TAX COURT OPINION

Case: David R. Mills
Docket Number: 9715-10
Judge: Kroupa
Opinion Type: bench
Filed: 06/27/2011
Pages: 15

UNITED STATES TAX COURT WASHINGTON, DC 20217 DAVID R. MILLS, KVC Petitioner, v. ) Docket No. 9715-10 COMMISSIONER OF INTERNAL REVENUE, Respondent. 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 the pages of transmit the to petitioner and to respondent a copy of transcript of June 9, 2011, containing her oral rendered in this case. the above case before Judge Diane L. Kroupa on 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. June 27, 2011 SERVED Jun 30 2011 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 3 Bench Opinion By Judge Diane L. Kroupa June 9, 2011 David R. Mills v. Commissioner Docket No.: 9715-10 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 pursuant to the authority granted by section 7459(b) and Rule 152. All section references are to the Internal Revenue Code as amended and in effect for 2006, and all Rule references are to the Tax Court Rules of Practice and Procedure. This is a deficiency case in which petitioner contests the amounts shown on the substitute for return respondent prepared for 2006 after petitioner late filed a purported return reflecting zero in each line for taxable amounts. Petitioner is no stranger to this Court nor are his arguments that he has zero taxable income. David Mills appeared pro se, and Ron Chun appeared on behalf of respondent. FINDINGS OF FACT The facts are derived from the statements 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 4 that were deemed admitted under Rule 91(f). The Stipulation of Facts and the accompanying exhibits attached to the 91(f) motion are incorporated by this reference. Petitioner resided in California at the time he filed the petition. Petitioner worked at Keyes Acura in 2006 earning approximately $90,000. Petitioner's employer, Keyes Acura, withheld Federal income tax and issued petitioner a Form W-2 entitled "Wage and Tax Statement" reflecting petitioner's compensation as required by law. Petitioner also received $1,414 from a company also known as Amway and a $898 state income tax refund from the California Franchise Tax Board in 2006. He did not make estimated tax payments for 2006. Petitioner filed a late purported income tax return showing zero income. He attached a Form 4852, Substitute for Form W-2, to the purported tax return. Petitioner reported that his employer, Keyes Acura, had withheld Federal income tax, State tax, local tax, Social Security and Medicare tax. Petitioner sought refunds for all Federal taxes, Social Security and Medicare taxes withheld. Petitioner signed these forms (1040 and 4852) under penalties of perjury. Respondent did not process petitioner's 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 5 purported return and notified petitioner that his purported return for 2006 was frivolous and that his position had no-basis in the law. Respondent requested that petitioner submit a corrected return. Instead, petitioner wrote a response arguing that his position was not frivolous. He arduously had researched the issue and asserted that he had no taxable income. Petitioner never filed a corrected return for 2006. Respondent prepared a substitute for return for petitioner based upon information from third-party payors. Respondent issued the deficiency notice to petitioner determining an $18,471 deficiency in Federal income tai for 2006 and determining a $3,149.33 late filing addition under section 6651(a) (1), a $638.87 late payment addition under section 6651(a) (2) and a $2,029.57 failure to pay estimated taxes under section 6654 for 2006. Petitioner timely filed a petition with this Court. Petitioner was before this Court recently for 2004 and 2005. His amended Forms 1040X eliminated the wages previously,reported as income on Forms 1040, sought a refund for all the Federal income taxes paid on those wages and attached Forms 4852, Substitute for W-2, Wage and Tax Statement. He made frivolous arguments, including that "income" is not defined in 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 the Code and that wages earned by non-Federal employees are not subject to Federal income tax. Petitioner does not want to be "members of the herd" blindly following the involuntary nature of our tax system. This Court rejected each of his arguments and imposed a $20,000 penalty under section 6673. In this case, petitioner asserts that respondent erred in rejecting his purported return for 2006. He argues that respondent's substitute for return is not valid and that respondent and the Court are bludgeoning him with threats of additional penalty amounts under section 6673. Petitioner is aware of the consequences of his actions. Indeed, the Court 1 has warned petitioner in two Orders, during calendar call and during trial that he would be subject to additional sanctions under section 6673 if he continued to make frivolous arguments. Nevertheless, petitioner continued to make frivolous arguments, similar to those espoused by Peter Eric Hendrickson in his book entitled "Cracking the Code: The Fascinating Truth About Taxation in America." OPINION This case involves a taxpayer's continuing protest against the Federal income tax system. Petitioner instituted this case as a protest against 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 7 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. By citing, out of context, selected text from the withholding tax provisions, petitioner concludes that only Federal employees are subject to the Federal income tax on their wages. Petitioner also argues that the income tax is an excise tax on the exercise of federal "privilege" and that he did not receive "wages." Petitioner has followed in the footsteps of numerous others who have unsuccessfully attempted to find a way to avoid paying Federal income tax. We find petitioner's arguments to lack merit and not worthy of further analysis. Courts have found arguments frivolous when taxpayers argue as does petitioner and other followers of Mr. Hendrickson's Cracking the Code book, that wages are not income, e.g. Tornichio v. United States, 263 F.Supp.2d 1090 (N.D. Ohio 2002); Montero v. Commissioner, docket no. 23166-07L, affirmed by 5th Circuit in an unpublished order dated Nov. 19, 2009; Scott v. Commissioner, docket no. 26392-06 affirmed by 2d Circuit in an unpublished order dated Nov. 5, 2009; Elias v. Commissioner, docket no. 24624-06L; Mills v. Commissioner, docket no. 3441-08. 