TAX COURT OPINION

Case: John H. Nix, III
Docket Number: 3723-12
Judge: Marvel
Opinion Type: bench
Filed: 06/12/2013
Pages: 19

UNITED STATES TAX COURT WASHINGTON, DC 20217 JOHN H. NIX, III, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. DRB ) ) ) ) ) Docket No. 3723-12 ) ) ) ) ) OR 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 transmit to petitioner and to respondent a copy of the pages of the transcript of the proceedings of the above case before Judge L. Paige Marvel at Jacksonville, Florida, on May 24, 2013, containing her oral findings of fact and opinion. It is further ORDERED that the oral findings of fact and opinion rendered on May 24, 2013, are amended in that the decision line is changed to read: "Decision will be entered pursuant to Rule 155." (Signed) L. Paige Marvel Judge Dated: Washington, D.C. June 12, 2013 SERVED Jun 13 2013 Capital Reporting Company 3 Bench Opinion by Judge L. Paige Marvel May 24, 2013 John H. Nix, III v. Commissioner Docket No. 3723-12 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. THE 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) of the Internal Revenue Code of 1986 as amended,- and Rule 152 of the Tax Court Rules of Practice.and Procedure. Hereinafter in this bench opini n, unless otherwise indicated, section references are to the Internal Revenue Code of 1986 (Code) as amended and in effect for the year in issue. Rule references are to the Tax Court Rules of Practice and Procedure. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Monetary amounts have been rounded to the nearest 22 23 24 25 dollar. John H. Nix, III appeared pro se. Randall B. Childs appeared on behalf of respondent. Mr. Nix resided in Florida at the time he filed his petition. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 In a notice of deficiency dated November 7, 2011, respondent determined a deficiency of $10,300 in Mr. Nix's 2008 Federal income tax and additions to tax under sections 6651(a) (1) and (2) and 6654 of $2,123, $1,368, and $300, respectively. Respondent ·since has asserted an increased addition to tax under section 6651(f), and, alternatively, a fraud penalty under section 6663 or additions to tax under sections 6651(a) (1) and 6662. Respondent also has filed a 10 motion to impose a penalty on Mr. Nix under section 11 12 13 14 6673(a). Accordingly, the issues for decision are: (1) whether Mr. Nix received unreported income of $64,750 for 2008; (2) whether Mr. Nix is liable for an addition to tax under section 6651(f); (3) whether 15 Mr. Nix is liable for additions to tax under sections 16 17 18 19 20 21 22 23 24 25 6651(a) (2) and 6654; and (4) whether we should impose a penalty under section 6673(a). Facts Some of the facts have been deemed established for purposes of this case in accordance with Rule 91(f). The deemed facts are incorporated herein by this reference. During 2008 Mr. Nix worked for T-Mobile USA, Inc. (T-Mobile). In 2008 he received wages of $64,747 from T-Mobile. T-Mobile issued to Mr. Nix a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 Form W-2, Wage and Tax Statement, for 2008, showing payment of $64,747 to Mr. Nix. During 2008 Mr. Nix also received dividend income of $3 from AT&T. Mr. Nix failed to file a Federal income tax return for 2008. On the basis of third-party payor information, respondent prepared a substitute for return for Mr. Nix under section 6020(b). Respondent subsequently issued to Mr. Nix the notice of deficiency for 2008. In the notice of deficiency respondent determined that Mr. Nix had unreported wage and dividend income of $64,747 and $3, respectively. Respondent also determined additions to tax under sections 6651(a) (1) and (2) and 6654. 14 Mr. Nix's Compliance History 15 16 17 18 19 20 21 Mr. Nix failed to file valid Federal income tax returns for 2001-11. Mr. Nix did not make any income or estimated tax payments for 2002-11. From 2002-11 Mr. Nix submitted to respondent numerous documents on which he claimed that he either did not have a Federal tax liability or was exempt from Federal taxation. For 2002 Mr. 22 Nix submitted to respondent a Form 1040, U.S. 23 24 25 Individual Income Tax Return, that showed zero income and zero tax liability. For 2002 Mr. Nix also submitted a Form 1041, U.S. Income Tax Return for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 Estates and Trusts, in an attempt to obtain an improper refund. For 2003-07 Mr. Nix submitted to respondent Forms 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, that showed zero income and zero tax liability. For 2004 he also submitted a Form 1040X, Amended U.S. Individual Income Tax Return, that showed zero income and zero tax liability. Mr. Nix attached a Form 4852', 9 Substitute for Form W-2, Wage and Tax Statement, or 10 Form 1099-R, Distributions From Pensions, Annuities, 11 Retirement or Profit-Sharing Plans, IRAs, Insurance 12 Contracts, Etc., on which he claimed that he received 13 14 15 zero income and had zero tax liability, to the Forms 1040EX and 1040X. For 2002-05 and 2008-09 Mr. Nix submitted to T-Mobile Forms W-4, Employee's 16 Withholding Allowance Certificate, on which he 17 claimed that he was exempt from Federal tax 18 withholding requirements. 