TAX COURT OPINION

Case: Lisa & Robert Abell
Docket Number: 23385-07
Judge: Colvin
Opinion Type: bench
Filed: 11/25/2008
Pages: 14

UNITED STATES TAX COURT WASHINGTON, D .C . 2021 7 LISA AND ROBERT ABELL , Petitioners , V . Docket No . 23385-07 COMMISSIONER OF INTERNAL REVENUE, ) Respondent . O R D E R pal CAL STAT . Self' JUDGE q F2 4S Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial of the above case before Judge Diane L . Kroupa at San Antonio, Texas on October 15, 2008, containing her oral findings of fact and opinion rendered after the conclusion of trial . In accordance with the oral findings of fact and opinion, decision will be entered for respondent . (Signed) Diane L. Kroupa Judg e Dated : Washington, D .C . November 25, 2008 SERVED Nov 26 2008 3 1 Bench Opinion by Judge Kroupa October 15, 200 8 2 Abell v . Commissioner Docket No . 23385-0 7 3 THE COURT : The Court has decided to render 4 oral findings of fact and opinion in this case, an d 5 the following represents the Court's oral findings of 6 fact and opinion . These oral findings of fact and 7 opinion shall not be relied upon as precedent in any 8 other case . 9 This bench opinion is made pursuant to the 10 authority granted by § 7459(b) and Rule 152 . Al l 11 section references are to the Internal Revenue Code in 12 effect for 2000, 2001, 2002 and 2003 (collectively the 13 years at issue) and all rule references are to the Tax 14 Court Rules of Practice and Procedure . 15 Petitioners were pro se, and Roberta Shumway 16 appeared for Respondent . 17 Findings of fact . Certain facts have been 18 stipulated . The stipulation of facts, th e 19 supplemental stipulation of facts and the secon d 20 supplemental stipulation of facts, with accompanying 21 exhibits, are incorporated by this reference . The 22 facts are so found . 23 Petitioners resided in Texas at the time 24 they filed the petition . Petitioners failed to file 25 federal income tax returns for any of the four year s Heritage Reporting Corporation (202) 628-4888 4 1 at issue . Petitioners are naturopathic doctors an d 2 acupuncturists who challenge the federal income system 3 as it applies to them . 4 Respondent examined their back records and 5 determined Petitioners were liable for a $170,90 3 6 deficiency in federal income tax for 2000, a $38,453 7 late filing addition under § 6651(a)(1), a $42,72 6 8 failure to timely pay addition under § 6651(a)(2), and 9 a $396 addition for failure to pay estimated tax under 10 § 6654 . 11 For the tax year 2001, Respondent determined 12 a $204,220 deficiency and that Petitioners were liable 13 for a $45,950 late filing addition, a $51,055 failure 14 to timely pay addition, and an $8,161 addition fo r 15 failure to pay estimated taxes . 16 For 2002, Respondent determined a $229,218 17 deficiency and a $51,574 late filing addition, a 18 $57,305 failure to pay addition, and a $7,660 addition 19 for failure to pay estimated tax . 20 For 2003, Respondent determined a $219,503 21 deficiency and a $49,388 late filing addition, a 22 $42,803 failure to pay addition, and a $5,744 addition 23 for failure to pay estimated tax . 24 Petitioners failed to provide any books and 25 records when requested by Respondent's revenue agent . Heritage Reporting Corporatio n (202) 628-4888 5 1 The only information Petitioners provided were copies 2 of war-torn arguments that they were not taxpayers , 3 they did not reside in, but instead were domiciled at, 4 and that they were not U .S . citizens, even thoug h 5 Petitioner husband was born in Lubbock, Texas . 6 The revenue agent was able to obtain certain 7 bank records through a third-party summons . It wa s 8 these banks records that the revenue agent used to 9 prepare a bank deposit analysis to determine the 10 deficiencies and additions to tax set forth in the 11 deficiency notice against each Petitioner . 12 Petitioners timely filed a petition t o 13 contest the determinations in the deficiency notices, 14 but Petitioners failed to provide any business records 15 to refute the determinations in the deficienc y 16 notices . Petitioners admitted that they destroyed 17 whatever documents they had after the revenue agen t 18 received bank records for one account as to one of the 19 years at issue . 