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 8 In addition, the Court notes that a Federal district court has also found Peter Hendrickson, the author of the book, to be an employee within the meaning of section 3401(c). United States v. Hendrickson, 2007 WL 238501 (E.D. Mich.), 100 A.F.T.R. 2d, 2007-5395. Petitioner blindly follows the work of Mr. Hendrickson even though his arguments have been soundly rejected. United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985) (court characterized argument that category of 'employee' does not include privately employed wage earners is a preposterous reading of the statute."); Abdo v. United States, 234 F.Supp.2d 553, 563 (M.D.N.C. 2002), affd 63 Fed.Appx. 163 (4th Cir. 2003) (court noted claim that wages are not income "has been rejected as many times as it has been asserted.") Petitioner received wage income from Keyes Acura in 2006. He also received income from Amway and a state income tax refund from the California Franchise Tax Board. It is a fundamental tax principle that gross income includes all income form whatever source derived, including wages, interest, dividends, state income tax refunds (in certain situations) and non- employee income. Sec. 61(a) (1). The income petitioner earned in 2006, as determined both by respondent as well as by the facts deemed admitted by 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 the Court, constitute gross income. We therefore sustain the deficiency determination in respondent's deficiency notice for 2006. We now focus on the additions to tax. An addition to tax is imposed if a taxpayer fails to file a timely Federal income tax return. Sec. 6651(a) (1). "Return" is not defined in section 6651, nor in any other section of the Code. See secs. 6011, 6651; Swanson v. Commissioner, 121 T.C. 111, 122-123' (2003). The Court of Appeals for the Ninth Circuit, to which the present case is appealable, has found that a Form 1040 containing all zeros signed under penalties of perjury qualifies as a return for criminal purposes (section 7203-willful failure to file returns. United States v. Long, 618 F.2d 74 (9th Cir. 1980). Petitioner cites this case to support his position. The Court of Appeals for the Ninth Circuit reversed the taxpayer's conviction for willful failure to file, holding that the forms containing all zeros were "returns" for section 7203 purposes because the zeros constituted information from which the tax could be computed. Id. The Court of Appeals' view that a return containing all zeros constitutes a return is contrary to the view of several other courts that have 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 considered the question. See United States v. Mosel, 738 F.2d 157 (6th Cir. 1984); United States v. Smith, 618 F.2d 280 (5th Cir. 1980); United States v. Rickman, 638 F.2d 182 (10th Cir. 1980); Cabirac v. Commissioner, 120 T.C. 163, 168-170 (2003); Halcott v. Commissioner, T.C. Memo 2004-214. As Long involved a different provision of the Code, it is not squarely on point. Here, petitioner contests applying a civil failure to file addition, not a criminal penalty. In addition, in Long, the IRS had not saved any documents the taxpayer had submitted but sought to prosecute the taxpayer for willful failure to file. Id. The taxpayer provided "facsimiles" of the documents he allegedly filed, and the court was asked to decide whether they constituted returns. Id. In this case, the parties introduced petitioner's purported return as evidence. Petitioner may not rely on Long to avoid civil additions to tax under these circumstances. We follow the Supreme Court's definition of what constitutes a return. Beard v. Commissioner, 82 T.C. 766, 777 (1984), affd. per curiam 793 F.2d 139 (6th Cir. 1986). Petitioner cites, but misunderstands, this case. The four-part test of Beard requires that a document contain sufficient data 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 11 to calculate tax liability, purport to be a return, represent an honest and reasonable attempt to satisfy the requirements of the tax law, and be executed by the taxpayer under penalties of perjury. Beard v. Commissioner, supra at 777. We have applied this test to the cases under section 6651(a) (1) as well as in cases under other sections of the Code. See Cabirac v. Commissioner, supra at 168-170. The Court of Appeals for the Ninth Circuit has characterized our test as a widely accepted interpretation that provides a sound approach under the Code. United States v. Hatton, 220 F.3d. 1057, 1060-1061 (9th Cir. 2000). The Court of Appeals for the Ninth Circuit also views this test as consistent with the policy that a return should obtain tax information with uniformity and completeness to facilitate the physical task of handling and verifying returns. Id. We focus on one requirement of the Supreme Court cases, as articulated in Beard, to determine whether the 1040 document constitutes a return. Under the Beard test, a document must be an honest and genuine endeavor to satisfy the tax law to be considered a return. Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 180 (1934); Beard v. 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 Commissioner, supra at 777. A document containing all zeros and supported by tax protester rhetoric does not represent an honest and genuine endeavor to satisfy the taw law. See United States v. Moore, 627 F.2d 830, 835 (7th Cir. 1980); United States v. Rickman, supra at 184. Petitioner's continuing reliance on discredited arguments convinces us that he did not make an honest and genuine endeavor to satisfy the law and therefore did not file a return for purposes of section 6651. We therefore find that petitioner failed to file a return for 2006. We now address whether petitioner's failure to file was due to reasonable cause and not to willful neglect. Petitioner presented no evidence showing that his failure to file or pay was due to reasonable cause and not due to willful neglect. As already mentioned, petitioner has advanced several specious arguments as to why he should not have to pay tax. None of his arguments suffice to show that he had "reasonable cause." Accordingly, we hold that petitioner is liable for the late filing addition to tax- under section 6651(a) (1). We next consider whether petitioner is liable for the late payment addition to tax for failure to timely pay the amount of tax shown on a Heritage Reporting Corporation (202) 628-4888 I | 1 13 taxpayer's Federal income tax return. Sec. 6651(a) (2). Respondent prepared a substitute for return under section 6020(b) for 2006. Substitutes for return made by the Secretary under section 6020(b) are treated as the returns filed by the taxpayer for purposes of determining whether the late payment addition to tax applies. Sec. 6651(g) (2). Petitioner argues that respondent cannot prepare a substitute for return unless respondent has personal knowledge and the SFR lacks petitioner's signature agreeing to the liability. We need not discuss petitioner's erroneous position at length. See Wnuck v. Commissioner, 136 T.C. No. 24 (2011). We sustain respondent's determination of the late payment addition to tax under section 6651(a) (2). Next, we consider whether petitioner is liable for the addition to tax under section 6654(a) for failure to make estimated tax payments. The required annual payment of estimated tax, as it relates to this case, equals 90 percent of . petitioner's tax for 2006. Sec. 6654(d) (1) (]B) (I). Petitioner's income tax deficiency for 2006 is $18,471, petitioner's withholding from wages was $4,474, and he made no payments of estimated tax. He has not made the required annual payment of the 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 14 statute. There are other exceptions to the obligation to make estimated tax payments set forth in section 6654, but petitioner has failed to establish he fits within those exceptions. Accordingly, we hold that petitioner is liable for the section 6654(a) addition to tax for failure to make estimated tax payments. We now address whether it is appropriate to again impose a penalty against petitioner under section 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 this Court imposed a $20,000 penalty under section 6673 on petitioner and his wife in 2009 for making similar arguments regarding 2004 and 2005. We again note that the type of arguments on which petitioner bases his purported return for 2006 has been deemed by this Court.to be frivolous and/or sanctionable under section 6673. The Court warned petitioner several times in this proceeding that he risked being subject to the penalty for this case if he continued to raise only frivolous arguments and waste the Court's and r'espondent's limited time 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 15 resources. Nevertheless, petitioner continues his protest of the Federal income tax system and still refuses to acknowledge and satisfy his tax obligations. 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 Cir. 1986). Petitioner says that we are bludgeoning him with threats of penalties. Petitioner defied the Court and argues that he has not brought this case for delay purposes. We disagree. The IRS has been unable to collect the taxes due for 2006 for almost five years. (We also note that the IRS has been unable to collect the taxes due for 2004 and 2005 for over seven years because the earlier case is still on appeal to the Ninth Circuit. If five to seven years is not a delay, the Court does not know what a delay would be. Indeed, we find that prior penalties did not have the intended effect and therefore a greater penalty is needed. Given the ineffectiveness of our $20,000 penalty in the earlier case, we shall now require petitioner to pay a $25,000 penalty under section 6673(a) (1). Petitioner's tactics should not be condoned. They damage the integrity of the Federal 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 16 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 T.C. 403, 412 (1984). Petitioner is pro se and seeks leniency from the Court. Pro se status, however, is not a license to litter the dockets of the Federal courts with ridiculous allegations concerning the Code. Parker v. Commissioner, 117 F.3d 785 (5th Cir. 1997). To reflect the foregoing, decision will be entered for respondent and an appropriate order will be issued imposing a $25,000 penalty against petitioner under section 6673 for 2006. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 9:35 a.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // Heritage Reporting Corporation (202) 628-4888