TAX COURT OPINION

Case: Martin Nitschke
Docket Number: 5156-13
Judge: Morrison
Opinion Type: bench
Filed: 05/21/2014
Pages: 17

UNITED STATES TAX COURT WASHINGTON, DC 20217 MARTIN NITSCHKE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) Docket No. 5156-13. ORDER OF SERVICE OF TRANSCRIPT Pursuant to Rule 152(b), Tax Court Rules of Practice of Procedure, there is transmitted herewith to petitioners and to respondent a copy of the pages of the transcript of the trial of the above case before Judge Richard T. Morrison, at Houston, Texas, on March 19, 2014, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, an appropriate order and decision will be entered. (Signed) Richard T. Morrison Judge Dated: Washington, D.C. May 21, 2014 SEMED MAY 2 2 2014 Capital Reporting Company 3 1 2 Bench Opinion by Judge Robert T. Morrison Docket No. 5156-13 3 Martin Nitschke 4 March 19, 2014 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 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, which shall not be relied on as precedent in any other case. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, all references to sections are to sections of the Internal Revenue Code in effect for 2009, the year at issue, and all references to rules are to the Tax Court Rules of RTr Practice and Procedure. By a statutory notice of deficiency, the IRS determined a $18,787 deficiency in the federal income tax of the petitioner, Mr. Martin G. Nitschke, an addition to tax under section 6651(a)(1) of $2,721.83, an addition to tax under section 6651(a)(2) of $1,875.04, and an addition to tax under section 6654(a) of $271.83, all for the 2009 tax year. In its pretrial memorandum, the IRS conceded 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 that Nitschke was not liable for the section 6651(a)(2) addition to tax, but that the amount of the section 6651(a)(1) addition to tax should be increased. This concession is described later in 5 more detail. 6 The trial of this case was conducted on 7 March 17, 2014, in Houston, Texas. 8 9 10 petition. Findings of Fact Nitschke resided in Texas when he filed his 11 12 13 14 Nitschke did not file a federal income tax return for 2008 or 2009. Nitschke received $98,860 in wages from Seismic Micro-Technology, Inc., during 2009. 15 Nitschke received $11 in interest income from Navy 16 17 Federal Credit Union during 2009. For 2009, federal income taxes were 18 withheld from Nitschke's wages in the amount of 19 20 21 22 23 24 25 $6,690.24. The IRS prepared a substitute for return for Nitschke's 2009 tax year under section 6020(b). The notice of deficiency was mailed by the IRS to Nitschke on November 26, 2012. He received the notice of deficiency. The notice of deficiency determined that Nitschke received $98,860 in wage 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 income and $11 in interest income. The additions to tax calculated in the notice of deficiency were calculated as of November 1, 2012. The notice determined that the amount of the addition to tax under section 6651(a)(2) was 15.5 percent of $12,097, or $1,875.04. The 15.5 percent is equal to the 0.5 percent monthly statutory percentage at which the section 6651(a)(2) addition 10 to tax accrues, multiplied by 31 months. The first 11 month in the 31-month period was the month that began 12 13 14 15 16 17 18 19 20 21 22 23 24 25 on April 15, 2010, and ended on May 14, 2010. The last month in the 31-month period began on October 15, 2012, and ended on November 14, 2012. The significance of the April 15, 2010% date is that it was the date on which Nitschke was required to pay his 2009 income-tax liability. The $12,097 amount is F equal to the $18,787 tax imposed, minus $6,690 in income tax withheld. The notice determined that the amount of the addition to tax under section 6651(a)(1) was 22.5 percent of $12.097, which is $2,721.83. The 22.5 percent is the 5 percent monthly statutory percentage for the section 6651(a)(1) addition minus the 0.5 percent monthly statutory percentage for the section 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6651(a)(2) addition, multiplied by five months. In the form of an equation, this is: 22.5% = (5%-0.5%) X (5 months) The first month of the five-month period to which this calculation relates is the month beginning on 6 April 15, 2010, and ending on May 14, 2010. The last 7 month of the five-month period is the month beginning 8 9 10 11 12 13 on August 15, 2010, and ending on October 15, 2010. The significance of the April 15, 2010y date is that RT it is the date on which Nitschke was required to file his 2009 income tax return. A five-month period was used because the section 6651(a)(1) addition to tax is capped at 25 percent and accrues at 5 percent per 14 month, as described later. 15 On February 25, 2013, Nitschke filed a Tax 16 Court petition. 