TAX COURT OPINION

Case: William J. Licha & Alicia T. Licha a.k.a. Alicia Tovar
Docket Number: 14382-08
Judge: Wherry
Opinion Type: memo
Filed: 11/17/2011
Pages: 18

T. C. Memo. 2011-275 UNITED STATES TAX C URT WILLIAM J. LICHA AND ALICIA T. LICHA, A.K.A. ALICIA TOVAR, COMMISSIONER OF INTERNAL REVENUE, Respondent Pet itioners v. Docket No. 14382-08. Filed November 17, 2011. R determined that Ês underreported income and claimed excess deductions and expenses, causing defi Federal penalties pursuant through 2006 tax years. to sec. 6662(a), income taxes, and are liable for accyracy-related iencies in I.R.C., for their 2001 Held: After a small concession by R with respect to 2006, Ps are liable for the remaining deficiencies and sec. 6662(a), I.R.C., penalties. William J. Licha, for p titioners. Kris H. An, for respondènt. MEMORANJUM FINDINGS OF FACT AND OPINION WHERRY, Judge: This case is before the Court on a petition for redetermination of income tax deficiencies that respondent determined for petitjoners' 2001 through 2006 tax years.1 After respondent conceded $345 of petitioners' 2006 capital gain, the issues for decision are: (1) Whether petitioners failed to report on Schedules C, Profit or Loss From Eusiness, gross income of $48, 000, $85, 000, $91, 073, $276, 371, $172, 367, and $90 , 523, f or the 2001 through 2006 t x years, respectively; (2) whether petitioners received ther ,unreported income of $7,500, $22,000, and $9,626 for the 2002 through 2004 tax years, respectively; (3) whether petitioners are entitled to deduct additional Schedule C expenses over and above those respondent allowed for the 2001 throudh 2006 tax years; (4) whe her petitioners had unreported capital gains of $123 778 for 2003 and $123, 720 for 2006; 1Petitioner wife did not attend the trial. Petitioner husband (Mr. Licha) explained that she knew about had authorized him to represent her but that she does not understand English or petitioners' finances. the trial and - 3 - (5) whether petitioners are liable for secti n 6662 (a) accuracy-related penalties for the 2001 through 2006 tax years;2 and 6673. (6) whether Mr. Licha is liable for å penaltþ under section FINDINGS OF FACT At the time they filed their petition with this Court, petitioners resided in California. Mr.' Licha is ä self-employed contractor who owned a construction company which served primarily as a framing subcontractor during the yéars at issue. Petitioners timely filed their Formsî 1040, U.S. Individual Income Tax Return, for 2001 through 2006.1 Petitioners hired Jagit Arora, an enrolled agent, who for the 2001 year worked for Jackson Hewitt Tax Service add thereafter for hi 1self, and/or tax associates Neelu Arora and H rleen Chadha to pre åre their 2001 through 2006 tax returns but did not prov de the n with any documentation. Mr. Licha wo ld simply tell Mr. rora or his associate "what I .made total after I'd pa d all ny deductions, expenses, insurance, repairs and all this other stuff." For each of the 2001, 2002, 2003, and 2004 tax years petitioners reported on Schedule C income of $25, 000 and no expenses. For the 2005 tax year petitioners repokted on Schedule 2All section references are to the Internal Revenue Code of 1986, as amended and in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. C income of $26, 070 yith;no expenses; and for the 2006. tax year they reported on, Sche dule C income of $29, 125 with no expenses . Petitioners stipulated that they did not specify any of the expenses - related to the constructi.on business . Mr . Licha did not maintain any records related to his construction business. Petitioners reported only the. net income from the business on their tax return without any breakdown of gross receipts and expenses. In fact, Mrf Licha. knew what he earned and what his expenses were only by looking at his bank account balances. During the , years at issue .petitioners ehad .a, checking account with Bank of -America which Mr. Licha used as his primary -business account . Petitioners also had accounts with Wells Fargo Bank and Citibank during the years at issue . Petitioners did not provide .any documentation to the . examining agent; therefore, during the examination, -a revenue agent summoned all of petitioners' bank account records and conducted a bank depos;i.ts analysis . .The revenue agent examined all of petitioners' deposit-s and "if they were clearly for his construction business they were made. out to Licha Construction or the memo would say for a remodel or framing, then * * * .