TAX COURT OPINION

Case: Paul Douglas & Candace Louise Moredock
Docket Number: 10704-09
Judge: Whalen
Opinion Type: bench
Filed: 06/06/2011
Pages: 20

UNITED STATES TAX COURT WASHINGTON, DC 20217 PAUL DOUGLAS & CANDACE LOUISE MOltEDOCK, . Petitioners, v. COMMISSIONER OF Il\iTERNAL REVENUE, Respondent . ) ) ) ) ) ) Docket No. 10704-09 ) ) ) ) O R 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 herewith the pages of the to petitioners and to respondent a copy of transcript of Laurence J. Whalen at Oklahoma City, Oklahoma, containing his oral the proceedings in the above case before Judge fact and opinion rendered on May 19, 2011. findings of In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Laurence J. Whalen Judge Dated: Washington, D.C. June 6, 2011 8ERVED JUN - 8 2011 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 Bench Opinion by Senior Judge Laurence J. Whalen May 19, 2011 Moredock v. Commissioner Docket No. 10704-09 3 I. THE COtJRT HAS DECIDED TO RENDER Ld W ORAL FINDINGS OF FACT AND OPINION IN THIS CASE, AND THE FOLLOWING REPRESENTS THE COURT' S ORAL FINDINGS OF FACT AND OPINION. II. This proceeding was heard as a regular case. See section 7453. This bench opinion was made pursuant to the authority granted by section 7459 (b) of the Internal Revenue Codes of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Hereinafter in this bench opinion, and unless otherwise indicated, all section numbers refer to the Internal Revenue Code, as amended and in effect for 2006 and 2007, the taxable years in issue, and all Rule numbers refer to the Tax Court Rules of Practice and Procedure. III. Paul Douglas Moredock and his spouse, Candace Louise Moredock, appeared in these proceedings on their own behalf, and Ms. Dessa J. Baker-Inman, attorney at law, appeared on behalf of respondent. Heritage Reporting Corporation (202) 628-4888 1 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 IV. 4 Petitioners resided' in Sandy, Utah, at the time they filed their Petiti n, and they resided in Oklahoma City, Oklahoma, at the time they filed their Amended Petition. V. Petitioners are experienced litigants in this Court. Ove.r the last twenty years, they have prosecuted four cases in this Court, including the instant case. See the cases at docket nos.-6556-89, 18472-05S, 14751-085, and the instant case at docket no. 10704-09. For reasons that will become evident later in this opinion, it is necessary to understand the issues in, and the disposition of, the case they filed in 2005. Petitioners' Case at Docket No. 18472-05S: That case involved petitioner's' income tax return for 2000 on which they reported zero tax liability, and they claimed withholding credits of $22,887. As a result, respondent issued a refund to petitioners in the amount of the overpayment, $22,887. Later, respondent determined that petitioners' actual withholding only amounted t $2,486. Accordingly, respondent made a summary assessment, pursuant to section 6201(a) (3), of the amount of the overstated 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 5 withholding, $20,239, and issued letters demanding repayment. In due course, after petitioners failed to repay the amount demanded, respondent initiated collection by issuing a notice of levy. Petitioners contested the notice of levy before the Appeals Office in a collection due process hearing, but the Appeals Office issued a notice of determination to petitioners on September 8, 2005, which approved levy as an appropriate action to collect the unpaid taxes of $20,239 for taxable year 2000. Petitioners filed the 2005 case to contest that notice of determination. In their petition and, later, in their pretrial memorandum in that case, petitioners made the claim that the INS had over-withheld employment taxes on the award of certain backpay that was to be paid to Mr. Moredock under a settlement agreement. Parenthetically, I note that circa 1995 the Department of Justice had taken steps to remove Mr. Moredock from his position ass Asylum Officer with the Immigration and Naturalization Service, and Mr. Moredock had fought that action. During the year 2000, while that matter was þending before the Merit Systems Protection Board, the parties entered into a settlement agreement which, among other things, 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 26 27 6 LJW LJW required the INS to purchase a life annuity contract benefitting Mr. Moredoc for the sum of $318,723.63, and to fund both the employer's and the employee's shares of the Federal Employees' Retirement System (FERS), Social Security (OASDI), and Medicare (HITS) contributions. The settlement agreement stipulates that the payments under the annuity contract are "taxable payments in lieu of other compensation and shall be taxable when received by Mr. Moredock." The settlement agreement is attached to Petitioner's [sic] Objection to Respondent's Motion to Dismiss for Lack of Jurisdiction, filed May 12, 2010, (herein referred to as Petitioners' Objection). Soon after the settlement agreement was