19 Mr. Nix's Income 20 21 22 23 24 25 Burden of Proof and Burden of Production Ordinarily, the taxpayer bears the burden of proving that respondent's deficiency determination is erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The burden of proof shifts to the Commissioner, however, if the taxpayer produces 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 credible evidence to support the deduction or position, the taxpayer complied with the substantiation requirements, and the taxpayer cooperated with the Secretary with regard to all reasonable requests for information. Sec. 7491(a); see also Higbee v. Commissioner, 116 T.C. 438, 440- 441 (2001). Mr. Nix does not contend that section 7491(a) (1) applies, and the record establishes that he did not satisfy the section 7491(a) (2) requirements. Consequently, Mr. Nix bears the burden of proving that respondent's deficiency determination was erroneous. Under section 6201(d), if a taxpayer asserts a reasonable dispute with respect to an item of income reported on an information return filed by a third party and the taxpayer meets certain other requirements, the Commissioner bears the burden of producing reasonable and probative evidence, in addition to the information return, concerning the deficiency attributable to the income item. The record establishes that Mr. Nix received wages of $64,747 from T-Mobile during 2008. Although some of 24 Mr. Nix's statements might be construed as attacking 25 the validity of the Form W-2 issued by T-Mobile, he 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 has raised no reasonabl.e dispute with respect to the accuracy of the information return. His attempt to dispute the accuracy of the information return under these circumstances is not reasonable and thus the burden of production with respect to the deficiency did not shift to respondent under section 6201(d). Wage and Interest Income Section 61(a) defines gross income as "all income from whatever source derived", including "[c]ompensation for services, including fees, commissions, fringe benefits, and similar items", as 12 well as dividends. Wages and salaries are 13 14 15 16 17 18 19 20 21 22 23 24 compensation for services that are includable in gross income. See sec. 1.61-2(a), Income Tax Regs. When a case involves unreported income and that case is appealable to the U.S. Court of Appeals for the Eleventh Circuit, as this case appears to be absent a stipulation to the contrary, see sec. 7482(b) (1) (A), (2), the Commissioner's determination of unreported income is entitled to a presumption of correctness only if the determination is supported by a minimal evidentiary foundation linking the taxpayer to an income producing activity, see Blohm v. Commissioner, 994 F.2d 1542, 1549 (11th Cir. 1993), 25 aff'g T.C. Memo. 1991-636. Once the Commissioner 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 produces evidence linking the taxpayer to an income- producing activity, the burden shifts to the taxpayer to rebut the presumption by establishing that the Commissioner's determination is arbitrary or erroneous. Id. at 1549; see also United States v. Janis, 428 U.S. 433, 441-442 (1976). The record establishes that Mr. Nix received payments of $64,747 and $3 from T-Mobile and AT&T, respectively. We conclude that respondent laid the requisite minimal evidentiary foundation for the contested unreported income adjustments and that respondent's determinations of tax due are entitled to a presumption of correctness. Mr. Nix argues that the amounts he received are not subject to Federal taxation. In his petition he argues that the compensation amounts he received are not "wages" and that he is not an "employee", as those terms are defined in the Code. Mr. Nix has raised only frivolous and groundless arguments. The U.S. Court of Appeals for the Eleventh Circuit has held similar arguments to be frivolous and without merit. See United States v. 23 Morgan, 419 Fed. Appx. 958, 959 (11th Cir. 2011) 24 25 (taxpayers' arguments concern1ng the definitions of "employment" and "wages" were frivolous and without 