)(b)(1) and (2) . The term "negligence" includes any 9 failure to make a reasonable attempt to comply with th e 10 provisions of the internal revenue laws . The term 11 "disregard" includes any careless, reckless, or intentional 12 disregard . Sec . 6662 ( c) ; see Sec . 1 .6662-3(b)(2), Income 13 Tax Regs . 14 An individual substantially understates his or her 15 income tax when the reported tax is understated by th e 16 greater of 10 percent of the tax required to be shown on the 17 return, or $5,000 . Sec . 6662(d) (1) (A) . Tax is no t 18 understated to the extent that the treatment of the item is 19 based on substantial authority or is adequately disclosed in 20 the return or in a statement attached to the return, an d 21 there is a reasonable basis for the tax treatment of such 22 item by the taxpayer . Sec . 6662(d)(2)(B) . 23 In the present case, the record demonstrates that 24 Petitioner failed to report the entire amount of his wage 25 income for 2004 . As a consequence, he understated hi s Heritage Reporting Corporation (202) 628-4888 1 1 1 income tax, and the understatement was substantial, within 2 the meaning of Section 6662(d) . We find Respondent ha s 3 satisfied his burden of production, under Section 7491(c), 4 with respect to the accuracy-related penalty, under Section 5 6662, for substantial understatement . Moreover, Petitioner 6 failed to present any documents or information to show that 7 his substantial understatement was due to reasonable caus e 8 and not willful neglect . Petitioner did not consult any tax 9 attorney to file the return or question any position s 10 advocated in Mr . Hendrickson's book . Petitioner advanced 11 only frivolous and groundless arguments . Finally, nothing 12 in the record suggests Petitioner had reasonable cause not 13 to report wages as income . 14 In view of the foregoing, we sustain Respondent's 15 determination that Petitioner is liable for the accuracy- 16 related penalty, under Section 6662(a), for 2004 . 17 We now address whether it is appropriate to impose 18 a penalty against Petitioner, under Section 6673, whic h 19 authorizes the Tax Court to require a taxpayer to pay to the 20 United States a penalty up to $25,000 whenever it appear s 21 that proceedings have been instituted or maintained by the 22 taxpayer primarily for delay or that the taxpayer's position 23 in such proceedings is frivolous or groundless . See Scruggs 24 v . Commissioner , T .C . Memo . 1995-355, affd . without 25 published opinion, 117 F .3d 1433 (11th Cir . 1997) ; Zvglis v . Heritage Reporting Corporatio n (202) 628-4888 1 2 1 Commissioner , T .C . Memo . 1993 - 341, affd . without published 2 opinion , 29 F .3d 620 (2d Cir . 1994) ; Fischer v . 3 Commissioner , T .C . Memo . 1994 - 586 ; McDonald v . Commissioner , 4 T .C . Memo . 1992 - 586 ; Schott v . Commissioner , T .C . Memo . 5 1991-457 . 6 We note that the type of arguments Petitione r 7 raises have been deemed by this Court to be frivolous and/or 8 sanctionable under Section 6673 . The Court is aware tha t 9 Petitioner has pursued the same frivolous argument in this 10 case as he does for 2005, 2006, and 2007 . Apparently , 11 Respondent asserting the fraud penalty, under Section 6663, 12 against Petitioner has not deterred Petitioner from wasting 13 the Court ' s and Respondent's limited time and resources . 14 Petitioner deserves a penalty, under Section 15 6673 ( a)(1), and that penalty should be substantial , if it is 16 to have the desired deterrent effect . Cf . Talmad a v . 17 Commissioner , T .C . Memo . 1996-114, affd . without published 18 opinion 101 F . 3d 695 ( 4th Cir . 1996 ) . The purpose o f 19 Section 6673 is to compel taxpayers to think and to conform 20 their conduct to settled tax principles . Coleman v . 21 Commissioner , 791 F .2d 68 , 71 (7th Cir . 1986 ) ; see also 22 Grasselli v . Commissioner , T .C . Memo . 1994-581 . 23 In this proceeding now before the Court , 24 Petitioner asserts nothing but frivolous and groundless 25 arguments . It is apparent from the entire record that Heritage Reporting Corporation (202) 628-4888 1 3 1 Petitioner instituted or maintained this proceedin g 2 primarily, if not exclusively, as a protest against th e 3 federal income tax system, and his proceeding in this Court 4 is merely a continuation of Petitioner's refusal t o 5 acknowledge and satisfy his tax obligations . We ar e 6 convinced that no purpose would be served in repeating all 7 that has been said about his frivolous and misguide d 8 arguments . 9 We are also convinced that Petitioner is aware of 10 the warnings this Court has given to taxpayers who provide 11 the type of arguments Petitioner provided in this case, yet 12 Petitioner persisted and wasted this Court's limited time 13 and resources . We, therefore, shall require Petitioner to 14 pay a penalty of $20,000, pursuant to Section 6673(a)(1) . 15 In addition, we take this opportunity to admonish Petitioner 16 that the Court will consider imposing a larger penalty i f 17 Petitioner returns to the Court and advances similar 18 arguments in the future . 19 To reflect the foregoing, decision will be entered 20 for Respondent, and an appropriate order will be issue d 21 sustaining the determinations in the deficiency notice, 22 dated October 16, 2006, for 2004, granting Respondent' s 23 motion for summary judgment and imposing a $20,000 penalty 24 against Petitioner under Section 6673 . Respondent als o 25 affirmatively asserts the fraud penalty against Petitioner Heritage Reporting Corporatio n (202) 628-4888 1 4 1 for 2004 . Respondent must prove fraud by clear an d 2 convincing evidence that some portion of the underpayment is 3 attributable to fraud . Sec . 7454(a) ; Rule 142(b) ; 4 Neidringhaus v . Commissioner , 99 T .C . 202, 210 (1992) . We 5 think the record is replete with evidence that Petitioner 6 falsified Form 4852 for the year 2004, filed a fraudulent 7 return reporting no wages for 2004, even though he had a 8 pattern of paying taxes and was thus aware that there was a 9 filing requirement to report the wages before the year at 10 issue . We are hopeful, however, that the Section 667 3 11 penalty will be more productive in deterring Petitioner's 12 arguments and making Petitioner comply with his requirement 13 to report his earnings as wages, as defined in the Code, and 14 acknowledging that he is an "employee," as defined in th e 15 Code . 16 This concludes the Court's oral findings of fact 17 and opinion in this case . 18 (Whereupon, at 9 :35 a .m ., the bench opinion in the 19 above-entitled matter was concluded . ) 20 21 22 23 2 4 25 Heritage Reporting Corporation (202) 628-4888