executed, Mr. Moredock believed that the INS had not properly funded his OASDI and FERS accounts, and he filed actions to enforce the settlement agreement. See Moredock v. Department of Justice, Fed.Cir. docket no. 02-3258, slip opinion, January 10, 2003, attached to Petitioners' Objection. The United States Court of Appeals for the Federal Circuit, which considered the case on appeal, states as follows, id. at 5: "Mr. Moredock argues that the agency [INS] improperly withheld certain sums from the settlement amount: taxes in the amount of $20,066; back pay in the amount of $19,667; and interest in the specifically, OASDI Heritage Reporting Corporation (202) 628-4888 1 2 3 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 amount of $5,078. These contentions are without merit. * Also without merit is Mr. Moredock's contention that the agency failed to comply with various additional obligations under the settlement agreement." * * 7 The provision of the settlement agreement requiring the INS to fund the employer's and employee's share of FERS, OASDI, and HITS contributions has remained of ongoing concern to Mr. Moredock. Indeed, in their 2005 case in this Court, petitioners raised as an issue the question whether they were liable for employment taxes that had been withheld on "back pay of several years" and they requested a "refund of over-withheld OASDI tax." At the trial of their 2005 case, petitioners asserted that their overstatement of income tax withholding is an offset to the excess employment taxes that petitioner's former employer had withheld from payments negotiated as part of the settlement described above. Respondent did not deny petitioners' claim that Mr. Moredock's employment taxes had been overpaid, but took the position that the Court did not have jurisdiction, at that time, over employment taxes in a levy case, with the result that petitioners must repay the erroneous refund of income taxes and sue in District Court for refund of the employment taxes. During a pretrial conference, the Court resisted the 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 26 27 28 29 30 31 32 33 34 8 notion that the two steps could not be accomplished in the same proceeding. Ultimately the parties reached a basis for settlement that respondent's:attorney described during a hearing on October 29, 2007. According to the transcript of the hearing, respondent's attorney described the agreement of the parties as follows: The parties further is The parties further "The parties agree that the notice of .determination issued to Petitioners for taxable year 2000, Þn September 8, 2005, not sustained. stipulate that Respondent will not continue any collection action in regards to an erroneous income tax refund issued to Petitioners for ta able year 2000 in the amount of $20,239. stipulate that Petitioners are entitled to amounts applied to their 2000 tax year plus applicable interesU in the amount of $1,663, $141 and $213. that this will endi the journey that they started in this regard, and there's no need for any stipulatioh in regards to whether or not the future." there be otherilegal actions taken in The Moredocks have agreed At the conclusion of the remarks of respondent's attorney, Mr. Moredock advised the Court, "We're satisfied." The case ended when a stipulated decision was submitted by the parties and was entered by the Court on December 11, 2007. The decision that was entered by the Court ordered and decided the following: 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 26 27 28 29 30 9 the determinations set forth in the "That Notice of Determination Concerning Collection Action(s) under Section 6320 and/or 6330 issued to petitioners on September 8, 2005,iwith respect petitioners' taxable year 2000, and upon which this case is based, are not sustained; and incomel tax liability for to That there is'no-income tax due from petitioners for tailable year 2000." Pursuant to the settlement of the parties in that case, therefore, the Court decided that the notice of determination issued for taxable year 2000 was not sustained, and no income tax was due from petitioners for 2000. Thus, contrary to the allegations in the Amended Petition and petition'ers' representations at trial, the case at docket no. 18472-05S dealt with 2000, and only with 2000. That case has nothing to do with the adjustments determined by respondent in petitioners' taxable years 2006 and 2007. VI. Petitioners made a single return jointly of income taxes on Form 1040, U..S. Individual Income Tax Return, for both taxable year 2006 and 2007. As shown by a certified transcript of petitioners' return for taxable year 2007, that return was filed after the due date and was delinquent. VII. Notices of Deficiency: In separate notices 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 t' 10 of deficiency issued on February 18, 2009, respondent determined a deficiency of $10,279 with respect to petitioners' 2006 tax return, and a deficiency of $22,218 with respect to their 2007 return. The adjustments to