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 merit); United States v. Morse, 532 F.3d 1130, 1132- 2 3 4 5 6 7 8 9 10 11 12 13 1133 (11th Cir. 2008); Motes v. United States, 785 F.2d 928, 928 (11th Cir. 1986) (taxpayers' arguments that "wages are not income subject to tax" and "only public servants are subject to tax liability" are frivolous). Mr. Nix's frivolous and groundless arguments warrant no further discussion. See Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984). Mr. Nix does not dispute that he eceived the amounts respondent determined but he disputes that the amounts are taxable income. The record shows that the amounts were wages and dividends, both of which are includible in income under section 61. 14 Accordingly, we sustain respondent's determination 15 with respect to the deficiency in tax. 16 17 18 19 20 21 22 23 24 25 Section 6651(f) Addition to Tax Section 6651(f) imposes an addition to tax of up to 75% of the amount of tax required to be shown on the return in the case of a taxpayer's fraudulent failure to file a tax return. To prove that a taxpayer is liable for the penalty, the Commissioner must prove by clear and convincing evidence that (1) an underpayment of tax exists, and (2) some part of the underpayment is due to fraud. Sec. 7454 (a); Rule 142 (b); Clayton v. Commissioner, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 102 T.C. 632, 646 (1994·). If the Commissioner proves that any part of an underpayment is attributable to fraud, then the entire underpayment shall be treated as attributable to fraud unless the taxpayer shows by a preponderance of the evidence that a part was not so attributable. See, e.g., sec. 6663 (b). In the notice of deficiency respondent determined that Mr. Nix underpaid his 2008 taxes by $10,300, and we sustain respondent's determination. We find that respondent has proven by clear and convincing evidence that Mr. Nix underpaid his Federal income tax for 08. See Gilday v. Commissioner, 62 T.C. 260, 262 (1974) The Commissioner also must prove that some part of the underpayment is due to fraud by showing that "the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes." DiLeo v. Commissioner, 96 T.C. 858, 874 (1991), aff'd, 959 F.2d 16 (2d Cir. 1992). Fraud "does not include negligence, carelessness, misunderstanding or unintentional understatement of income." United States v. Pechenik, 236 F.2d 844, 846 (3d Cir. 1956). The existence of fraud is a question of fact to be resolved upon consideration of the entire 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 12 1 2 3 4 record. See DiLeo v.. Commissioner, 96 T.C. at 874. Fraud is never presumed and must be established by independent evidence of fraudulent intent. See Baumgardner v. Commissioner, 251 F.2d 311, 322 (9th 5 Cir. 1957), aff'g T.C. Memo. 1956-112. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Because it is difficult to prove fraudulent intent by direct evidence, the Commissioner may establish fraud by circumstantial evidence, which includes various "badges of fraud" (hereinafter, factors) on which the courts often rely. See Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), aff'g T.C. Memo. 1984-601. These factors focus on whether the taxpayer engaged in certain conduct that is indicative of fraudulent intent, such as: (1) understating income; (2) failing to maintain adequate records; (3) offering implausible or inconsistent explanations; (4) concealing income or assets; (5) failing to cooperate with tax authorities; (6) engaging in illegal activities; (7) providing incomplete or misleading information to the taxpayer's tax return preparer; (8) offering false or incredible testimony; (9) filing false documents, including filing false income tax returns; (10) failing to file tax returns; and (11) engaging in extensive dealings in cash. See Bradford v. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 9 10 11 12 13 Commissioner, 796 F.2d at 307-308. The existence of any one factor is not dispositive, but the existence of several factors is persuasive circumstantial evidence of fraud. See Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992). Respondent contends, and our review of the record shows, that numerous factors are present in this case. First, Mr. Nix failed to file a Federal income tax return and thus failed to report income of $64,750 for 2008. Respondent also introduced evidence to show that Mr. Nix failed to file Federal income tax returns for 2002-09 although he received wages from T-Mobile during those years, resulting in 14 Mr. Nix underreporting his income for those years. 