[she] determined that they were gross receipts from his business". After .the examination .the revenue agent met with Mr. Licha and reviewed respondent's proposed adjustments; at. the meeting she allowed additional expenses on he basis of Mr. Licha's reasonable oral explanations regarding specific eNpenses. After reviewing petitioners' bank account records and considering Mr. Licha's oral statements, the revenue agenii deterbined the following adjustments to petitioners' constructiofi business accounts as shown in table 1 Table 1 Tax year 2001 2002 2003 2004 2005 2006 Gross receipts $48, 000 $85 000 $91, 073 $276, 37 $172, 367 $90 , 523 Expenses (Other, materials) labor, 40,009 39 827 28,068 176,913 95,584 80,951 Net profit 7,991 45,173 63,005 99,458 76,783 9,572 The revenue agent also determined that petitioners had unreported income unrelated tÉo the construction business of $7,500, $22,000, and $9,626 for the 2002, 2003, and 2004 tax years, respectively. In addition the revenue agent allowed itemized deductions for taxable years 2001 through 2003 of $13,Ñ11, $21,442, and $21,654, respectively in lieu of the lesser amounts petitioners claimed on their tax returns. ! On or about May 26, 1988, petitioners purchased a property at 19314 Valerio Street, Los Angeles, California (Valerio property). On November 13, 2003, Mr. Licha exchanged the Valerio property as part of a like-kind exchange. An element of the transaction was the use of the buyer's purchase payment, in part, to pay off Mr. Licha's loan against the Valerio property of $163,873.25. In return Mr. Licha received a property at 20036 Community Street, Winneika, California (Community property) . On or about Aprjl 20,· 2006,^ petitioners sold the Community property as part of 2nother like-kind exchange and received property at 2700 Colimbus Street SE, Albany, Oregon (Columbus property) in return. Petitioners a;lso received $131,563.39 denominated in the closing documents as "boot" as a result of the exchange. On or about November 27,b 2006, petitioners sold the Columbus property f or $229, 900 . On March 12, 2008, respondent sent petitioners a notice of deficiency determining deficiencies in income taxes and section 6662 (a) penalties as shown in table 2. Table 2 Tax year 2 0_0 1_ 20 0_2 _2_0_0 3_ 2.0_0 4 2 0 0 5 2 0 0 6 Deficiency $2,020 $14,845 $43,202.00 $34,721.00 $26,030 $20,293.00 Sec. 6662(a) penalty 404 2,969 8,640.40 6,944.20 5,206 4,058.60 Total 2,424 17,814 51,842.40 41,665.20 31,236 24,351.60 On or around May 31, 2008, Mr. Licha respondecÍ to the notice of deficiency by mailing a "PETITION OF PROTEST AND NOTICE OF APPEAL" to the Internal Revenue Service (IRS) , stating that "I hereby, refuse this demand, for cause, based upon errors in fact and law. I am not liable for the payment of this unsubstantiated and unattested demand " Among other things, Mr. Licha demanded - 7 - that the IRS send him all laws, regulations, and instructions he would need for "perfecting my appeal" and "Your f 11 legal name, a Copy of your Identif icatior! Card, Badge and Bond Numbers arid your Social Se curity Numbers . " Mr . Licha conclud d by = s tating that "Failure to respond to this Notice within 10 days will mean you have acquiesced to this error and have cancelled. this ' demand." The IRS returned Mr. Licha's document with a letter explaining that he must send the petition to this Court and that the IRS could not forward it. Mr. Licha· then timely mailed the above mentioned "PETITION OF PROTEST AND NOTICE OF APP] AL" to this Court along with the letter from the IRS. It was received and* filed as 'petitioners' petition on June 11, .2008. On July 7, 2008, respöndent filed a motion to dismiss for failure to state a claim upon which relief can be granted. On July 10, 2008, petitioners we e ordered to 11 respond to the motion and/or file an amended peti ion containing any assignments of error that they alleged respon ent had made. On August 13, 2008, petitioners filed an amended petition with the Court. Petitioners objected to every adjustment respondent made in the notice of deficiency, in some instances alleging that they were owed a refund, and listed a variety of statutes they believed appli d. The amen ed petition states that 44 U. S . C. S . 