TAX COURT OPINION

Case: George J. Smith & Sheila A. Smith
Docket Number: 13383-22
Judge: Goeke
Opinion Type: bench
Filed: 05/10/2023
Pages: 17

United States Tax Court Washington, DC 20217 Petitioners v. George J. Smith & Sheila A. Smith, COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 13383-22. ORDER Pursuant to Rule 152(b) of the Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to the Commissioner a copy of the pages of the transcript of the trial in this case before Judge Joseph Robert Goeke at Seattle, Washington containing his oral findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the oral findings of fact and opinion, an appropriate decision will be entered for respondent. (Signed) Joseph Robert Goeke Judge Served 05/10/23 Bench Opinion by Judge Joseph Robert Goeke April 28, 2023 George J. Smith & Sheila A. Smith v. Commissioner of 3 Internal Revenue Docket No. 13383-22 THE CLERK: 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. Section references herein are to the Internal Revenue Code of 1986, as amended, in effect for the relevant period. Rule references are to the Tax Court Rules of Practice and Procedure. The findings of fact and opinion today is made pursuant to the authority granted by section 7459(b) and Rule 152. Except as provided in Rule 152(c), this bench opinion shall not be cited as 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 authority. 17 18 19 20 21 22 23 24 25 This is a deficiency case in which respondent determined tax deficiencies and penalties for the years 2017 and 2018 in two separate Notices of Deficiency. Also before us is petitioner's Motion to Dismiss. This case follows a pattern established by the petitioners. For over a decade, the petitioners have filed frivolous purported federal income tax returns based upon the position that wages are not taxable. Those have been rebuked in each of the prior cases. See Smith v. Commissioner, T.C. Memo. 2019-111; Smith v. Commissioner, 4 T.C. Memo. 2021-29; and Smith v. Commissioner, Order and Decision, Tax Court docket number 10759-20 (June 8th, 2022). In the present case, respondent has determined deficiencies in federal income tax in the amounts of $6,157.60 and $2,748 for the years 2017 and 2018, respectively. Respondent has also determined a penalty under section 6662(a) for each of the two years at issue in the amounts of $1,124.32 and $549.60, respectively. Petitioners were residents of the State of Washington when they timely filed their petition in this case. This case was called for trial on April 24th, 2023. The record consists of Exhibits 1-P through 7-P, offered by petitioners, and Exhibits 8-R and 9-R, which are the federal income tax returns which were filed by the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 petitioners. 18 19 20 21 22 23 24 25 We also have before us, petitioners' Motion to Dismiss. This motion challenges the Court's jurisdiction based upon an assertion that the matters raised in the Notices of Deficiency should be dismissed as unauthorized because petitioners challenges the authority of the JRG Internal Revenue Service employee who signed these notices. In his reply to petitioners' Motion to Dismiss, respondent has submitted the declaration of Denise D. Davis, which is also made part of the record relative to 5 our analysis of petitioners' motion. The Notices of Deficiency were issued on March 16th, 2022 by "Commissioner: by Denise D. Davis, Executive Officer, Return Integrity & Compliance Services, Integrity & Verification Operation." We will refer to the Return Integrity & Compliance Services as RISC, hereinafter. We will refer to the Integrity & Verification Operation as IVO, hereinafter. Section 6212(a) grants authority to the Secretary to issue Notices of Deficiency. Section 7701(a)(11)(B) defines the term Secretary to include her delegates. The term "delegate" means "any officer, employee, or Agency of the Treasury Department duly authorized by the Secretary of the Treasury directly, or indirectly by one or more redelegations of authority, to perform the function mentioned or described in the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 context." 19 20 21 22 23 24 25 Section 7701(a)(12)(A)(i). A Notice of Deficiency must be sent by someone with delegated authority to issue Notices of Deficiency. Muncy v. Commissioner, 890 F.3d 724, 726 (8th Cir. 2018). A Notice of Deficiency signed by an IRS employee without delegated authority to do so is invalid. Petitioners relied on the fact that when the Notices of Deficiency in the present case were issued, Ms. Davis held the title of director, 6 Return Integrity Verification Program Management, hereinafter referred to as RIVPM. However, she signed the Notices of Deficiency using the title, Executive Officer of RISC, IVO. Petitioner also argues that Executive Officer in RISC, IVO is not listed in Delegation Order 4-8 as having authority to issue Notices of Deficiency. Petitioner has the burden of proof on this issue because there is a presumption of official regularity in the issuance of Notices of Deficiency. Harriss v. Commissioner, T.C. Memo. 2021-31; see also, Kohli v. Gonzales, 473 F.3d 1061, 1068 (9th Cir. 2007). The Ninth Circuit applied the well-established principle of federal law that administrative agencies are entitled to a presumption that they act properly and according to law. When an official has acted, it is presumed that whatever is required to give validity to the official's act, in fact, exists. Harriss, T.C. Memo. JRG 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2021-31. 