TAX COURT OPINION

Case: Mark Smalley
Docket Number: 13625-11
Judge: Gustafson
Opinion Type: bench
Filed: 04/25/2012
Pages: 11

RMM UNITED STATES TAX COURT WASHINGTON, DC 20217 MARK SMALLEY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 13625-11. ) ) ) ) ORD 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 herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge David Gustafson at Boston, Massachusetts, on April 11, 2012, containing his oral findings of fact and opinion. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) David Gustafson Judge Dated. Washington, D.C. April 25, 2012 SERVEDApr262012 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 David Gustafson April 11, 2012 Smalley v. Commissioner Docket No. 13625-11 THE COURT: The Court has decided to render oral Findings of Fact and Opinion in this case. The following represents the Court's oral Findings of Fact and Opinion, which shall not be relied on 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. By notices of deficiency dated March 14, 2011, respondent (the IRS) determined deficiencies in the Federal income tax of Petitioner Mark Smalley for 2007 and 2008, plus for each year additions to tax under section 6651(a) (1) for failure to timely file, under section 6651(a) (2) for failure to timely pay, and under section 6654(a) for failure to pay estimated tax. By our order of February 16, 2012, we granted the IRS's motion for summary judgment for all those liabilities (except the section 6654 (a) addition for 2007, which the IRS concedes), and by our order of February 23, 2012, we denied Mr. Smalley's motion for reconsideration. We took under advisement the IRS's motion for the imposition of a penalty under section 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 6673(a), and we scheduled that motion for a hearing. For the reasons explained hereafter, we will impose a penalty under section 6673(a). The hearing in this case was conducted on April 10, 2012, in Boston, Massachusetts. Respondent was represented by Derek Kelly, and Mr. Smalley represented himself and was the only witness. We find the following facts: Findings of Fact Mr. Smalley is 53 years old. He received a Bachelors degree from the University of Minnesota. He works as a writer, and for the last three years he has been a freelance writer, writing mostly on subjects related to business and Internet technology. For the years before 2007, Mr. Smalley had filed tax returns on which he reported his earnings. In each of the years 2007 and 2008, Mr. Smalley received interest and nonemployee compensation. He did not·file Federal income tax returns for those years. The IRS received information of Mr. Smalley's income from the third-party payors and on December 6, 2010, prepared "substitutes for return" ("SFRs") pursuant to section 6020(b). In preparing the SFRs, the IRS used the standard deduction (rather than itemized deductions), assumed 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 no business deductions, and assumed that Mr. Smalley was entitled to only one exemption. The IRS sent the SFRs to Mr. Smalley with a letter that stated: 5 Since we computed your tax based on income only, it would be to your advantage to file your return(s) so that you can claim all of the exemptions, deductions, and credits that the law allows you. Mr. Smalley did not submit returns as the IRS had suggested, and on March 14, 2011, the IRS issued statutory notices of deficiency to Mr. Smalley, determining liabilities that totaled well over $30,000 for the two years. On June 8, 2011, Mr. Smalley timely filed his petition in this Court, listing his address as being in Camden, Maine. He left blank on the petition the spaces for the items that ask "Explain why you disagree with the IRS determination in this case" and "State the facts upon which you rely". On November 14, 2011, the Court issued notice that the case would be tried at the Court's session beginning April 10, 2012. In January 2012 Mr. Smalley served on the IRS a document that made various frivolous arguments, including that the 16th Amendment to the U.S. Constitution is invalid, and that only 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 non-resident aliens and foreign corporations are subject to tax. The Commissioner filed and served his motion for summary judgment on February 10, 2012. The motion asked us to sustain the notices of deficiency, except that the Commissioner conceded the section 6654 addition to tax for 2007. On February 13, 2012, we issued our order requiring Mr. Smalley to file by March 2, 2012, a response to the Commissioner's motion, and we stated: The Commissioner's motion rightly points out that if a Tax Court petitioner maintains a frivolous position in Tax Court litigation, then he may be at risk of a penalty under section 6673(a) of up to as much as $25,000. The Court is not even likely to address frivolous arguments in an opinion, but will simply give them the short shrift that they deserve. See Wnuck v. Commissioner, 136 T.C. 498 (2011). Without prejudging the Commissioner's motion, the Court warns Mr. Smalley that the positions that the Commissioner's motion attributes to him do indeed appear to be frivolous. If Mr. Smalley has been maintaining frivolous positions, then he should cease doing so. In his response to the motion for summary judgment, he should disclaim any Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 lo 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 frivolous positions he has maintained and should assert instead only legitimate arguments, such as additional deductions or credits to which he may be entitled but that were not allowed in the IRS's notice of deficiency. The Court will be pleased to adjudicate any legitimate disputes between the parties. Mr. Smalley did not wait until March 2 to file his response. Rather, on February 13--i.e., a mere three days after the Commissioner had served his motion--Mr. Smalley filed two documents evidently