3512 states No person shall be subject any PENALTY, if the IN ORMATION COLEECTION R.EQUEST involved DOES NOT display a current OMB control No. per none the Paperwork Reduction Act of 1980, (CFR page v) . to [sic] of the . forms the IRS used ·to niake ^ additional assessment of Taxes and Penalties have VALID OMB :CONTROL NUMBERS. Mr . Licha also wonders, ; at . the start ·of ¯ the last page of the amended petitione "Does the IRS have a PERSONABLE [sic] problem against: Me" . He s tat es that (cid:16)042 Individuals who "are citizens or residents of the United States and SUBJECT to its Jurisdiction. Title 27 USC - Judiciary; and Jadicial -Procedures' sec.297 (a) (b) states the 50 Freely Associated Compact States are Countries, and 527 USC sec.. 1746 (1) (2),states - WITHOUT the United States is the United States of America, and WITHIN the United States i s Its Territores, Possessiones or Commwealths. Tax on is 26 USC 911~(d) (2) (A)Î(B) based on 26 _USC 911 (b) (1) (A) Foreign Country to the United[ States, and Claim 26 USC 7701 (b) (B) , as I am a Citizen and resident of the Republic State of. California *"* *. over $30,000.00 for the yearsk 2001-2006, as the Illegal Mexicams [sic]uImmigrants havet taken over the Construction in Los Angelos [sic] . - Foreign Earned Income, as California is a [sic] Therefore I DETERMINED what I pay a I have never made A trial was held on September 17, 2010, in Los Angeles, California. Petitioners pretrial memorandum inter alia does not dispute receipt of unreported income or allege that respondent erroneously excluded expenses from petitioners' construction business. Instead, Mr. Licha argues.that he is not a citizen of the United States and, therefore, this Court does not have jurisdiction over him. Mr. Licha also reiterates his argument with regard to Office of Management and Budget (OMB) control numbers that "The 1040 Return Forms for the years 2001 ;to 2006 Do Not Display a VALID OMB CONTROL .NO * * *. No person can be ADVERSELY EFFECTED [sic] by h matter REQUIRED to be published in the Federal Register and NOT: so published." At trial the Court attempted to explain to r. Licha that the OMB control numbers argument has been rejected by this Court and Courts of Appeals and provided him with copiös of the caselaw. Mr. Licha was advised that this Court is not the proper forum for expressing disagreement with the Fede(cid:16)040alGovernment's tax laws and policies and that he should Finstead take them up with his elected representatives. At trial thi¼ Court warned Mr. Licha that if he made frivolous arguments and/o pursued his case merely for delay in addressing his tax obligatiöns he could be subject to a penalty under dection 6673. OPINION I. Jurisdiction and Burden of Production A. Jurisdiction We begin by confirming our jurisdiction in his case. Our jurisdiction.to redetermine a Federal income tax deficiency depends on the issuance of a valid notice of deficiency and a timely filed petition. Secs. 6212(a), 6213(a), 6214 (a); Monge v. Commissioner, 93 T.C. 22, 27 (1989). B. Burden of Production Section 61(a) specifie that "Excep as ot erwise provided", gross income includes "all ncome from whatever source - 10 - de rived" . The Commis s ioner ' s de termination o f a taxpayer ' s liability for an income tax deficiency,is generally presumed correct,, and the taxpayer bears the burden of proving that the determination is improper. : See Rule 142 (a) ;. Welch v. Helvering, 290 U. S . 