17 18 19 20 21 22 23 24 In its pretrial memorandum, the IRS conceded that Nitschke was not liable for the addition to tax under section 6651(a)(2). However, it asserted an increase in the amount of Nitschke's liability for the addition to tax under section 6651(a)(1). This increase is equal to the section 6651(c) reduction used in the calculations in the notice of deficiency. Numerically it would be (5 25 months) X ($60.49), or $302.45. After this increase 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company is accounted for, the addition to tax under section 6651(a)(1) would be $2,721.83 plus $302.45, or $3,024.28. This calculation is described below in 7 section 2.a. 1. Deficiency. Opinion Generally, the IRS's determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving that it is incorrect by a 1 2 3 4 5 6 7 8 9 10 preponderance of the evidence. Rule 142(a); Welch v. 11 Helvering, 290 U.S. 111, 115 (1933) (burden of proof 12 13 14 15 16 17 18 19 on taxpayer); Estate of Gilford v. Commissioner, 88 T.C. 38, 51 (1987) (preponderance standard). The U.S. Court of Appeals for the Fifth Circuit, to which an appeal would lie absent a stipulation to the contrary, see section 7482(b) (1) (A), has held that for the presumption of correctness to attach in an unreported income case, the IRS must establish "some factual foundation" for its determination, see 20 Portillo v. Commissioner, 932 F.2d 1128,1133 (5th 21 Cir. 1991), aff'g in part and rev'g in part T.C. memo 22 23 24 25 1990-68; Carson v. United States, 560 F.2d 693,696 (5th Cir. 1977). In Portillo, the Fifth Circuit held that when the notice of deficiency rests only on the twin suppositions that an information return (such as 866.488.DEPO www.CapitalReportingCompany.com 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 Capital Reporting Company 8 a Form 1099) reporting that the taxpayer earned unreported income is correct and that the Form 1040 filed by the taxpayer is wrong, then the IRS's determination should be judicially reversed. Id. at 1133-1134. The Fifth Circuit applied Portillo in Parker v. Commissioner, 117 F.3rd 785 (5th Cir. 1997). In Parker, the taxpayer failed to file a Form 1040. 117 F.3d at 786. The IRS's deficiency determination was based on Form W-2 and Form 1099 information returns. Id. Parker held that because the taxpayer did not file a return, Portillo did not require judicial reversal of the IRS's determination. 117 F.3d at 786-787. See also Green v. Commissioner, 322 Fed. AppxV 412,417 (5th Cir. 2009), aff'g T.C. RTPM A Memo 2008-130. Like the taxpayer in Parker, Nitschke did not file a Form 1040. Thus, the presumption of correctness attaches to the IRS's notice of deficiencyg Nitschke bears the burden of proving A that the determination is incorrect, and Portillo does not require judicial reversal of the deficiency determination. Nitschke contends that the statutory notice of deficiency is invalid. Shortly before trial he moved to dismiss the case for lack of jurisdiction on this theory. According to Nitschke, the statutory 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 notice of deficiency is invalid because the information the IRS used to generate it "resided" and "was maintained" by the IRS "on the invalid segment of the IMF. " He claims that the improper storage of this information is evidenced by the code "Val-1" 6 which appears in the IRS's records. This particular 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 argument appears not to have yet been considered by the courts. However, an unconsidered argument is not necessarily meritorious. Our explanation Wnuck v. Commissioner, 136 T.C. 498, 501-502 (2011), is equally applicable here: "If one is genuinely seeking the truth, if he focuses on what is relevant, and if he confines himself to good sense and logic, then the number of serious arguments he can make on a given point is limited. However, if one is already committed to a position regardless of its truth, if he is willing to say anything, if he is willing to ignore relevance, good sense, and logic, and if he is simply looking for subjects and predicates to put together into sentences in ostensible support of a given point, then the number of frivolous arguments that he can make on that point is effectively limitless. When each frivolous argument is answered, there is always another, as long as there are words to be uttered. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 Such arguments are without number." 2( - Nitschke's groundless and frivolous RTWs 10 3 4 5 6 7 8 9 assertionß- warrants no further discussion. See Crane AD¼ v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984). His motion to dismiss is denied. The burden of proof is imposed on the IRS for factual issues that meet the requirements of section 7491(a). Nitschke does not contend, nor does the record allow us to conclude that the requirements 10 of 7491(a) have been met. 11 12 13 If a taxpayer asserts a "reasonable dispute" with respect to any item of income reported on a third-party information return, such as a Form 14 W-2 or Form 1099, and the taxpayer has fully 15 16 17 18 19 20 21 22 cooperated with the IRS, the IRS will have the burden of producing reasonable and probative information concerning the item of income in addition to the information return. Sec. 62 Ol(d). Seismic Micro- Technology, Inc., reported to the IRS on a Form W-2 that it paid $98,860 in wage income to Nitschke. Navy Federal Credit Union reported to the IRS on a Form 1099 that it paid $11 in interest