15 Given the amount of his unreported income, his 16 17 pattern of underreporting income, and his lack of a satisfactory explanation for the understatement, Mr. 18 Nix's understatement is persuasive evidence of 19 20 21 22 23 24 25 fraudulent intent. See, e.g., Korecky v. Commissioner, 781 F.2d 1566, 1568 (11th Cir. 1986) (stating that "a '[c]onsistent and substantial understatement of income is by.itself strong evidence of fraud.'") (quoting Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir. 1962), aff'g T.C. Memo. 1959- 172), aff'g T.C. Memo. 1985-63. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 4 Second, Mr. Nix failed to maintain adequate records. It is deemed est·ablished that Mr. Nix failed to maintain any documents or records regarding his income and expenses for 2008. Furthermore, Mr. 5 Nix offered no explanation regarding the nonexistence 6 7 8 of his records. His missing records are indicative of fraud. See Truesdell v. Commissioner, 89 T.C. 1280, 1302-1303 (1987) (holding that the failure to 9 maintain adequate records supports a finding of 10 11 12 13 14 fraud). Third, Mr. Nix failed to cooperate with the Commissioner throughout the examination of his 2008 Federal income tax liability and that lack of cooperation continued throughout this proceeding. 15 Mr. Nix failed to cooperate with respondent's counsel 16 17 18 19 20 21 22 in preparing a stipulation of facts as required by our standing pretrial order. He failed to respond properly to respondent's requests for admissions. At trial he failed to respond to most of the questions posed by respondent's counsel, claiming a Fifth Amendment privilege as to each such question. We find that Mr. Nix consistently failed to cooperate 23 with respondent and this Court, and this finding 24 25 supports a finding of fraud. See Smith v. Commissioner, 91 T.C. 1049, 1052, 1059-1060 (1988), 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 aff'd, 926 F.2d 1470 (6th Cir. 1991). 2 3 4 5 Fourth, Mr. Nix submitted to the Internal Revenue Service and T-Mobile numerous false documents, including a Form 1040, Forms 1040EX, a Form 1040X, Forms W-4, and Forms 4852. We find that 6 Mr. Nix submitted these false documents to evade the 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 payment of Federal tax. Consequently, this factor supports a finding of fraud. See Zell v. Commissioner, 763 F.2d 1139, 1146 (10th Cir. 1985) (holding that the filing of false documents with the Internal Revenue Service constitutes "an 'affirmative act' of misrepresentation sufficient to justify the fraud penalty."), aff'g T.C. Memo. 1984-152. Fifth, Mr. Nix failed to file Federal income tax returns for 2001-11. While a failure to file returns, even over an extended period, does not establish fraud per se, see Grosshandler v. Commissioner, 75 T.C. 1, 19 (1980), an extended pattern of failing to file returns may be persuasive circumstantial evidence of fraud, see Marsellus v. Commissioner, 544 F.2d 883, 885 (5th Cir. 1977), 22 aff'g T.C. Memo. 1975-368. Mr. Nix's extended 23 24 25 pattern of failing to file returns constitutes persuasive circumstantial evidence of fraud. Sixth, during the course of these 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 proceedings., Mr. Nix repeatedly raised arguments 2 which, as discussed above, the U.S. Court of Appeals 3 for the Eleventh Circuit has held to be frivolous and 4 without merit. Despite admonishments by this Court, 5 Mr. Nix continued to assert such arguments. This 6 7 8 9 10 11 12 13 14 15 16 17 factor supports a finding of fraud. See Kotmair v. Commissioner, 86 T.C. 1253, 1259-1261 (1986) (holding that a taxpayer's assertion of frivolous arguments may provide evidence supporting a finding of fraud). On the basis of these factors, we find that respondent has proven by clear and convincing evidence that Mr. Nix underpaid his tax liability for 2008 and that some part of his underpayment was due to fraud. Mr. Nix appears to contend that he is not liable for the section 6651(f) addition to tax because he was not obligated to file a return. Mr. 18 Nix had more than sufficient income in 2008 to 19 20 21 22 23 24 require him to file a Federal income tax return. See sec. 6012 (a) (1) (A) (i). Mr. Nix has not advanced any other arguments or introduced any credible evidence to prove that any portion of his underpayment was not attributable to fraud. In fact, the record is packed 25 with evidence that Mr. Nix did everything possible to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 evade his tax filing and payment obligations. 