21 22 23 24 25 The Notices of Deficiency issued to petitioners do not exhibit any irregularities. By Regulation, the Secretary has delegated authority to issue Notices of Deficiency to the Commissioner and has granted authority to the Commissioner to redelegate that authority. See Treas. Reg. 301.6212-1(a) and 301.7701-9(c). The 7 Commissioner redelegated that authority under Delegation Order 4-8 (Rev. 2). This delegation authorizes the issuance of Notices of Deficiency by the Wage and Income Division to senior managers, Return Integrity Verification Operations (RIVO). See Internal Revenue Manual 1.2.2.5.8(6)(December 7, 2020). Delegation Orders provide the lowest level JRG employee position to whom the authority is delegated and or every intervening supervisor in the chain of command the same authority has the position listed in the Delegation JRG Order. IRM 1.11.4.5.2(1)(a)(April 9, 2020); 1.11.4.6.3(1)(c)(April 9, 2020). Thus, any intervening supervisor of a senior manager in the RIVO has delegated authority to issue a Notice of Deficiency. Muncy v. Commissioner, 890 F.3d 724 (8th Cir. 2018) aff'g T.C. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Memo. 2017-83. 18 19 20 21 22 23 24 25 There is no statutory requirement that delegated authority must be expressly embodied in Delegation Order 4-8 or any other particular document, and the mere fact that Ms. Davis's position is not expressly listed in the Delegation Order 4-8, does not rebut the presumption of official regularity. Harriss, Id. IVO was responsible for issuing the Notices of Deficiency through the Frivolous Return Program. IVO is part of RIVO. Ms. Davis signed the Notices of Deficiency 8 as an executive officer of IVO. By declaration, Ms. Davis has explained that when the Notices of Deficiency were issued, she had supervisory authority over senior managers of IVO and thus, had delegated authority to issue the Notices of Deficiency. She explained that RICS was undergoing a reorganization that included the creation of RIVO and RIVPM. Before the reorganization, Ms. Davis had supervisor authority over senior managers in IVO. As part of the reorganization, she became the director of RIVPM, but retained supervisory authority over senior managers of IVO for a short period of time, including when the Notices of Deficiency were issued. As the supervisor of the IRS employee with delegated authority to issue Notices of Deficiency, Ms. Davis also had that authority. Internal Revenue Manual 1.11.4.6.3(c)(note)(April 9, 2020) states, "If during a reorganization, position titles change, without substantive change in responsibility, a Delegation Order is still effective for the new position title until the Delegation Order is revised. Under no circumstances should operations cease because a new title is not reflected in an existing Delegation Order." IRM 1.11.4.5.1(2)(May 6, 2006) states, "When 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 organizational or personal changes are made which alter 9 title/designation, without substantive alteration and function or duty, existing Delegation Orders remain in effect until updated by the appropriate organization." Given these circumstances and the context of the reorganization and the directives in the IRM, we will apply the presumption of official regularity and we find that Ms. Davis had delegated authority to sign and issue the Notices of Deficiency. We find that Ms. Davis had delegated authority to issue the Notices of Deficiency and thus, they are valid, and we have jurisdiction. Accordingly, we will deny petitioner's Motion to Dismiss. Petitioners filed a timely petition seeking review of the Notice of Deficiency for both of the years, 2017 and 2018. We have jurisdiction over those years and accordingly, Motion to Dismiss is inappropriate. Petitioners also make in their Motion to Dismiss, an argument about the statute of limitations as it applies to 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 the year 2017. 20 21 22 23 24 25 Respondent has replied to that argument in respondent's supplemental response to the Motion to Dismiss. We do not address all the issues raised by respondent in rebuttal to petitioners' position. However, we do apply the statutory language of section 6501(e), JRG which is raised in respondent's memorandum. Section 6501(e) addresses substantial omissions of items on income JRG tax returns. It states, as the general rule, the 10 following, "If the taxpayer omits from gross income an amount properly includable therein, and (i) such amount is in excess of 25 percent of the amount of gross income stated in the return", the section goes on to state, "the tax may be assessed or a proceeding in court for collection of such tax may be begun without assessment at any time within six years after the return was filed." As we will analyze herein, petitioners did omit over 25 percent of the income they had in 2017 on the document they purported to be an income tax return