TAX COURT OPINION

Case: John Stewart Turner
Docket Number: 22427-09
Judge: Colvin
Opinion Type: bench
Filed: 11/24/2010
Pages: 13

UNITED STATES TAX COURT WASHINGTON, DC 20217 RMM JOHN STEWART TURNER, Petitioner, v. ) Docket No. 22427-09 COMMISSIONER OF INTERNAL REVENUE, Respondent. O R D E R Pursuant to Rules 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit the to petitioner and to respondent a copy of transcript of proceedings of L. Kroupa at San Francisco, California on October 27, 2010, containing her oral the above case before Judge Diane the pages of findings of fact and opinion. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Diane L. Kroupa Judge Dated: Washington, D.C. November 24, 2010 SERVED Nov 26 2010 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 Diane L. Kroupa October 27, 2010 John Stewart Turner v. Commissioner Docket No. 22427-09 3 THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. These oral findings of fact and opinion shall not be relied upon as precedent in any other case. This bench opinion is made pursúant to the authority granted by section 7459(b) and Rule 152. All section references are to the Internal Rebenue Code, as amended, and in effect for 2000, 2001, 2002, and 2003, the years at issue, and all rule references are to the Tax Court Rules of Practice & Procedure. John Turner appeared pro se. Christian Speck appeared on behalf of Respondent. FINDINGS OF FACT Certain facts have been stipulated. The stipulation of facts the parties filed with accompanying exhibits is incorporated by this reference. The facts are so found. Petitioner failed to file returns for each of the four years at issue. Based upon information from third parties, Respondent prepared a substitute for return for each of the four years at issue. Respondent issued Heritage Reporting Corporation (202) 628-4888 4 Petitioner four statutory deficiency notices, each dated June 16th, 2009, in which Respondent determined specific items with respect to each year. Respondent determined a deficiency in federal income tax, a fraudulent-failure-to-file addition under section 6651(f), a late-filing addition under section 6651(a) (2); and a failure-to-pay-estimated-tax addition under section 6654 with respect to each year. Petitioner and his spouse were married and lived in California, a community property state, during each of the years at issue. Petitioner's spouse geceivëd wage and interest income during each of the years at issue. Petitioner is a former revenue officer of the Internal Revenue Service, IRS. As a former revenue officer, Petitioner was trained in ensuring compliance with the filing and payment obligations of taxpayers. Petitioner was also trained in the use of administrative tools and procedures. Petitioner's father-in-law was the former regional director of collections for the ,IRS. Petitioner received a copy of the code while a revenue officer and he was also trained in the administrative procedures in closing taxpayer delinquency investigations when a taxpayer failed to file a required return. Petitioner was paid wages to perform the duties of a revenue officer with the IRS. Before 2000, Petitioner 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 1 Heritage Reporting Corporation (202) 628-4888 a 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 5 filed federal income tax returns and reported the wages he earned from working as a revenue officer. After resigning as a revenue officer in 1997, Petitioner received enrolled agent status from the IRS as a former revenue agent. As an enrolled agent, Petitioner represented taxpayers in matters before the IRS, and his clients compensated him for the services he performed. He also represented taxpayers in this Court who had failed to file returns and pay taxes. Petitioner failed to report any compensation he received in exchange for the services he performed as an enrolled agent, including fees that he received for testifying in criminal tax trials. He also worked as an employee for Air Filtration Services where he received wages after leaving the IRS. Petitioner made deposits of taxable income into his Washington Mutual account during each of the four years at issue, and into his Bank of the West accounts during each of the last three years at issue. Revenue agent Osborn removed any non-taxable deposits, as well as other deposits that were already taxable, such as wages, so that Petitioner would not be taxed twice on the same income. Petitioner admitted he received income other than that which was deposited into these accounts. Petitioner also received payment for services by taking Federal Reserve Heritage Reporting Corporation (202) 628-4888 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 6 notes rather than a check. Despite earning income during the years at issue, Petitioner failed to file returns or pay tax. Respondent issued the deficiency notices to Petitioner after examination. During the examination, Petitioner attempted to obstruct Respondent's ability to determine his tax liability, including failing to voluntarily provide || information about his earnings and 'stonewalling' a summons interview. OPINION After listening to Petitioner's testimony and arguments, Petitioner is essentially questioning our tax system's fundamental filing requirement. His argument continues that Respondent cannot assess a fraud addition, or any addition, for that matter, because each is based upon a valid return, and there is no