TAX COURT OPINION

Case: Kelly Roe & Christopher Roe
Docket Number: 19423-12
Judge: Gustafson
Opinion Type: bench
Filed: 12/20/2013
Pages: 18

SYM UNITED STATES TAX COURT WASHINGTON, DC 20217 KELLY & CHRISTOPHER ROE, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 19423-12. ) ) ) ) OR D E R Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at Denver, Colorado, on December 4, 2013, containing his oral findings of fact and opinion, 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 in the above case before Judge Gustafson at Denver, Colorado, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. December 20, 2013 SERVED Dec 20 2013 C pital Reporting Company 3 1 2 Bench Opinion by Judge David Gustafson December 4, 2013 3 Kelly & Christopher Roe v. Commissioner 4 5 6. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Docket No. 19423 12 The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Tax Court Rule 152; and it shall not be relied on as precedent in any other case. By notices of deficiency dated May 3, 2012, the Internal Revenue service (IRS). determined a deficiency in the Federal income tax of each of the petitioners Kelly and Christopher Roe for the years 2002 through 2010, along with additions to tax under section 6651(f) f r fraudulent 'failure to file, under section 6651(a) (1) in the alternative for (non- fraudulent) failure to file, under section 6651(a) (2) for failure to pay the tax shown on a return, and under section 6654 for failure to pay estimated tax. The issues for dedision are whether the Roes received 23 taxable income in the amounts determined by the IRS, 24 25 and whether they re liable for the additions to tax. In addition, at the conclusion of trial, the IRS 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 moved for a penalty to be imposed on the Roes under 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 section 6673(a). We.hold in favor of the IRS that the Roes did receive the incohe and are liable for the income tax, and that they ar liable for the non-fraudulent failure-to-file addition to tax, the addition to tax for failure-to-pay estimated tax, and a penalty under section 6673(a); but we hold, in favor of the Roes, that they are not liable for the fraudulent failure- to-file penalty r the addition for failure to pay tax shown on a r turn. The case was tried in Denver, Colorado, on December 3, 2013. The Roes represented themselves, and respondent was represented by Tamara Kotzker and Luke Ortner. FINDINGS OF FACT The Roes' backgroynd and business Both Kelly a d Christopher Roe graduated from college with degrees in wildlife biology, and they work in that field. In 1999 they formed a limited liability company then called Wildlife Property 22 Management, LLC, the name of which was changed in 23 24 25 2003 to Roe Environmental Services, LLC. (We refer to the entity simp y as "the LLC". ) Each of the Roes owned 50% of the L C. The LLC's clients included 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 private individuals, local government entities, and the Federal gove cnment . In each of the years 2002 through 2010, the LLC received gross receipts and incurred deductible business expenses in the amounts determined by the IRS after audit -- a fact that the Roes conceded in closing argument at the conclusion of trial. In 2011 Ms. Roe received a Juris Doctor degree. She is an intelligent, competent, and articulate person. The Roes' income Although the Roes assert pseudo-legal arguments denying their receipt of taxable income, they do not dispute the factu 1 predicate for their receipt of income from the LLC in the amounts determined by the IRS as "guarantee payments" and "ordinary income" (although the Roe do assert, and the IRS concedes, that the amounts dharacterized as ordinary income were attributed in full to each of them, to prevent a "whipsaw, " and that instead half should be allocated to each of them) . The IRS also determined that 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Mr. Roe received S hedule C income in each of the 22 23 years 2002, 2003, nd 2005, and at trial he made no dispute of this in ome. 24 Pre-suit years 25 For the year 000 Ms. Roe submitted a Federal 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 income tax return filled out with all zeroes (Stip. 19) and for 2001 she filed no return (Stip. 21). For both 2000 and 2001 Mr. Roe submitted Federal income tax returns filled out with all zeroes. (Stip. 22.) For the years 20)0 and 2001 the Roes received notices of deficiency from the IRS and filed petitions in this Court, in Docket Nos. 20535-03 and 15744-04. In O thgse consolidated cases they made frivolous arguments, and in October 2005 the Court indicated 10 its intention to impose on the Roes a penalty under 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 section 6673(a) for maintaining frivolous positions, in amounts of $5,000 each (totaling $10,000). (Ex. 15-J at 55-59). The Roes then recanted their frivolous positions in, professed to acknowledge that "at least most of their arguments were in fact frivolous," and r2quested that the penalty be "abated." (Ex. 15-J at 6-7.) The Court evidently accepted their apology and, it appears, did not impose the penalt r. The IRS examination Nonetheless, the Roes did not file Federal income tax returns for any of the years 2002 through 2010. When the I S began an examination, the Roes were partially cooperative and partially hostile, sometimes giving information promptly, but most of 866.488.DEPO www.CapitalReportingCompany.com Gapital Reporting Company 7 1 2 3 4 5 the