111, .115 (1933) The Court of Appeal.s for the Ninth Circuit to which an appeal would lie absent a. stipulation to . the contrary, has held that where unreported income is inÿolved, :the ..presumption of correctness applies only after ther Commissioner introduces some substantive evidence that the taxpayer received. unreported income. Edwards ,v. Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982) ; Weimerskirch v. Commissioner, 596 .F.2d 358, 360-362 (9th Cir. 1979), revg. 67 T.C. 672 (1977) . If the Commissioner introduces such evidence3 the burden, shifts to the taxpayer to show by a preponderar.ce of the evidence that the deficiency was arbitrary . or erroneots . 3 See Hardy v. Commis sioner, .181 F . 3d 1002, 1004 (9th Cir. 1999)w affg. T.C. Memo. 1997-97. Respondent has introduced suf ficient evidence connecting . petitioners .with the unreported income. ,Petitioners and respondent stipulated over 84 exhibits / including petitioners' bank account transactions evidencing income and . expenses of the 3Although sec. .7Ül(a) may shi t Èhe burden of proof to the Commissioner in specified circumstances, petitioners have fallen far short of satisfying the prerequisites under sec. 7491(a) (1) and (2) for such a shift. - 11 - construction business, as well as documentation felated to petitioners' real estate transactions. Conseque tly, respondent's determination is entitled to the pr sumption of correctness.4 . II. Limitations Periods In the amended petition, Mr. Licha seems to argue that he believes the limitations periods for the 2001, 2002, and 2003 tax years have expired. As Mr. Licha properly notes; section 6501(e) (1) (A) applies and extends the limitations period to 6 years "If the taxpayer omits from gross income an amount properly includable therein which is in excess of n25 percent of the amount of gross income stated in theireturn". 1 As shown in table 1, supra p. 5, respondent -determined petitioners' unreported Schedule C gross income to be: $48,000, $85,000, $91,073, $276,371, $172,367, an $90,5 3, for 2001 through 2006, respectively. All of the missio s are well above 25 percent of the amounts petitioners re orted n income. 4Even if he was alleging that the unreported income was incorrect and arbitrary, Mr. Licha's tacit acknowledgment that he received alleged income is enough "minimdl evidÊnce" presumption of correctness to attach to the notice of deficiency. Mr. Licha does not deny that he received income. See Havrilla v. Commissioner, 978 F.2d 1265 (9th Cir. 1992) Court's dismissal after the taxpayer had argued that the Commissioner failed to meet his burden of demonstrating that the taxpayer owed taxes on unreported income yet not dispute the receipt of wages, arguing instead only that income was not taxable), affg. without published opinion T.C. Memo. 1991-497. the taxpayer did the for the (affirming Tax - 12t - Therefore, section 6 01(e) (1) (A). applies in this case. Respondent sent peti ioners the notice of deficiency on March 12, 2008, which is less than 6 years from the April 15, 2002, filing deadline for petitio2ers' 2001 tax year, and the notice is therefore valid. This same 1s true for the 2002 and 2003 tax years at- issue. III. Recordkeeping Requirements The taxpayer must maintain records adequate to substantiate his income and deduc ions. Sec. 6001 (the taxpayer "shall keep such records"); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). As in this case, when the taxpayer fails to maintain adequate books and r cords, the Commissioner>is authorized to use whatever method he d ems appropriate to determine the existence and amount of the ta payer's income so long as it clearly reflects income. Sec. 446(b); Mallette Bros. Constr. Co., Inc. v. United States, 69 F.2d 145, 148 (5th Cir. 1983). The Commissioner has wide discretion in determining which method to apply, and reconstruction of the taxpayer's income "need only be reasonable in light f all surrouncling facts and circumstances." Gowni v. Commissioner, T.C. Memo. 2004-154. Petitioners did not present aüy documentation concerning the property swaps other than the documents respondent had subpoenaed from the mortgage conpanies. The documentation is sparse at best, and this Court cannot determine with prec1slon petitioners' - 13 - basis in the original