petitioners' r'eturns that were determined by respondent in the notices of deficiency are the following: First, respondent disallowed the expenses reported on the Schedules C, Profit or Loss From Business, filed with the subject returns for a business named Moredock's Applicant Services, LLC, in the amount of $81,062 in 2006 and $49,157 in 2007. Second, respondent disallowed a loss of $30,985 that was claimed on petitioners' Schedule C, line 6 labeled "Other income, including federal and state gasoline or fuel tax credit or refund," for 2007. Third, respondent increased petitioners' gross income by taxable social security benefits received by petitioners in the amount of $19,550 in 2006 and $19,106 in 2007. Fourth, respondent determined an increase in petitioners' self-employment tax of $678 in 2006, and $5,056 in 2007,'and also determined self-employment adjusted gross income adjustments of $339 in 2006 and $2,528 in 2007. Fifth, respondent disallowed the special fuel tax credits claimed by petitioners of $142 in 2006, and $171 in 2007. 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 Finally, respondent determined petitioners' liability for the failure-to-file penalty under section 6651 11 with respect to their 2007 return. VIII. Petitioners' Amended Petition: Paragraph 5 of petitioners' Amended Petition purports to explain the reasons why they disagree with the notices of deficiency. Petitioners make four points in paragraph 5. First, they claim that the Court has "already decided these same matters and found 'no deficiencies' on 11-16-2006 in Las Vegas." This is a reference to the case at docket no. 18472-05S, discussed above, .which involved a notice of deficiency dated September 8, 2005, that had been issued to petitioners for taxable year 2000. At trial, petitioners continued to misrepresent the nature of the proceeding at docket no. 18472-05S. Notwithstanding those misrepresentations and the references to the case in the Amended Petition, that case, and the issues decided therein, have nothing to do with the issues in the instant case. Second, petitioners' Amended Petition asserts that respondent has "no reasonable basis" for the determination of additional tax, because 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 respondent "previously determined no deficiency from in-person examination by IRS General Counsel in Las Vegas in 2005 and 2006." Again, petitioners refer to the case at docket no. 18472-05S, which, as described above, has nothing to do with the instant case. Petitioners also assert that "This decision is a policy-driven statistical search of a general class of taxpayers; and assumes 'guilt by group characteristic-association.'" It is not clear to what decision petitioners are referring by the words "This decision." In any event, we see no reason why a policy-driven search for deficient taxpayers is improper or requires that petitioners receive any relief. Third, petitioners' Amended Petition states that the "assessment" (presumably, petitioners meant to say "notices of deficiency") violates "IRS regulations and collection procedures" and is "the sixth collection or levy on the same tax years, issues, and facts which has [sic] not been sustained by the Tax Court." Contrary to petitioners' allegation, the instant case does not involve a collection matter. As described above, it involves the separate notices of deficiency that were issued by respondent for 2006 and 2007. At the time petitioners 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 13 filed their Amended Petition, and to this day, no tax has been assessed for either year and, thus, contrary to the Amended Petition, no collection procedure has been or could properly have been initiated for either year. Fourth, petitioners state that "each previous erroneous levy was canceled, and the levied amount was refunded." It is not clear to what "previous levies" petitioners are referring. Once again, petitioners seem to be referring to the case at docket no. 18472-05S, described above, which involved a notice of determination that sustained levy to collect unpaid tax for taxable year 2000. Petitioners further assert that the instant notice "is yet another meritless claim in an ongoing pattern of abuse of official authority." Paragraph 6 of the Amended Petition purports to state the facts upon which petitioners rely. Petitioners make the following three points in paragraph 6: First, petitioners assert that they "cooperated in an examination by two attorneys in the Las Vegas office of the IRS General Counsel after a due process hearing." They assert that "the collection actions from 2000 to 2007 were not sustained by the U.S. Tax Court . . . [and] the 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 14 taxpayers were determined to have 'no deficiencies' for those years." As discussed above, the case at docket no. 18472-05S, to which petitioners were referring, involved a collection action for the year 2000, and only the year 2000. Second, petitioners assert that the IRS has given written