for 2017. Without finding whether or not this document should, in fact, be treated as an income tax return, we held that the statute of limitations for 2017 is open and we therefore, also, deny petitioners' motion seeking relief because petitioners have asserted that the statute of limitations has run for 2017. We now turn to the merits of the adjustments made in the Notices of Deficiency issued to the petitioners. The issues as listed in respondent's trial memorandum for the 2017 are as follows: 1) whether petitioners received and failed to report $30,617 in taxable wage income for tax year 2017; 2) whether petitioners received and failed to report $2,686 in 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 taxable IRA distributions for the tax year 2017; 3) 11 whether petitioners received and failed to report $10 in interest income for the tax year 2017; 4) whether petitioners received $16,476 in unemployment compensation income for the tax year 2017. And respondent notes, in the context of this issue, that petitioners did, in fact, report $16,476 on the document they purported to be an income tax return for 2017; 5) whether petitioners are liable for the section 6662(a) penalty for 2017. For 2018, 6) whether petitioners received and failed to report $50,083 in taxable wage income for 2018; 7) whether petitioners received and failed to report $7 in interest income for 2018; and 8) whether petitioners are liable for the section 6662(a) penalty for 2018. The pertinent facts are as follows: on April 15th, 2018, the petitioners filed a purported Form 1040 tax return for 2017. On the 2017 return, which was signed under the penalties of perjury, petitioners reported $16,476 of wage income on line 7. They claimed the standard deduction of $12,700 for married filing jointly. They claimed a self and spouse exemption of $8,100, and reported zero total tax. They also claimed that they had had federal income tax withheld in the amount of $3,665.32 and they claimed a refund of this entire amount. Attached to the purported 2017 return were five 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 Forms 4852, which were substitutes for Form W-2, Wage and 12 Tax Statements or 1099-R, Distributions from Pensions, Annuities, Retirement, or Profit-Sharing Plans. These five documents pertain to Staples Contract & Commercial, Walter E. Nelson Company of Western Washington, Mygrant Glass Company, Proliance Surgeons, Inc., and the Matrix Trust Company, respectively. JRG On April 15th, 2019, petitioners filed another purported Form 1040 and attached another Form 4852, substitute for Form W-2, Wage and Tax Statement or 1099-R, Distributions from Pensions, Annuities, Retirement, or Profit-Sharing Plans. That Form 4852 identified Mr. Smith on line 1 and referenced Mygrant Glass Company. in (audio interference). The form reflected no income, but yet reported federal tax withheld and Medicare withholding, similar to the forms that were filed for 2017, which reported no income but withheld federal income tax and 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Medicare taxes. 19 20 21 22 23 24 25 The petitioners timely filed a petition disputing the Notices of Deficiency determinations, which included JRG amounts from the entities listed in the Forms 4852, identified by Mr. and Mrs. Smith. We note, however, that the actual W-2s were not included with the income tax return and the income tax return for 2017 did not reflect any income, other than the $16,476 referred to previously. Internal Revenue Code section 61(a) provides 13 that all income received from whatever source is includable as income unless it is specifically excluded by another provision of the Internal Revenue Code. Gross income includes interest income, dividends, pensions, and distributive shares of partnerships. Section 61(a)(4)- (a)(12). Income is taxed to the earner by established law. Helvering v. Eubank, 311 U.S. 122 (1940). Where unreported income is at issue, the Commissioner has the burden of production to establish some evidentiary foundation demonstrating that the taxpayer received the unreported income. Section 6201(d) and Edwards v. Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1982). 15 16 17 18 19 20 21 22 23 24 25 In the present case, the petitioners have never disputed that they did, in fact, receive the funds which respondent asserts is income. Thus, they claim such funds were not properly taxable as wages. This was true even when this case was called for trial when we asked Mrs. Smith what her position was and confirmed that she was not disputing that the funds were received. We deem these JRG admissions and petitioners' failure to challenge whether the funds were received as sufficient to meet respondent's JRG obligations under section 6201(d). And Therefore, the burden of proof shifts to the JRG petitioners to show by a preponderance of the evidence 14 that the deficiency was arbitrary or erroneous. Kloottwyk v. Commissioner, T.C. Memo. 2006-130. However, in the present case, the burden of proof does not play a role because there is no dispute that the petitioners received the funds in question, and we find this a matter of law that they are taxable to the petitioners. In the petition, the petitioners never assert that they did