property and thus annot ompute the capital.gains resulting from the transac ions. We note that under section 1031(b) taxpay rs must rec gnize he fair market value of any boot received i an exchang . Res ondent determined that petitioners had capital gains in thd amoun s of the boot they received in the transac ions minus hat he determined were closing costs. Mr. Licha di not refute jthese eterminations or address this issue on brief or at trial and did not present any additional documentation of his original(cid:16)040basis.As -petitioners had the burden of proof and completely fáiled t satisfy it, they are liable for the.additional tax on capstal gains respondent determined. IV. Bank Deposits Method ofil Proof Respondent used the bank deposits method of tproof to reconstruct petitioners' income for 2001 hthrough 2006. "Deposits in a taxpayer's bank accounti are prima fácie evidence of income, and the taxpayer bears the burden of showing that the deposits were not taxable income but were derived "from a·nontaxable source." Welch v. Commissioner, 204 F.3d 1228, $230 (9th- Cir. 2000), affg. T.C. Memo. 1998-121. "The bank deposits method assumes that all money deposited in a taxpayer's ibank account during a given period constitutes taxable income, but the Government must take into account any nontaxable source or deductible expense of which lit has knowledge." dlayton v. - 14 - Commissioner, 102 T.C. 632v645-646 (1994) (citing DiLeo v. Commissioner, 96 T.Cu 858, 868· (1991)t, affd. 959 F.2d 16 (2d Cir. 1992) ) After the deposits have been shown to be "in the nature of incomeaand to exceed what the taxpayers had reported as income, it became the taxpayers' responsibility" to show that the deposits were nontaxable, s Dodge v. Commissioner,. 981 F.2d 350, 354 (8th Cir. 1992), affg. in part and revg. in part 96 T.C. 172 (1991) . 3 . Mr Licha invoked the jurisdiction of this Court but has~ not denied,receiving, and at !trial did--not produce evidence or rebuttrespondent's determination that he received and failed to report, gros s income of : $48, 000 , $85, 000, $91, 0 73, $276, 371, $172,367, and $90,523, for 2001 th ough 2006, respectively. Rather, Mr. Licha argues that he does'not owe ~the deficiencies because they have,not been properly determined, he is not a U S. cit-izen, and 3 the Forms 1040 did not. contain the proper OMB control-numbers,. Mr< ,Licha also,did not attempt to identify expenses or provide iny furthers documentation not already 1 stipulated with regard to his construction business or his property swaps. Mr. Licha's argfments are without merit and lack factual and legal foundation; herce "we are not; obligated to exhaustively review and rebut pet;it;i.oner s misguided contentions." See Sanders v. Commissioner, T.C. Memo.' 1997-452.' Writing detailed - 15 - opinions "to refute these± arguments with somber i easoning and copious citation of precedent * * * might suggest that these arguments have some colorable merit." See Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984); see also .Nieman v. Commis s ioner), T . C. Memo . 1993 - 533 ( taxpayer ' s ab urd argument s that he was a citizen of Illinois, not a citizen of the United States, and therefore he did not owe Fedèral" inc me taxes were "no more than stale tax protéster contentions lor g dismissed summarily by this Court and all other courts which have heard such contentions") ; Solomon 57. Commissiorier, T. C. Memo. 1993-509, affd. without published opiniion 42 F.3d 1391 (7t Cir. 1994) . Mr. 'Licha repeatedly argued that his Forms 040 lacked valid OMB.control numbers, even' after he had bèen warsi d by the Court that the argument was frivolous and he was provi ed with caselaw to that effect. ' We remind .Mk. Licha thati in Le s v. Commissioner, 523 F.3d 1272,f1277 (10th Cir. 2ØÒ8), affg. T.C. Memo. 2007-44, the Court of Appeals stated that tihe arguments related to the OMB control nïlmbers "have (no meri and cannot be supported by caselaw. We hold.that Forml1040 sat isfies the PRA [Paperwork Reduction Act] re uirements" . As Mr. Licha did not challenge respondent's determination that he received and failed {to report income of 48,000,' $85,000, $91, 0 73, $276, 371, $172, 367, and $90 , 523 i f or 200 through 2006, respectively, and did not" atiitempt to identify ad itional expenses - 16 - or provide any docugentation with regard to his construction . business .or'his property swaps, we sustain the deficiencies respondent determined for petitioners' tax years at issue. V. Section 6662 (a) Penalties Respondent dete mined that. petitioners v are liable for section· 6662 (a) accuracy-related penalties.. for, their 2001 through 20 06 tax years . Pur suant . to section 7491 (c) ; the Commissioner has the burden of pr oduction with respect to a taxpayer' s liability for a pena Lty and is, therefore, required to "come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty.". See Higbee v. Commissioner, 116 T. . 438 446 (2 01) . However, "once .the Commissioner.meets- his burden of production,. the taxpayer must come forward with evidence sufficient to persuade a Court that the Commissioner' s determination is .incorrect . " . Id . at 447 . Subsection (a)- of section 6662 imposes an accuracy-related penalty of 20 percent of the portion of any underpayment attributable. to causes specified in subsection (b) (cid:16)042 Respondent asserts two causes justifying the penalty: A substantial understatement of income tax subsec. (b) (2), and negligence, subse c . (b) (1) . There is a "substantial understatement" of, income tax for any, tax year where.tle amount of the understatement exceeds the greater . of (1) 10 percent . of the tax required to be. shown on . the - 17 - return for the tax year or in the case of an individual (2) $5,000. Sec. 6662(d) (1)(A). "'[N]egligence' includes any failure to make a reasonable attempt to comply 7 th the provisions of this title" (i.e., the Internal Re enue Code) . * Sec. 6662 (c) . Under caselaw, "'Negligence is a ack of due care or the failure to do what a easonable arid ordin rily prudent person would do under the circumstances.'" Frey ag v. Commissioner, 89 T. C. 849 887 (1987) (giioting 1%arcello v. Commissioner, 380 F.2d 499, 506 (5th Cir 1967), affg. on this issue 43 T.C. 168 (1964) and! T.C. Memo. 1964-299), affd. 904 F.2d 1011 (5th Cir., 1990), affd. .501 U.S. 868 (1991) . Respondent met his burdèn 'of product ion und r both causes, and Mr. Licha addressed the section 6662 (a) pena ties only in reference to his OMB control numbers argument di cussed above Mr. Licha presented no evidence that he lïad reas nable ãause for any portion of any underpayment.' Petitinners ar liable for the penalties. I 'There is an exception t;o the sec. 6662 (a) p nalty when a taxpayer can demonstrate: underpayment and (2) respect to the underpayment . Sec . 6664 (c) (1) . (i) Reasonable cause for the that the taxpayer acted in c ood faith with 'We note that Mr. Licha did not argue that h relied on his tax return preparer (s) , nor could he, as he did ot supply them with the necessary business records. logy Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2Q00), af d. 299 F.3d 221 (3d Cir. 2002) . See Neonat VI. Section 6673 Penalty |, - 18. - We again remind Mr. Licha that section 6673 (a) (1) authorizes us to impose a penalty 1not: in excess of $25, 000 on a taxpayer for instituting or maintaining proceedings primarily for delay or in which the taxpayer's position is frivolous or groundless. "A position maintained oy the taxpayer is 'frivolous' where it is 'contrary to established law and unsupported by a reasoned, colorable argument for change in the law. '" Williams v. Commissioner, 114 T. O. 136, 144 (2000) . (quoting Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986)) . We have exercised restraint in not penalizing petitioners under section 6673. However, if M::. Licha insists on continuing his tax- protester rhetoric in this Court, we .will be inclined to impose a section 6673 penalty in ^the future The Court has considered all of . petitioners' contentions, arguments, requests, and, statements . To the extent not discussed herein, we conclude that they are meritless, moot, or irrelevant. To reflect the foregoing, Decision .will - be entered under Rule 155 .