intended as his response, one entitled "Petitioner's Initial Brief" and the other entitled "Memorandum at Law on Federal Taxation and the Personal Federal Income Tax". Mr. Smalley admits that he did not compose these documents, but states that he does not remember precisely where he got them. The Brief and Memorandum did not respond directly to the Commissioner's motion (nor could they, since they were evidently prepared before the motion was filed, by persons who had never seen the motion). The documents collect various frivolous arguments. Mr. Smalley did not challenge the facts as to his receipt of income, his non-filing of returns, the IRS's issuance of the SFRs and the notices of 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 deficiency, or the computations reflected in those documents. We therefore granted the IRS's motion for summary judgment by our order of February 16, 2012. However, after explaining the section 6673(a) penalty, we stated that we would hold a hearing on the issue of Mr. Smalley's liability for such a penalty. We stated that-- the purpose of the hearing will be for the Court to learn whether there might be facts that would mitigate Mr. Smalley's culpability in making those frivolous arguments. It is apparent that Mr. Smalley has borrowed his frivolbus arguments from someone else; and if he has been deceived or misled by tax defier charlatans or pseudo- experts, then he may be less culpable. The main purpose of section 6673(a) is to deter taxpayers from making frivolous arguments; and therefore if Mr. Smalley will assure the Court that he will hereafter stop making such arguments, then that assurance might reduce the amount of penalty that the Court would otherwise impose. We also encouraged Mr. Smalley to prepare to prove his entitlement to any deductions or credits that he had 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 not been allowed in the notice of deficiency. However, on February 23, 2012, Mr. Smalley filed a document in the nature of a motion for reconsideration, again replete with frivolous arguments. By our order issued that same day, we denied his motion, again warned him about section 6673(a), and again encouraged him to prove his entitlement to deductions and credits. Nonetheless, on April 5, 2012, Mr. Smalley filed a pretrial memorandum incorporating by reference the frivolous arguments he had previously made. In advance of trial Mr. Smalley did not provide to the IRS any documents to prove deductions or credits, and when the case was called on April 10, 2011, he likewise offe'red no such proof (although he testified that he has three children, which, if disclosed to the IRS before the hearing and proved true, might have entitled him to dependency exemptions). At the hearing Mr. Smalley testified that he had been "shocked" to receive the IRS's deficiency notices, that he embarked on research to learn his rights and duties, and that the positions he took were the result of the conclusions he reached--though he noted that he found tax law very difficult to 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 understand, and though it is clear that he submitted documents composed by others that he simply downloaded into his filings. At the hearing Mr. Smalley did not advance any frivolous positions, and he stated in a general way his intention to comply with the tax laws in the future. opinion Section 6673(a) (1) authorizes the Tax Court to impose a penalty not in excess of $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 proceeding is frivolous or groundless. A position maintained by the taxpayer is "frivolous" where it is "contrary to established law and unsupported by a reasoned, colorable argument for change in the law." Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986). The statute grants the Court discretion in deciding whether to impose the penalty. The IRS proposes that we impose such a penalty on Mr. Smalley. We will do so. His positions in his filings of February 13, February 23, and April 5, 2012, were certainly frivolous, even though he made those filings after the warning in our order of February 13, 2012 (which we repeated in our orders 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 of February 16 and 23, 2012). In addition, we observe that Mr. Smalley never made or supported, in addition to his frivolous contentions, any non-frivolous contentions. In his favor, we note (1) that he has already suffered, as a result of his frivolous positions, the disadvantage of foregoing deductions and credits to which he might have been entitled; (2) that he conducted himself civilly before the Court; and (3) that he now undertakes to comply with the tax laws in the future. Nonetheless, after all the good that we can say about Mr. Smalley, it remains true that he took frivolous positions that prevented the IRS from , assessing tax that he owed, and that he burdened both the IRS and this Court with all the chores necessary · for the adjudication of an inevitable tax liability. The penalty of section 6673(a) is designed to address petitioners who conduct themselves in this manner. In determining the amount of the penalty, we take account of all the foregoing facts. We impose today a $2,500 penalty, which is a relatively modest penalty, given that we have the discretion to impose a penalty ten times that high. Mr. Smalley should be aware, however, that if he should ever repeat his maintenance of frivolous tax litigation, he would 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 stand in peril of a much steeper penalty. Decision will be entered in favor of the IRS, sustaining the liabilities determined in the notices of deficiency (except as to the section 6654 (a) addition to tax that the IRS conceded for 2007) and imposing on Mr. Smalley a penalty under section 6673(a) in the amount of $2,500. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 12:49 p.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888