time delaying, declining, and asse·rting Fifth Amendment object ions . The IRS therefore obtained, by means of administrative summonses, information from third-parties, including the Roes' banks and 26 other entities or individuals. The IRS requested the 6 QuickBooks data on which the Roes had maintained 7 8 9 financial informátion for themselves and the LLC, but the Roes refused: and ultimately the Government filed and prevailed in a summons enforcement suit in 10 district court. Using the QuickBooks data that the 11 12 13 14 15 16 17 18 19 20 21 Roes finally proc.uced, along with the information received from banks and others, the IRS did a thorough job reconstructing the income of the LLC and the Roes, as well as their deductible expenses as reflected on QuickBooks. The SFRs The examining agent then determined the resulting income and in February 2012 prepared, for each of Mr. and Mrs. Roe for each of the years 2002 through 2010, a stbstitute for return (SFR) that computed the resulting income tax. Each SFR 22 consisted of a Form 13496 ("IRC Section 6020 (b) 23 Certification") as a front page, to which were 24 attached Forms 4543-A ("Income Tax Discrepancy 25 Adjustments") and orms 886-A ("Explanation of 866.488.DEPO www.CapitalReportingCompany.com Üapital Reporting Company 8 i 1 2 3 4 5 6 7 8 9 Items") . The S Rs did not include any Form 1040 nor any transcript of account showing the entry of data used to establish the taxpayer's IRS account. Each front page states that the composite document is a valid return under section 6020(b) and lists the contents of the SFR as being (1) the agent' s report (including Form 4549), (2) Form 886 and (3) the cover sheet (Form 13496) . It does not list, as a fourth item, a Form 1040 or a transcript. 10 Notice of deficiency and Tax Court suit 11 12 13 14 15 16 The IRS issued its notices of deficiency on May 3, 2012. The notices were consistent with the SFRs and determired the tax deficiencies and additions to tax at issue here. The Roes timely filed a joint petition in this Court on August 1, 2012. 117 On September 19, 2013, the Roes moved for 18 summary judgment, and in that motion they presented 19 20 21 one version 'of their argument that zero entries on various IRS transcripts conclusively establish that their tax liability is zero. In our Order of 122 October 17, 2013, we stated: "The IRS's assessment 23 of the amount of tax reported by the taxpayer 24 25 (whether a positive amount or zero) does not somehow bar or estop the IRS from thereafter determining a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company deficiency of t2x. Petitioners' argument to the 9 contrary is frivolous, and petitioners are warned that if they continue to make frivolous arguments, they are at risk of being held liable for a penalty of up to $25,000. pursuant to section 6673(a) (1)." At the trial of this case, the Roes essentially conceded the accuracy of the IRS's reconstruction of their income and deductions but asserted their frivolous legal 2rguments. I. Income tax liability OPINION The Roes have conceded their ownership of the LLC, and the LLC's gross receipts and expenses as determined by the IRS. There is therefore no factual dispute that must be resolved in order to determine 1 2 3 4 5 6 7 8 9 10 11 12 13 14 115 16 the Roes' taxable lncome and income tax liability. 17 Rather, the Roes advance only frivolous arguments, 18 19 including: that they are not "individuals" for purposes of secticn 1(a); that the Code defines 20 taxable income improperly, under the 16th Amendment, 21 22 23 24 25 by failing to allow a sufficient zero bracket amount; that unless the IR3's transcripts for the Roes' accounts are coded in a certain way, they are not required to file income tax returns; that if their IRS transcripts bear zeroes in certain entries, then 866.488.DEPO www.CapitalReportingCompany.com C pital Reporting Company 10 they have no income tax liability notwithstanding their receipt of income; and so on. These arguments are all frivolous, and we will not spend further time and effort refut ng them,· for the reasons we explained in Wnu k v. Commissioner, 136 T.C. 498, 501-513 (2011) . II. Additions to tax Section 7491 (c) provides, "the Secretary shall have the burden of production in any court proceeding 1 2 3 4 5 6 7 8 9 10 with respect to the liability of any individual for 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 any penalty, addition to tax, or additional amount imposed by this title." Thus, for the additions, the IRS must make a s owing of liability before petitioner has th burden to counter that showing and prove otherwise. A. Fraudulent failure to file Since the addition of section 6651(f) for fraudulent failure to file is premised on fraud, the IRS not only has he burden of production but also the burden of pro f, sec. 7454 (a) -- in particular, the burden to prove fraud by clear and convincing evidence, a high standard of proof. Because fraud conventionally re ires a false or misleading statement intendedquto induce detrimental reliance, the imposition of an addition for a fraudulent 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 failure to file sometimes required discerning analysis. As has been explained (under a prior penalty regime) by the Tenth Circuit (to which an appeal would lie in this case), "Clearly, will·ful failure to file a timely return does not in itself, 6 without more, es ablish liability for the fraud 7 penalties. The civil fraud provision does not reach 8 mere intentional disregard of the rules and 9 regulations. Rather, there must be some element of 10 11 12 13 concealment or deception to justify the imposition of the penalty. Thus, a taxpayer is not liable for the civil fraud pena ties unless he commits some affirmative act f concealment or misrepresentation. 