valid return when a 'substitute for return' is prepared under; section 6020(b). His arguments attack the very fþundation on which our federal income tax system is baseds We find Petitioner has instituted and maintained this case as a protest against the federal income tax system. Petitioner's arguments are familiar to this Court and other federal courts and have been soundly rejected on numerous occasions, Petitioner cites out of context selected texts from statutes and cases. Petitioner has followed in the footsteps of others who have Heritage Reporting Corporation (202) 628-4888 7 unsuccessfully attempted to find a way to,avoid paying federal income tax. He apparently believ s that he is smarter than the average person and that his interpretation of the code is correct, even though no court has agreed with his position. Advancing tax arguments that have no reasonable basis is not an honest and reasonable attempt to comply with the tax law. Dunham v.Commissioner, TC Memo 1998-52. We find Petitioner's arguments to lack merit and not worthy of further analysis. We mention two cases that have addressed circular arguments similari to Petitioner's: United States v. Latham, 754 F.2d 747, 750 (7th Circ. 1985), court characterized argument that 'category of "employee" does not include privately employed wage-earners' is a preposterous reading of the statute; Abdu v. United States, 234 F.Supp.2d 553, 563 (MDNC 2002), affd. 63 Fed.Appx. 163 (4th Circ. 2003), court noted claim that wages are not income 'has been rejected as many times a:s it has been asserted'. We begin with the general propogition of taxation. Gross income generally includes all income from whatever source derived. Sec. 61(a). Taxpayers must keep adequate books and records from which their correct tax liability can be determined. Sec. 6001. 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 Heritage Reporting Corporation (202) 628-4888 : .1 8 When a taxpayer fails to keep records, the Commissioner has discretion to reconstruct the taxpayer's income by any reasonable means. Sec. 446(b). Factor v. Commissioner, 218 F.2d 100, 117 (9th Circ. 1960), affg. TC Memo 1958-94. The reconstruction need only be reasonable in light of all surrounding facts and circumstances. See Schroder v. Commissioner, 40 TC 30, 33 :(1963). We have previously approved the use of the bank deposits method as a means of income reconstruction. Clayton v. Commissioner, 102 TC 632, 645 (1994). The bank deposits method assumes that all money deposited into a taxpayer's bank account during a particular period constitutes taxable income. Clayton v. Commissioner, supra at 645. The Commissioner must take into account, however, any known non-taxable source or deductible expense. Id. Respondent determined through bank deposit analysis that Petitioner failed to report taxable deposits in each of the four years at issue. Petitioner bears the burden of demonstrating that Respondent's determinatiòn is erroneous. See Kling v. Commissioner, TC Memo 2001-78. Petitioner did not produce the receipts or otherwise present any books, records, or other testimony to refute Respondent's determinätion. Indeed, Petitioner 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 Heritage Reporting Corporation (202) 628-4888 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 9 admitted he received income other than that deposited into the bank accounts. We find that Petitioner has failed to meet his burden and we sustain Respondent's determination that Petitioner failed to report income in each of the years at issue. We therefore find that Petitioner is liable for the deficiency in federal income tax for each of the four years at issue. We now focus on the additions to tax. Respondent bears the burden of production with respect to an addition. Sec. 7491(c). Respondent provided a certified transcript of account for each of the years at issue, showing that Petitioner failed to timely file and p y any tax for any of the years at issue. We find that Respondent has satisfied his burden of production. Thus, the additions to tax under section 6651(a) (1) for delinquent filing; delinquent paying under section 6651(a) (2); and the failure to make estimated tax payments under section 6654 apply to Petitioner for each of the years at issue. We next consider whether Petitioner's failure to file was fraudulent. When determining whether a failure to file is fraudulent, the Court considers the same elements that are considered in imposing the fraud penalty under section 6663. Clayton v. Commissioner, supra at 653. Heritage Reporting Corporation (202) 628-4888 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 10 Fraud is an intentional wrongdoing designed to evade tax known or believed to be owing. Edelson v. Commissioner, 829 F.2d 828, 833 (9th Circ. 1987), affg. TC Memo 1986-223. An addition to tax equal to 75 percent of the underpayment will be imposed if any part of the taxpayer's underpayment of federal income tax is due ito fraud. See sec. 6663 (b) (1). Further, if any portion of the underpayment is attributable to fraud, the entire underpayment will be treated as attributable to fraud unless the taxpayer establishes otherwise. Sec. 6653(b) (2). Respondent has the burden of proving by clear and convincing evidence that an underpayment exists for the years in issue, and that some portion of the underpayment is due to fraud. Sec. 7454(a); Rule 142(b). Respondent established that Petitioner received unreported