20 From the bank records for the year 2003, 21 Petitioners extrapolated the information an d 22 determined that they had some $200,000 of business 23 expenses, another $200,000 of unreimbursed employee 24 business expenses, $20,000 of miscellaneous medical 25 and/or charitable expenses and some $67,000 of debit Heritage Reporting Corporatio n (202) 628-4888 6 1 card expenses so that by Petitioners' reformulation 2 they had approximately $10,000 of adjusted gros s 3 income in any of the years at issue . 4 During cross-examination of Petitioners ' 5 reformulation, Petitioners admitted they made several 6 mistakes like including exactly the same amounts for 7 different categories of expenses . 8 They also admitted that they categorize d 9 Sallie Mae and student loan repayments as deductible 10 expenses and categorized all credit card payments as 11 deductible business supply expenses even though they 12 did not have any credit card statements or receipts . 13 In addition, they denied that they had any personal 14 use of these supplies . 15 They also reflected homeowner's fees fo r 16 Petitioner wife's mother in which Petitioners held no 17 ownership interest . 18 Petitioners also made payments t o 19 organizations like "We the People" or "The Heritage 20 Group", but could not say what type of organizations 21 these were . 22 Petitioners also established various trusts 23 to hold assets . It is unclear whether the trusts were 24 ever funded or how many trusts actually exist . There 25 is no information from the testimony that the trust s Heritage Reporting Corporation (202) 628-4888 7 1 ever filed tax returns . The trusts were created to 2 protect Petitioners' assets from lawsuits, but it is 3 unclear what investments or assets the Petitioner s 4 have . 5 Petitioners timely filed a petition, yet 6 failed to make any specific allegation of error s 7 regarding Respondent's determination in the deficiency 8 notice . The petition merely asserted that th e 9 taxpayers do not owe any taxes . 10 Opinion . This is primarily a substantiation 11 case where we must determine whether Petitioners 12 earned amounts other than as determined under the bank 13 deposit analysis and whether Petitioners are entitled 14 to any expenses to offset the income derived fro m 15 Respondent's bank deposit analysis from their 16 acupuncture, massage, nutritional, herb and 17 homeopathic business, even though Petitioners had no 18 documentation to support any expenses . In fact , 19 Petitioners admit that they destroyed the business 20 records . 21 We begin with two fundamental principles of 22 tax litigation . First, the Commissioner' s 23 determinations are generally presumed correct, and the 24 taxpayer bears the burden of proving that thos e 25 determinations are erroneous . Rule 142(a) . 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 ~~p This principle is not affected by § 7491() dl9 because Petitioners failed to comply with th e substantiation requirements and failed to maintai n adequate records . See § 7491(a)(2)(A) and (B) ; se e also Higbee v . Commissioner , 116 T .C . 438 (2001) . Second, deductions are a matter o f legislative grace, and the taxpayer must show that h e or she is entitled to any deduction claimed . Rule 142(a) ; Deputy v . duPont , 308 U .S . 488, 493 (1940) ; Welch v . Helvering , 290 U .S . 111 (1933) . Thi s includes the burden of substantiation . Hradesky v . Commissioner , 65 T .C . 87, 90 (1975), affd . per curiam 540 F 2d 821 (5th Cir . . 1976 ) . Substantiation means that a taxpayer shal l keep such permanent records or books of account as ar e sufficient to establish the amount of deduction s claimed on the return . Sec . 6001 ; sec . 1 .6001-1(a) , (e) , Income Tax Re s g . The Court need not accept a taxpayer' s self-serving testimony when the taxpayer fails t o present other probative evidence . Beam v . Commissioner , T .C . Memo 1990-304 (citing Tokarski v . Commissioner , 87 T .C . 74, 77, 1986)) . Although the Cohan rule allows the Court i n certain situations to approximate the amount o f Heritage Reporting Corporation (202) 628-4888 9 1 allowable deductions, no such circumstances exist 2 here . Cohan v . Commissioner , 39 F .2d 540, 543-544 3 (2nd Cir . 