income to 23 Nitschke. Nitschke has not asserted a reasonable 24 25 dispute with respect to the Form W-2 and the Form 1099. He argues that Seismic Micro-Technology, Inc., 866.488.DEPO www.Capita1ReportingCompany.com I Capital Reporting Company 11 1 2 3 4 5 6 does not have the authority to determine if he is an employee of that company. He also argues that the IRS itself has determined that he is not an employee of Seismic Micro-Technology, Inc. With respect to his argument that Seismic Micro-Technology, Inc., lacks the necessary authority, the argument 7 misapprehends the IRS's position. The IRS is not 8 9 10 11 contending that Seismic Micro-Technology, Inc., has the power to determine whether Nitschke is an employee. It contends only that the Form W-2 is evidence that Nitschke earned income from Seismic 12 Micro-Technology, Inc. Nitschke refused to submit 13 14 15 any evidence to rebut this Form W-2. He did not even testify. As to his argument that the IRS has determined that he is not an employee of Seismic 16 Micro-Technology, Inc., Nitschke relies on a letter 17 from the IRS indicating that it had not made a 18 written determination of his worker status. This 19 20 21 22 23 24 25 letter appears to state that the IRS has not made a separate determination for employment tax and income- tax withholding purposes whether Nitschke was an employee or independent contractor of Seismic Micro- Technology, Inc. The letter does not take the position that Nitschke is not an employee. It merely says that no written determination had been made. In 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 any case, Nitschke has not demonstrated why any determination of his employee-versus-independent- contractor status, even if made by the Tax Court, would reduce his deficiency. Also, Nitschke has not been fully cooperative with the IRS. Therefore the burden of production does not shift to the IRS. The preponderance of the evidence supports our finding that Nitschke received $98,860 in wages from Seismic Micro-Technology, Inc., during 2009. And the preponderance of evidence supports our finding that Nitschke received $11 in interest income from Navy Federal Credit Union during 2009. Consequently, the IRS's determination of the deficiency for 2009 is sustained. 2. Additions to tax. Section 7491(c) provides that the IRS bears the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount. Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). To meet its burden of production, the IRS must come forward with sufficient evidence that it is appropriate to impose the penalty, addition to tax or additional amount. Once the IRS meets its burden, the taxpayer must come forward with evidence 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 sufficient to persuade the Court that the IRS's determination is incorrect. Id. a. Section 665(a)(1) The IRS contends that Nitschke is liable for an addition to tax for failure to file a return for 2009 under section 6651(a)(1). Section 6651(a)(1) imposes an addition to tax for failure to file a return on the due date unless the taxpayer can establish that the failure was due to reasonable cause and not due to willful neglect. A substitute for return prepared by the IRS does not count as a return for this purpose. Sec. 6651(g)(1). Nitschke argues that he is not liable for the section 6651(a)(1) addition to tax because he did not have income from taxable sources. If 16 Nitschke did not have taxable income, then he would 17 18 19 20 21 22 23 not have had to file a return. Sec. 6012(a)(1) (A) (individual taxpayer must file a return if gross income exceeds the exemption amount). But, as we find, Nitschke had $98,860 in wage income and $11 in interest income. Therefore, he was required to file a return. The IRS introduced into evidence a certification from one of its recordkeepers that 24 Nitschke did not file a tax return for 2009. 25 Consequently, we conclude that the IRS has satisfied 866.488.DEPO www.CapitalReportingCompany.com 1 Capital Reporting Company 14 1 its burden of production under section 7491(c), and 2 Nitschke must come forward with evidence sufficient 3 4 5 6 7 8 9 to persuade the Court that the IRS's determination is inappropriate. See Paschall v. Commissioner, 137 T.C. 8,21 (2011) (IRS satisfies its burden of production if it shows the taxpayer did not file a return). Other than to claim that the IRS has not shown he had taxable income, Nitschke has made no other argument why the failure-to-file addition to 10 tax is inappropriate. Consequently, we conclude that 11 Nitschke is liable for the addition to tax under 12 13 14 15 16 17 18 19 20 21 22 23 24 25 section 6651(a)(1) for failure to file a timely tax return for 2009. The amount of the section 6651(a)(1) addition to tax depends on the number of months the return is late. For each month the return is late, the addition to tax increases by 5 percent of the tax required to be shown on the return. However, the addition to tax cannot exceed 25 percent "in the aggregate." For a taxpayer like Nitschke who has not timely filed a return himself and has not paid the tax reflected on the later-filed return (or substitute return), the months for