income and that Petitioner's failure to file a return resulted in an underpayment for the years at issue. We find, therefore, that Respondent has mèt his burden. Respondent must also prove that Petitioner has fraudulent intent. Direct evidence of fraud is rarely available. Thus, it may be proven by circumstantial evidence. Spies v. United States, 317 US 492 (1943). Courts have developed several indicia or badges of Heritage Reporting Corporadion (202) 628-4888 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 11 fraud from which fraudulent intent can be inferred. They include, one, failing to file income tax returns; two, understating income; three, failing to maintain adequate records; four, failing to cooperate with taxing authorities; five, failing to make estimated tax payments; six, dealing in cash; and, seven, asserting frivolous arguments and objections to the tax laws. Bradford Y. Commissioner, 796 F.2d 303, 307 (9th Circ. 1986), affg. C emo 1984- 01; O Runkle v. Commissioner, TC Memo 2005-112. Although no single factor is necessarily sufficient to establish fraud, a combinatïon of several of these factors may be persuasive evidence of fraud. Bradford v. Commissioner, supra at 307-308. We are convinced, after applying these criteria to Petitioner's situation, that he fraudulently failed to file a return for each of the years at issue, with an intent to evade tax. Petitioner was aware of the requirements to file a federal income tax return and pay taiesi. He failed to file returns. He failed to cooperate with the Service's reasonable requests for information concerning his earnings. He failed to keep accurate records and report taxable income. His argument questioning his obligation to file returns and pay tax is meritless and absu|rd. These badges demonstrate that Petitioner's failure to file income tax returns was both deliberate and with the Heritage Reporting Corporation (202) 628-4888 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 12 intent to evade taxes he knew he owed. Respondent has proven by clear and convincing evidence that Petitioner fraudulently failed to file returns under section 6651(f) for each of the years at issue. We now address whether it is apyropriate to impose a penalty against Petitioner under sec io 6673, which authorizes the Tax Court to require a taxpayer to pay to the United States a penalty up to $25,000 whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer's position in such proceedings is frivolous or groundless. We note that the type of arguments Petitioner raises have been deemed by this Court to be frivolous and/or sanctionable under section 6673. Petitioner's tactics have consumed valuable government resources. These tactics should not be condoned. They damage the integrity of the federal tax litigation system because of the time and attention the Court and Respondent must devote to these frivolous arguments deprives other taxpayers with genuine controversies. See Abrams v. Commissioner, 82 TC 403, 412 (1984). When the Court has been faced with meritless arguments that waste the Court's and Råspþndent's limited time and resources, we have consistently found that the taxpayer deserves a penalty under section16673(a) (1) and Heritage Reporting Corporation (202) 628-4888 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 13 that penalty should be substantial if it is to have the desired deterrent effect. The purpose of section 6673 is to compel taxpayers to think and to conform their conduct to settled tax principles. Coleman v. Commissioner, 791 F.2d 68, 71 (7th Circ. 1986); see also Grasselli v. Commissioner, TC Memo 1994-581. Petitioner is no ordinary pro se taxpayer. He is a former IRS revenue agent, charged with the responsibility to enforce our tax laws. He states that he is not a tax protester; instead, he states that he has no filing requirement and that he cannot be liable for a penalty based upon an invalid return prepared by the Commissioner under section 6020(b). It is apparent from the entire record that Petitioner instituted or maintained this proceeding primarily, if not exclusively, as a protest against the federal income tax system, and his proceeding in this Court is merely a continuation of Petitioner's refusal to acknowledge and satisfy his tax obligations. Petitioner acknowledged his fil ng obligation when he was a revenue officer. It is only after he left the Service that he has 'gained more knowledge' and questions his filing obligation. Shame on you, Mr. Turner. We are convinced that no purpose would be served Heritage Reporting Corporation (202) 628-4888 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 14 in repeating all that has been said about his misguided arguments. Petitioner admitted that he was aware of section 6673 when Respondent orally moved to impose sanctions. We note that these are the first years that Petitioner makes his misguided arguments after having complied with his filing and payment obligations in the past. We reluctantly do not impose a penalty against Petitioner at this time. We strongly caution Petitioner, however, that should he bring similar arguments before this Court in the future, the Court is likely to impose such a penalty, up to $25,000, against him. To reflect the foregoing, decision will be entered for Respondent. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 12:53 p.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // Heritage Reporting Corporation (202) 628-4888