14 Mere failure to file, whether disclosed or not, does 15 16 17 18 19 20 21 22 not justify the fraud penalties even when the taxpayer knows taxes are due." Zell v. Commissioner, 763 F.2d 1139, 1143-46 (10th Cir. 1985). On the evidence of this case, it is entirely possible that the Roes' failure to file returns for 2002 through 2010 was fraudulent -- but the IRS did not prove by clear and convincing evidence that their failure was fraudulent. The Roes made maddeningly 23 silly arguments, but our record lacks clear indicia 24 of an "affirmative act of concealment or 25 misrepresentation." As a result of the prior audit 866.488.DEPO www.Ca3italReportingCompany.com Capital Reporting Company for 2000 and 2001, the Roes knew they were on the IRS's radar, yet apart from the non-act of failing to 12 file, they did little that can be construed as concealment or misrepresentation. The LLC did not deal in cash but received its money by check and deposited it in the bank -- not a good concealment strategy. During the IRS examination the Roes conveyed their h use to a trust; but it was a revocable trust of which they were the sole trustees, the transfer was publicly recorded, and such transfers are often made for estate planning purposes. We do not see how this transfer reflects any concealment or misrepresentation. Though the Roes resisted disclosing their QuickBooks records, they did maintain such records; and those records, once disclosed, did include all the income that the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 IRS had been able to find from banks and other third 18 19 20 21 22 23 24 parties --· again, not the recordkeeping one would expect of a fraudster. The closest thing to concealment that appears in our record is the Roes' non-cooperation with the IRS; but that non- cooperation is as easily explained by cussedness as by any attempt to defraud. We therefore hold that the IRS did not carry its 25 burden to prove, by clear and convincing evidence, a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 fraudulent failure to file. Consequently, the Roes 2 will not be liable for the addition to tax under section 6651 (f) . 13 I 3 4 5 6 7 8 9 10 11 12 B. Non-fraudulent failure to file Section 6651(a) (1), on the other hand, imposes an addition to tax for failure to file a timely return unless the taxpayer proves that such failure is due to reasonable cause and is not due to willful neglect. The evidence shows that the Roes filed no returns for the ears 2002 through 2010 (and the IRS thus carried its burden of production) . The addition to tax under section 6651(a) (1) therefore applies ,13 "unless it is shcwn that such failure is due to 14 reasonable cause and not due to willful neglect." 15 16 17 18 19 20 21 22 23 24 The- Roes certainly had no reasonable cause for their non-filing. Rather, their justification for not filing was their Erivolous arguments that they do not owe tax. They are therefore liable for the addition to tax under sect on 6651(a) (1) . C. Failure to pay tax Section 6651(a) (2) imposes an addition to tax for failure to pay "the amount shown as tax on any return, " and the Commissioner contends that the Roes are liable for this addition for each of the years at 25 issue. A return made by the Secretary under section 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 14 1 2 3 4 5 6 7 8 9 I 10 11 12 6020(b) -- i.e., an SFR -- is treated as "the return filed by the taxpayer for purposes of determining the amount of the addition" under section 6651(a) (2). Sec. 6651(g) (2). The IRS did prepare purported SFRs for the Roes, and if those qualified as returns under section 6020(b), then the IRS would have thereby carried its burdan of production to show that the Roes are liable for the addition to tax under section 6651(a) (2). As Ms. Roe correctly argued, however, the SFR's in this case are deficient. A "section 6020(b) substitute for r turn is fatally defective f i is 13 missing a copy of the Form 1040 the IRS used to 14 15 16 17 18 19 20 21 22 23 24 25 establish his account on its computer system or a transcript of acqount reflecting the entry of data used to establish the account," Buckardt v. Commissioner, T.C. Memo, 2010-145,. slip op. at 13, and these SFRs had neither. During closing argument it seemed that Ms. Rose insisted that in all cases an SFR must include a Form 1040, and the Court resisted this contention (which is an imprecise statement of the law). However, upon study and reflection we now conclude that, under the authorities Ms. Roe cited, the SFRs are deficient; no returns valid under section 6020(b) were prepared; and the Roes cannot be 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 held liable for the section 6651(a) (2) addition to tax. D. Failure to pay estimated tax The Roes admit they made no estimated tax payments for the years 2002 through 2010. Section 6654 imposes an addition to tax on an individual taxpayer who underpays his estimated tax. A taxpayer ' 8 must pay estimated tax for any year in which he has 9 "required annual payment." Sec. 6654 (d). A 10 11 I 12 13 14 15 16 17 18 19 20 21 22 23 24 "required annual payment" is defined in section 6654 (d) (1) (B), in pertinent part, as "the lesser of (i) 90 percent of the tax shown on the return for the taxable year (or, if no return is filed, 90 percent of the tax for such