1930) . 4 We must have some basis upon which an 5 estimate may be made . Vanicek v . Commissioner , 85 6 T .C . 731, 743 (1985) . Without such a basis, any 7 allowance would amount to unguided largesse . Williams 8 v . Commissioner , 245 F .2d 559, 560 (5th Cir . 1957) . 9 In addition, certain expenses, such as those 10 for listed expenses, which includes vehicle and travel 11 expenses, may not be estimated because of the strict 12 substantiation requirements mandated by § 274(d) . Se e 13 § 280F(d)(4)(A) ; Sanford v . Commissioner , 50 T .C . 82% , -3 SOV 14 827 (1968), affd . per curiam, 412 F .2d 201 (2nd Cir . 15 1969) . For such expenses, only documentar y 16 substantiation will suffice . 17 We now apply these rules to the facts here . 18 First and foremost, we find the record and testimony 19 of Petitioners to be incredible . Petitioners beg for 20 leniency that they are not well-versed in the law, yet 21 proclaim they are smarter than the average person and 22 have determined that they are not taxpayers, they have 23 not received income subject to tax, and they are not 24 required to file tax returns to report thei r 25 substantial income . Heritage Reporting Corporation (202) 628-4888 1 0 1 In addition, Petitioners would have u s 2 believe that after their reformulation of expenses 3 there was very little, if any, remaining income on 4 which to live . If we were to find that Respondent 5 determined all income and that Petitioner ' 6 reformulation of the expenses is accurate, we would 7 have to find that every penny Petitioners spent was 8 deductible . This we refuse to do . 9 We also refuse to find that Petitioners had 10 any deductible business expenses . Petitioners ' 11 records, or lack thereof, gave us no basis on which to 12 use the Cohan rule to guesstimate what wer e 13 legitimate . They had bald amounts for pharmac y 14 expenses, but did not supply the name of the vendor of 15 the herbs, vitamins or nutritional supplements . 16 Accordingly, we sustain Respondent' s 17 determination in the deficiency notices regarding the 18 deficiency amounts for each of the years at issue . 19 We now focus on the additions to tax . 20 Respondent determined that Petitioners were liable for 21 the late filing addition . Section 6651(a)(1) provides 22 for a five percent per month addition to tax, not to 23 exceed 25 percent, if a taxpayer fails to file a 24 timely federal income tax return . Respondent bears 25 the burden of production with respect to the addition . Heritage Reporting Corporatio n (202) 628-4888 1 1 1 Sec . 7491(c) . 2 Petitioners admit that they failed to file a 3 return timely and further admit that they have yet to 4 file a return for any of the years at issue . We find 5 Respondent has satisfied his burden of production that 6 Petitioners did not file an income tax return timel y 7 under § 6651(a)(1) . 8 The addition to tax for failure to fil e 9 timely under § 6651(a)(1) does not apply, however, if 10 the failure to file was due to reasonable cause and 11 not willful neglect . Sec . 6651(c)(1) . The taxpayer 12 bears the burden of proof as to reasonable cause and 13 willful neglect . Higbee v . Commissioner , 116 T .C . 14 438, 447 (2001) . 15 A taxpayer's failure to timely file is due 16 to reasonable cause if the taxpayer exercised ordinary 17 business care and prudence and was nevertheless unable 18 to file the return within the prescribed time . Se e 19 United States v . Boyle , 469 U .S . 241, 246 (1985) . 20 Willful neglect is defined as "a conscious , 21 intentional failure or reckless indifference ." Id . at 22 245 . 23 Petitioners have not shown that thei r 24 failure to file a return is due to reasonable cause . 25 Rather, Petitioners assert arguments that are without Heritage Reporting Corporatio n (202) 628-4888 12 1 merit in that they are not required to file returns o r 2 pay taxes . 3 Accordingly, Petitioners are liable for the 4 addition to tax under § 6651(a)(1) for each of the 5 years at issue . We also sustain Respondent' s 6 determination for the late payment additions for each 7 of the years at issue under § 6651(a)(2) . 