which the section 6651(a)(1) addition to tax are calculated may be the same months for which the section 6651(a)(2) addition 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 to tax are calculated. Section 6651(a)(2) imposes an addition to tax equal to 0.5 percent of the amount shown as tax on the return. The section 6651(a)(2) addition to tax is increased for each additional 5 month the taxpayer fails to pay the amount shown on 6 7 8 9 10 11 12 13 14 15 16 17 18 the return. Section 6651(c)(1) provides a rule for coordinating the amounts of additions to tax that are simultaneous. If the section 6651(a)(1) and section 6651(a)(2) additions apply to the same month, the section 6651(a)(1) amount must be reduced by the section 6651(a)(2) amount. Sec. 6651(c)(1). If the base amount upon which both additions to tax are based is the same, then the addition to tax pursuant to section 6651(a)(1) would be 4.5 percent for the overlapping month and the addition to tax pursuant to section 6651(a)(2) would be 0.5 percent for the overlapping month. The combined addition to tax for the month would be 5 percent for the overlapping 19 month. the 25 percent maximum for the section 20 21 22 23 24 25 6651(a)(1) penalty is calculated before the reduction required by section 6651(c)(1) is taken into account. Thus, if a taxpayer files a tax return eight months late, and the returns show the tax due is $500, and the correct amount of tax is $500, and the taxpayer pays the $500 with the return, then the amount of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 section 6651(a)(1) addition to tax is 5 percent times five months times $500, which is $125, minus $12.50, which is the amount imposed under section 6651(a)(2) for the same five months (i.e., 235 percent A times $500 times five months). The difference is $112.50. See sec. 301;6651-1(f) Ex. 2, Proced. & Admin. Regs. g7K4 According to the notice of deficiency, the amount of the section 6651(a)(1) addition to tax was $2,721.83. In its pretrial memorandum, however, the IRS asserted that the amount of the liability should be increased by the section 6651(c)(1) reduction allowed in the notice of deficiency. This results in a section 6651(a)(1) liability of $3,024.28. We hold that 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Nitschke's liability for the section 6651(a)(1) 15 16 17 18 19 20 21 22 23 24 25 liability is $3,024.28. b. Section 6654(a). The IRS contends that Nitschke is liable for an addition to tax for failure to pay estimated income tax for 2009 under section 6654(a). Section 6654(a) imposes an addition to tax for underpayment of estimated income tax by an individual taxpayer. This addition to tax is computed by reference to four required installment payments of the taxpayer's estimated tax liability, each constituting 25 percent of the "required annual 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 payment." Sec. 6654(d)(1)(A). The "required annual payment" is equal to the lesser of (1) 90 percent of the tax shown on the individual's return for the year, or, if no return was filed, 90 percent of the correct tax for such year, or (2) if the individual filed a return for the preceding tax year, 100 percent of the tax shown on that return. Sec. 6654(d) (1)(A), (B)(i) and £81(ii). The IRS must produce evidence that the taxpayer has a "required annual payment." Wheeler v. Commissioner, 127 T.C. 200, 210-212 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008). This is an aspect of its burden of production for additions to tax. Id. Here the IRS has shown that Nitschke did not file a 7 return for 2009; that the tax required to be shown on his 2009 return was $18,787; and that he did not file a return for 2008. Therefore, the required annual payment is 90 percent of $18,787, or $16,908.30. Nitschke made no estimated tax payments for r 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2009, except for the $6,690 withheld from his wages. 21 22 23 24 25 The $6,690 is creditable under section 31 and is treated as a payment of estimated tax pursuant to section 6654(g) (1). See MendeÉ.v. Commissioner, 121 T.C. 308, 323 n. 12 (2003). However, A the $6,690 is less than the $16,908.30 required annual payment. He 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 therefore has not made the required annual payment of estimated tax. See sec. 6654 (d) (1) (B) (ii), (g) (1). The Court also concludes that none of the exceptions given in section 6654(e) are applicable. As a consequence, the Court sustains the IRS's determination of the addition to tax pursuant to section 6654(a). 3. Conclusion. To give effect to the foregoing, a decision 1 2 3 4 5 6 7 8 9 10 will be entered that there is a deficiency for 2009 11 12 13 14 of $18,787, an addition to tax under section 6651(a)(1) of $3,024.28, an addition to tax under 6654(a) of $271.83, and no addition to tax under section 6651(a)(2). An order will be entered denying 15 Nitschke's motion to dismiss for lack of jurisdiction. This concludes the Court's Oral Findings of Fact and Opinion in this case. (Whereupon, at 3:55 p.m., the above- entitled matter was concluded.) 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com