year)", or (ii) if the individual filed a return for the preceding taxable year, then "100 percent of the tax shown on the return of the individual for the preceding taxable year." Thus, the IRS's burden f production under section 7491(c) requires it to pr duce, for each year for which the addition is asser ed, evidence that the taxpayer had a required annual payment under section 6654 (d); and in order to do so it must demonstrate the tax shown on the taxpayer's return for the preceding year or that the taxpayer filed no return. The IRS met this 25 burden here by showing that the Roes did not file 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 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 returns in any of the nine years in suit nor in the year preceding the years in suit, i.e., 2001. (Mr. Roe's zero return for 2001 was not a valid return. See Oman v. Commissioner, T.C. Memo 2010- 276.) Consequently, the IRS carried its burden of production to show that the Roes are liable for the section 6654 addLtion, and they made no defense. They are therefo:e liable for this addition for failure.to pay estimated tax. III. Section 6673 penalty Section 6673(a) authorizes the Tax Court to impose a penalty not in excess of $25,000 whenever it appears that a têxpayer has instituted or maintained proceedings primarily for delay or that "the taxpayer's position in such proceeding is frivolous or groundless." 'The Roes' pseudo-legal arguments certainly are frivolous, so we must now decide, in our discretion, w2ether to impose the penalty and in what amount. We began by affirming that this is America and that the Roes, like everyone else, have a right to their beliefs. The jurisprudence on the fundamental tax issues that the Roes challenge is well-settled, but they have the right to disagree with that jurisprudence and, under the First Amendment, to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 3 4 5 6 7 8 9 speak their beljefs, just as they would be free to believe and to preach that the world is flat. -However, they are not free to fail to comply with the laws as they are interpreted and applied by the courts, and in particular they are not free to file doomed lawsuits founded on frivolous positions that only put off the inevitable decision against them. Although Ms. Roe was the motive force behind their frivolous positions, Mr. Roe is an educated and 10 intelligent person himself, who knew that Ms. Roe's 11 12 13 14 15 16 17 18 19 20 21 22 23 24 positions had previously been exposed as frivolous and that she had confessed them to be frivolous . He is responsible for his decision to follow her lead and to delegate to her his decision-making and position-taking n this case. We therefore consider the section 6673(a) penalty for both of the Roes. The Roes ha e been through this process before, having seen their previous frivolous arguments discredited, having understood the risk of the section 6673 (a) penalty and seen the Court undertake to impose it against them, and having professed to repent of the error of their ways. Either their previous apologies were cynical and insincere (which would warrant a p nalty now) or else they sincerely 25 failed to learn their lesson before (which warrants a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 penalty now, lest they again be repeat offenders) . They were explicitly warned in this case, in our order of October 7, 2013. The Roes are both educated, and Ms . Roe has legal training and substantial intel igence. They certainly should know better. When the final computations have been made, it is likely that Ms . Roe will owe roughly $300, 000 in tax and Mr. Ro will owe roughly $150,000 in tax (not counting add tions to tax or interest) -- very substantial liabilities that .they attempted to avoid or forestall by their frivolous arguments. All these considerations weigh in favor of imposing a substantial penalty under section 6673 (a) . In the Roes' favor we can say that they did prevail on the fr ud issue and the failure-to-pay addition to tax. Moreover, at trial, they were polite, orderly, and compliant. When they persisted in disagreements with the Court, they were unfailingly respectful. Moreover, they eventually conceded the factual issues concerning income and expenses at the c nclusion of trial, and in a sense this is in their favor. However, before finally conceding those facts they put the IRS to enormous effort -- both during the administrativ proceedings and during 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 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 1 2 3 4 litigation -- to prove simply, in effect, the very amounts of income and expense that were on the Roes' own QuickBooks records, and which the Roes should have reported on a Federal income tax return, just as 5 millions of Americans do without taking themselves and the IRS to the brink. That they should go limp at the end reflects very poorly on the stubbornness they displayed up to that point. Weighing all these factors, we impose under section 6673(a) on the Roes a penalty of $20,000 each (totaling $40,000) -- high within the permissible range, but not the very top. We urge the Roes to abandon frivolous arguments once and for all, lest in a future suit they be held liable for even more. So that the liability can be recalculated to reflect the correction of the whipsaw position, decision will be en ered pursuant to Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 4:12 p.m., the above- entitled matter was concluded.) 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