2 Accordingly, we hold that Mr. Nix is liable for the 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 section 6651(f) fraudulent failure to file addition to tax. Sections 6651(a) (2) and 6654 Additions to Tax If the taxpayer assigns error to the Commissioner's determination that a taxpayer is liable for an addition to tax, the Commissioner has the burden, under section 7491(c), of producing evidence with respect to the liability of the taxpayer for the addition to tax. See Higbee v. Commissioner, 116 T.C. at 446-447. To meet this burden of production, the Commissioner must come forward with sufficient evidence that it is appropriate to impose the addition to tax. Id. Once the Commissioner meets this burden, the taxpayer must come forward with evidence sufficient to persuade this Court that the determination is incorrect. Id. Section 6651(a) (2) imposes an addition to tax for failure to pay timely the amount of tax shown on a return. The section 6651(a) (2) addition to tax applies only when an amount of tax is shown on a return. Cabirac v. Commissioner, 120 T.C. 163, 170 (2003). Mr. Nix did not file a 2008 return. However, respondent prepared a substitute for return 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 . 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 under section 6020 (b). A return made by the Secretary under section 6020(b) is treated as the return filed by the taxpayer for purposes of determining whether the section 6651(a) (2) addition to tax applies. Sec. 6651(g) (2); Wheeler v. Commissioner, 127 T.C. 200, 208-209 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008). Where the taxpayer did not file a return, to satisfy his burden of production for the section 6651(a) (2) addition to tax the Commissioner must introduce evidence that he prepared a substitute for return satisfying the requirements under section 6020(b). Wheeler v. Commissioner, 127 T.C. at 209. Respondent satisfied this burden by introducing into evidence an IRC Section 6020(b) Certification for 2008. Consequently, Mr. Nix had the burden of introducing evidence to show that his failure to pay was due to reasonable cause. He did not do so. Mr. 19 Nix did not advance any argument regarding the 20 21 22 23 24 25 section 6651(a) (2) addition to tax and introduced no credible evidence to show reasonable cause for his failure to pay tax shown on the return. Accordingly, we sustain respondent's determination with respect to the addition to tax under section 6651(a) (2) for 2008. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Section 6654 imposes an addition to tax for 19 underpayment of a required installment of estimated tax. Each required installment of estimated tax is equal to 25% of the "required annual payment", which in turn is equal to the lesser of (1) 90% of the tax shown on the taxpayer's return for that year (or, if no return is filed, 90% of his or her tax for such year), or (2) if the taxpayer filed a return for the immediately preceding taxable year, 100% of the tax shown on that return. Sec. 6654 (d) (1) (A) and (B). Respondent satisfied the burden of production under section 7491(c) by showing that Mr. 1 2 3 4 5 6 7 8 9 10 11 12 13 Nix had a required annual payment of estimated tax 14 15 16 17 18 19 20 21 22 23 24 25 and that he did not make any estimated tax payments for 2008. Mr. Nix presented no argument with respect to the section 6654 addition to tax. Therefore, we sustain respondent's determination with respect to the addition to tax under section 6654 (a) for 2008. Section 6673(a) Penalty Section 6673(a) (1) authorizes the Tax Court to require a taxpayer to pay to the United States a penalty not in excess of $25,000 when it appears that the taxpayer instituted or maintained proceedings primarily for delay or that the taxpayer's position in such proceeding is frivolous or groundless. · See 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 20 1 2 3 4 5 6 7 8 9 10 11 also Burke v. Commissioner, 124 T.C. 189, 197 (2005). Respondent asks us to impose a section 6673(a) penalty on Mr. Nix. In the exercise of our discretion, we will not impose a section 6673(a) penalty on Mr. Nix. We have already concluded that he is liable for the addition to tax under section 6651(f) and the amount of that addition to tax will be substantial as it is calculated at a rate of 75 the tax required to be shown on Mr. Nix's 2008 return. We warn Mr. Nix, however, that if he continues to 12 maintain frivolous positions in future cases, we may be less reluctant to impose a penalty under section 6673(a). To reflect the foregoing, decision will be entered for respondent and an appropriate order will be entered. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 11:03 a.m., the above- entitled matter was concluded.) 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com