TAX COURT OPINION

Case: Michael C. Christen
Docket Number: 16147-14
Judge: Holmes
Opinion Type: bench
Filed: 05/26/2016
Pages: 14

42 Sb f gb UNITED STATES TAX COURT WASHINGTON, DC 20217 MICHAEL C. CHRISTEN, Petitioner, v. ) ) ) ) ) Docket No. 16147-14. COMMISSIONER OF INTERNAL REVENUE, Respondent. ORDER 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 Mark V. Holmes at Los Angeles, California, containing his oral findings of fact and opinion rendered after the conclusion of trial. In accordance with the oral findings of fact and opinion, a decision for Respondent will be entered. . (Signed) Mark V. Holmes Judge Dated: Washington, D.C. May 26, 2016 SERVED JUN - 2 2016 Capital Reporting Company 3 1 Bench Opinion by Judge Mark Holmes 2 April 13, 2016 3 Michael C. Christen v. Commissioner 4 5 6 7 Docket No. 16147-14 THE COURT: In the case of Michael C. Christen v. Commission, Docket No. 16147-14, the Court has decided to rendered Oral Findings of Fact and 8 Opinion. And the following is the Court's Oral 9 Findings of Fact and Opinion. 10 11 12 13 14 15 This bench opinion is pursuant to the authority granted by Sec. 7459(b) of the Internal Revenue Code, 1986 as amended, and Rule 152(a) of the Tax Court Rules of Practice and Procedure. This case was brought by Mr. Christen, who is a native of California; still a resident of 16 California when he filed the Petition. The parties were able to achieve a stipulation through application of Rule 91(f). And the case concerns Mr. Christen's 1999, 2000 and 2002 tax years. The background of this case is unusual. And according to Mr. Christen, in a series of eight meetings between 1979 and 1990 with the American Broadcasting Company, the firm where his uncle worked, he had transcribed a bounty of ideas that were later, more or less, stolen by others, according 18 20 21 22 23 24 25 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 to his account. These included the plot and storyline for the Lion King, with its concentration on the evil uncle character; the corporate logos for Sony, Microsoft and Apple, among many others; and speeches and applause lines for the President Bush, including a claim of authorship of the "1,000 points of light," famously used by that President Bush in his acceptance speech in 1988; the "kinder, gentler America" line and "don't ask, don't tell" motto, 10 which is actually a Clintonism, but Mr. Christen said 11 12 13 14 15 16 he gave it to the first President Bush for his use. He also took credit for the idea of ending the Cold War and tearing down the Berlin Wall. But these were only the surface of his claims, which extended to the creative arts as well. In addition to the Lion King, Mr. Christen claimed to be the author or originator of the plots and storylines of 18 Rain Man, Ghost Busters II and the classic Earth 20 21 22 23 24 25 Girls Are Easy. He even claimed to have been the voice behind a group he called Milli Vanilli with a song called "Girl, You Know It's True." He tried to monetize this work of his by sending out demand letters, some of which were in the record. For example, sending a letter regarding his asserted authorship of Ghost Buster II demanding 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 8 9 10 11 $60,000 from Columbia Pictures in 1996 for services rendered between 1989 and 1991. Similarly, there was a demand letter for Rain Man and there he priced at $55,000 and sent to United Artists. There were a series of these one-page demand letters, sometimes two-page demand letters. None of them actually resulted in money coming in, however. Instead, in each tax year at issue, Mr. Christen received 1099 income as a non- employee independent contractor to a couple of small businesses in the LA area. Specifically, the 12 Merchant of Tennis and another firm that I believe is 13 14 15 16 17 18 19 20 21 22 23 24 25 called US Sales. And he grossed about $60,000 in income each year from this more well-documented work. However, he did not file tax returns for any of the three years at issue and that brings me to the origins of his tax trouble. Since he did not file but had received 1099 income, it came to the attention of the IRS's computers. And in November 2004, the IRS sent him a substitute for return prepared under IRC Sec. 6020(b) for the tax years 1999, 2000 and 2002, the very tax years we are here to discuss today. Mr. Christen, however, though he received, according to IRS records, a Notice of Deficiency for 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 17 18 19 20 21 22 23 24 25 these three tax years, never filed a petition. And in the ordinary course of events, the IRS then assessed the tax that it had prepared substitutes for, a return for. Mr. Christen did not pay any of those amounts and collection action finally ground into gear in about 2010. That then did prompt Mr. Christen to file the missing tax returns. And between April 2010 and June -- I'm sorry, January 2011, all three missing returns were received by the IRS. All, however, showed zero tax due. That prompted the IRS, nevertheless, to abate (i.e. reduce to zero) the previous assessments. And they sent notice, the standard notices the IRS sends called CT-21(c) forms, to Mr. Christen that reflected that adjustment to his account. But then the IRS began looking at those three returns that Mr. Christen had filed so many years after the tax years at issue. They showed, as I said, income of around $60,000 reported on a Schedule C, which was appropriate for someone who's a non-employee earning money through the sale of services. But these expenses were completely offset; indeed, more than offset by numerous claimed expenses. The biggest of these by far were what Mr. 