8 We next addressed the addition to tax under 9 § 6654(a) for failure to pay estimated tax . Th e 10 record reflects that Petitioners made no estimated tax 11 payments in any of the years at issue . Respondent has 12 therefore satisfied his burden of production regarding 13 the estimated tax addition . 14 The estimated tax addition to tax i s 15 automatically imposed under § 6654(a) where payments 16 of tax, either through withholding or by makin g 17 estimated quarterly tax payments during the course of 18 the year, do not equal the percentage of total tax 19 liability required . Sec . 6654(e) . Niedringhaus v . 20 United States , 99 T .C . 202, 222 (1992) . 21 There are certain mechanical exceptions to 22 the addition to tax under § 6654(a) . The recor d 23 reflects that no exception applies under this section . 24 Consequently, Petitioners are liable for the addition 25 to tax under § 6654(a) for failure to pay estimate d Heritage Reporting Corporation (202) 628-4888 1 3 1 tax for each of the years at issue . 2 We therefore sustain Respondent' s 3 determinations that Petitioners are liable for the 4 additions to tax as set forth in the deficienc y 5 notices . 6 We now address whether it is appropriate to 7 impose a penalty against Petitioners pursuant t o 8 § 6673, which authorizes the Tax Court to require a 9 taxpayer to pay the United States a penalty up t o 10 $25,000 whenever it appears that proceedings have been 11 instituted or maintained by the taxpayer primarily for 12 delay or that the taxpayer's position in suc h 13 proceeding is frivolous or groundless . 14 In this proceeding now before the Court, 15 Petitioners assert nothing but frivolous an d 16 groundless arguments that they are not required to 17 file an income tax return . We find that Petitioners' 18 use of frivolous arguments demonstrates their protest 19 against the federal income tax system, a system they 20 have failed to comply with for at least the last seven 21 years . 22 Petitioners deserve a penalty under § 6673, 23 and that penalty should be substantial if it is to 24 have the desired deterrent effect . Cf . Talmage v . 25 Commissioner , T .C . Memo 1996-114, affd . without Heritage Reporting Corporation (202) 628-4888 1 4 1 published opinion, 101 F .3d 695 (4th Cir . 1996) . 2 The purpose of § 6673 is to compel taxpayers 3 to think and to conform their conduct to settled tax 4 principles . Coleman v . Commissioner , 791 F .2d 68, 71 5 (7th Cir . 1986) . 6 Petitioners feign that they are not ta x 7 protestors ; they are simply trying to understand the 8 law . We are convinced from the entire record tha t 9 Petitioners instituted or maintained this proceeding 10 primarily, if not exclusively, as a protest agains t 11 the federal income tax system, and their proceeding in 12 this Court is merely a continuation of Petitioners ' 13 refusal to acknowledge and satisfy their tax 14 obligations . 15 We believe no purpose would be served in 16 repeating all that has been said before about their 17 frivolous and misguided arguments . Petitioners were 18 warned that if they continued to advance these types 19 of arguments that they would expose themselves to a 20 penalty . Despite these warnings Petitioners persisted 21 and wasted this Court's limited resources and time . 22 We think the record is sufficient to justify 23 a penalty . Respondent has not requested a penalty , 24 however . We therefore shall not impose one . 25 We hope and pray that Petitioners will Heritage Reporting Corporatio n (202) 628-4888 1 5 1 acknowledge their filing and payment obligations . We 2 take this opportunity to admonish Petitioners that the 3 Court will consider imposing a penalty if Petitioners 4 return to the Court and advance similar arguments i n 5 the future . 6 Based upon the entire record, we sustai n 7 Respondent's determination in the deficiency notices 8 for the years at issue . To reflect the foregoing , 9 decision will be entered for Respondent . 10 This concludes the Court's oral findings of 11 fact and opinion . 12 (Whereupon, at 2 :00 p .m . the bench opinion 13 in the above-entitled matter was concluded . ) 14 15 16 17 18 19 20 21 22 23 2 4 25 Heritage Reporting Corporation (202) 628-4888