not receive the income items in 2017 and 2018. In addition, as we stated in a discussion on the record, Mrs. Smith indicated she was not disputing the receipt of the funds in question, but rather, was challenging the taxability of those funds. Petitioners previously assert that they have not received any payment JRG of section 3121 and 3401 fees pursuant to transactions for the tax years 2017 and 2018. Petitioners have previously advanced the same argument in Smith v. Commissioner, T.C. Memo. 2019-111, which we previously cited. The Court's analysis of the petitioners position relative to the income in the years before the Court at Smith is very pertinent and applicable to the petitioners' JRG assertions in the present case. The Court rejected those assertions and asserted a sanction against the petitioners under section 6673(a) in the earlier case. We will not belabor the petitioners' present case with a rediscussion 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 of why their positions in this case are frivolous, but 15 rather, rely upon the previous two dockets, which were reported as opinions and cited previously in this bench opinion, as well as numerous other authorities, which have found that wages are, in fact, income despite frivolous arguments by taxpayers over the last several decades. Considering the application of the additions to tax under section 6662(a), the Internal Revenue Code provides for a penalty equal to 20 percent of the portion of the underpayment of tax if the underpayment is a substantial understatement of income tax. The definition of a substantial understatement of income tax for any taxable year is an understatement which exceeds the greater of 10 percent of the tax required to be shown on the income tax return, or $5,000. Section 6662(c) provides that negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. Section 6664(c) provides an exception for an underpayment if there is a reasonable cause for the underpayment and the taxpayer acted in good faith. We find no good faith on the part of the petitioners in the present case, as they have been admonished several times by this court that their position relative to the income in question is 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 frivolous. Respondent bears the burden of production with 16 respect to any penalties or additions to tax, including the section 6662(a) accuracy-related penalty for substantial understatement. Section 7491(c). Where an exception to the penalty or addition to tax is supported upon a showing of reasonable cause, the taxpayer bears the burden of showing that their position was based upon reasonable cause. Higbee v. Commissioner, 116 T.C. 438 (2001). Section 6751(b)(1) requires personal written supervisory approval of the initial determination of a penalty assessment. This supervisor approval is required before the assessment of a penalty or if earlier before the relevant supervisor loses discretion whether to approve the penalty. Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022). For the tax year 2017, the petitioners reported a total tax in the amount of $0. Respondent proposed a total tax in the amount of $6,157.60. Therefore, the petitioners understated their tax liability by well over $5,000 and substantially more than 10 percent of the tax required to be shown on the return. Therefore, there's a substantial understatement of income tax for 2017 and the accuracy-related penalty is applicable. Relative to 2018, the petitioners reported a 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 total tax in the amount of $0. Respondent proposed a 17 total tax in the Notice of Deficiency of $2,748. Once again, the substantial understatement penalty is applicable because of the ten percent understatement. Because we find that the application of the section 6662(a) penalty in the present case was based upon an automatic calculation of petitioners' tax liability, the supervisory approval set forth in section 6751(b)(1) is subject to an exception as set forth in sections 6751(b)(2)(B). Therefore, we uphold the application of the section 6662(a) additions to tax and penalties against the petitioners for the years 2017 and 2018. We also sustain the deficiency for the reasons previously stated because the wages, which the petitioners attempted to exclude from their purported income tax returns were, in fact, taxable under section 61, as previously explained. This is the only issue in question, as well as the petitioners are subject to sanctions pursuant to section 6673. We had previously held in the prior cases cited that the petitioners were, in fact, subject to sanctions in the amount of $2,500 in each case. Because the petitioners continue to make these frivolous arguments after many admonitions by this Court, we sustain a JRG $2,500 sanction in the present case. 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 Accordingly, we uphold the deficiencies in tax 18 and addition to tax under section 6662(a), as asserted in the Notices of Deficiency and we find the sanction as described. This ends the Court's oral findings of fact and opinion in this case. (Whereupon, at 11:44 a.m., the above-entitled matter was concluded.) 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