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 7 1 Christen had arrived at bad debt deductions: 2 3 4 $435,000 in bad debts for 1999, $125,000 in bad debts for 2000, and $132,000 in bad debts for 2002. This led to an audit, which led to a second round of 5 Notices of Deficiencies for these three years and to 6 Mr. Christen filing a timely petition in our Court. 7 8 9 I w(cid:0)540ed organize the discussion part of this bench opinion by going through each category of expense, and then I'll talk about Mr. Christen's 10 defense of accord and satisfaction and finally deal 11 with the penalties. 12 13 The first expense that was contested was an advertising expenses of $2,050 for the 1999 tax year. 14 Mr. Christen supplied no substantiation for this and 15 17 18 19 20 21 22 23 24 25 indeed, was unable to explain what was advertised or where the advertising was placed. I find in favor of the Government on this one. The second category of expenses at issue were the cost of goods sold adjustment, $9,520, in the year 2000 and $9,785 in the year 2002. A COGS is generally computed by subtracting the value of ending inventory for a year from the sum of beginning inventory and purchases made during the year. See Thor Power Tool Co. v. Commissioner, 439 US 522, 530 Note 9 (1979). There were no records of any cost of 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 goods sold by Mr. Christen's consulting business. And it is hard to understand what inventory was present here in what was essentially a service business. I find in favor of the Government on this point. The third category of expense and the big one were these bad debt deductions. In his testimony, Mr. Christen conceded that that was not quite the right characterization and he was correct to do so. Sec. 166(a) of the Code does allow a deduction for "any debt which becomes worthless 12 within the taxable year." But bad debt deductions 13 must have behind them a bona fide debt. See 26 CFR, 14 15 16 17 19 20 21 22 23 24 25 Sec. 1.166-1(c), "A bona fide debt is a debt which arises from a debtor/creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money." This means that it is not simply an account receivable or a hoped-for return on investment that gives rise to a bad debt, but a debtor/creditor relationship. There is, as usual in tax law, an exception for accrual taxpayers "a debt arising out of the receivables... is deemed to be an enforceable obligation_ to the extent that the income such debt 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 8 9 10 11 12 represents had been included in the return of income for the year for which the deduction has a bad debt is claimed or for a prior taxable year." Id. What this means is that Mr. Christen, who checked the box that he was an accrual taxpayer, had to show some proof that he had actually included in his taxable income, either in that year or a previous year, these rather large amounts of money for which he was claiming subsequent bad debt loss deduction. But he admitted in his testimony that he had not done so. Moreover, it's quite clear that there was no debtor/creditor relationship here. Mr. 13 Christen had not advanced hundreds of thousands of 14 15 17 18 19 20 21 22 23 24 25 dollars to these various companies which he sent demand letters to. The demand letters themselves don't create a bad debt loss, especially if they're . simply unanswered. So he asked during his testimony to re-characterize this bad debt loss as "other costs," which he also had a line for on his Schedule C. But there is no cost actually incurred here so that doesn't work either. And there were no out-of-pocket costs that Mr. Christen absorbed, perhaps apart from postage on these demand letters, but certainly nothing like the investment or expenditure companles 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 10 1 2 that have other costs that they have to report on their tax returns. So, again, I find in favor of the 3 Government on that point. 4 That leads me to the second category here, 5 which is Mr. Christen's claim of accord fe+ 6 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 satisfaction. As best I can tell, Mr. Christen looked at the history of assessment and abatement and concluded that he had worked out some kind of deal. There was no written evidence of any such deal with the IRS. But he claimed that the deal must have been accepted because of the abatement notices that he received. Even if we believed him on this point, and I stress that his story on this point is as incredible as his stories on others, we would find no basis for any defense of th; Ccurt in satisfaction. aceora æ~A What happened here has happened many times in the past and the cases are all in agreement. For instance, in Mitchell v. Commissioner, TC Memo 1990-1, "Whereas in this case Respondent mails a Notice of Deficiency to the taxpayer and no petition is filed in this Court within the applicable period, Respondent is authorized to assess the determined deficiency. However if... Respondent subsequently concludes that the... assessment 1s or may be invalid, Respondent is not prohibited from abating the 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 assessment and mailing a new Notice of Deficiency, provided that the applicable statute for limitations has not expired. Furthermore, if as here a timely petition is filed by the taxpayer with respect to the new notice, the jurisdiction of this Court is invoked for a redetermination of the taxpayer's correct tax liability. The abatement of the previous assessment does not constitute a final determination of petitioner's liability and does not deprive this 10 Court of jurisdiction to decide the controversy. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 "See with respect to the new notice, the jurisdiction of this Court is invoked for a redetermination of the taxpayer's correct tax liability. "The abatement of the previous assessment does not constitute a final determination of Petitioner's liability and does not deprive this Court of jurisdiction to decide the controversy." See Pfeiffer v. Commissioner, TC Memo 1983-437. See also Service Bolt and Nut Co. Trust v. Commissioner, 78 TC 812, 822 (1982), Aff. 724(f) (2) (E) 519 (6th Circuit 1983)." The Service Bolt and Nut Co. Trust Company case is itself very similar to this one. And in that case we held that "The Revenue Service's decision to 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 abate the decision, the assessment of the taxes and additions to tax can in no way be construed as a bar to later court proceedings as to those taxes and additions to tax. The decision by the IRS to abate the assessment previously made can in no way be viewed as an accord and satisfaction or other binding action sufficient to stop Respondent from further proceedings regarding these taxable years. Parks v. 9 Commissioner, 33 TC 298 (1959); Miller v. 10 Commissioner, 23 TC 565 (1954 ) , Af fj. 231 (.fà.-2-4 8 ( 5th 11 Circuit 1956). If Petitioners, in fact, relied on 12 13 14 15 such notice of abatement as a discharge of their tax liability they did so because of a mistake as to the legal effect of such notice. But the Respondent may not be estopped by such a taxpayer mistake. Service 16 Bolt and Nut Co. Trust, 78 TC 812, 821-22." I find, in other words, in favor of the Government on this second part. That leaves only the penalties. Two are at issue here. The first penalty is Sec. 6651(a). This section provides for an addition tax for the late filing of a return. Mr. Christen did not timely file his 1999, 2000 and 2002 forms 1040. On May 3rd, 2010, the IRS received his 2002 for 1040. On April 29 it received his 2000 and 1040. And on January 18 19 20 21 22 23 24 25 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 9 10 11 12 13 15 16 17 18 19 20 21 22 23 24 25 21st, 2011, it received his 1999 for 1040. All substantially late filed. He presented no defense at trial for this particular addition to tax and I find, again, in favor of the Government. That leaves only the penalty under IRC Sec. 6662. That section provides for an addition to tax for, among other things, a negligence or disregard of rules and regulations, and the substantial understatement of income tax. In an effort to avoid piling on, I will simply deal with the substantial understatement of income tax in this bench opinion. A substantial understatement of income tax occurs when the amount of the understatement for the taxable year exceeds the greater of ten percent of the tax required to be shown on the return for the taxable year or $5,000. See Sec. 6662(d) (1) (A). On his 1999 return, Mr. Christen reported a total tax of zero. The IRS has determined and the Court agrees that the tax required to be shown in the return was $19,533. Ten percent of that is $1,952.30. The understatement of tax was $19,533. The understatement for tax year 1999, therefore, exceeds ten percent of the tax required to be shown on the return and $5,000. 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 14 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 On his 2000 return, Mr. Christen reported an income tax of zero again. The IRS determined and the Court agrees that the tax required to be shown on the return was $21,658. Ten percent of that is $2,165.80. The understatement of tax was $21,658. The understatement for the tax year of 2000, therefore, exceeds ten percent of the tax required to be shown on the return and $5,000. On his 2002 tax return, Mr. Christen reported again a total tax of zero. The IRS determined that the tax required to be shown on the return is $19,177. Ten percent of that is $1,917.70. The understatement of tax was $19,177. The understatement for tax year 2002, therefore, exceeds ten percent of the tax required to be shown on the return and $5,000. Thus, the Commissioner has met his burden of production, which means the burden of proof shifts over to the Mr. Christen, including the burden of proving that the penalties are inappropriate because of reasonable cause. The determination of whether Mr. Christen acted with reasonable cause and in good faith is made by taking into account all pertinent facts and circumstances. And I find that the Petitioner should have 866.488.DEPO twww.CapitalReportingCompany.com Capital Reporting Company 15 1 2 known that these wildly inflated deductions were too good to be true. Mr. Christen is a fairly 3 well-educated man with a bachelor's degree. He's a 4 5 6 7 8 9 10 11 very smart person in his own way. And although I do have some concerns naturally about his rationality, I look particularly at his rationality as it relates to his ability to obey the tax laws in this matter. And he had undertaken, as he said in his testimony, that it was a fairly simple research project for him to discover that these massive bad debt deductions were, in fact, not justified. If he conceded that they 12 weren't justified, he should have done his research 13 14 before he took such wildly inflated deductions. So on this point, too, I find in favor the 15 Government. A decision will be entered in favor of the Respondent. This concludes the Court's Oral Findings of Fact in this case. (Whereupon, at 10:20 a.m. the above- entitled matter was concluded.) 16 19 20 21 22 23 24 25 866.488.DEPO twww.CapitalReportingCompany.com