instructions to petitioners that "non-taxable worker's compensation payments" were not reported correctly on Form 1099 and these "disability compensation payments" are to be recharacterized "as taxable self-employment wages and assessed OASDI, Medicare, and income taxes in error for tax years 2005, 2006, 2007." Third, petitioners assert that the IRS has no support for a position "of no dependents, no expenses, and no business deductions for a failed business. The IRS wrongly assumed residual rental income is actually a hobby." Petitioners bear the burden of proof in this case. It is noteworthy that petitioners did not raise an issue in the Amended Petition about their eligibility for any exclusion from income, under section 104(a), or any other provision of the Internal Revenue Code. // 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 IX. 15 We begin with several fundamental principles of tax litigation. First, as a general rule, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a). This principle was firmly established by" the United States Supreme Court as early as 1933 and has been reaffirmed by the Supreme CoùEt as recently as 1992. See INDOPCO Inc. v. Commissioner, 503 U.S. 79, 84 (1992). We note that section 7491(a) (1) shifts the burden of proof to the Commissioner in certain cases "if, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue. " Petitioners have not requested the application of section 7491(a) (1) to their case. Even if they had, the section would not apply because it is evident that they have not complied with the substantiation requirements. See section 7491(a) (2) (A) . Second, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed. Rule 142(a); Deputy v. duPont, 308 U.S. 488, 493 (1940) . This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 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 16 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). Third, the Court is not bound to accept as true the unverified and undocumented testimony of a taxpayer. Hradesky v. Commissioner, supra; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Even when a taxpayer's testimony is uncontroverted, we are not required to accept it if it is improbable, unreasonable, or questionable. Lovell & Hart, Inc. v. Commissioner, 456 F.2d 145, 148 (6th Cir. 1972), affg. T.C. Memo. 1970-335. Fourth, a petitioner's failure to introduce documentary evidence which is within his possession or control and which he implies would be favorable to him, gives rise to the presumption that, if produced, such evidence would be unfavorable. Recklitis v. Commissioner, 91 T.C. 874, 890 (1988); Pollack v. Commissioner, 47 T.C. 92 at 108 (1966), affd. 392 F.2d 409 (5th Cir. 1968); Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165(1946),. affd. 162 F.2d 513 (10th Cir. 1947). We also observe that section 6001 and the regulations promulgated thereunder require taxpayers to maintain records sufficient to permit verification of income and expenses. As a general rule, if such 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 17 records provide sufficient evidence that the taxpayer has incurred a deductible expense, but the taxpayer is unable to adequately substantiate the amount of the deduction to which he or she is otherwise entitled, the Court may estimate the amount of such expense and allow the deduction to that extent. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However, in order for the Court to estimate the amount of an expense, we must have some basis upon which an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). Without such a basis, any allowance would amount to unguided largesse. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957). X. Throughout these proceedings, the Court has been challenged to understand the written and spoken words used by petitioners, and to relate their statements to the adjustments determined in the subject notices of deficiencies for 2006 and 2007. From the first, during a conference call with the parties to discuss petitioners' motion for a second continuance, it was evident that there was little or no connection between the matters on which petitioners were focusing and the adjustments determined in the subject notices of deficiency. As a result, during 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 18 the conference call, the Court told the parties that it would order petitioners to file a statement of the issues in the case. The document that the Court received in response to that Order did not specifically address any of the adjustments determined in the notices of deficiency for 2006 and 2007. Rather, petitioners raised an assortment of unrelated matters, such as various exclusions from income to which they claimed to be entitled, certain ERISA violations of Mr. Moredock's former employer, and other matters. Furthermore, petitioners used the Order to file a statement of the issues as the opportunity to insert into the record of the case voluminous documents, several inches thick, similar to the documents they had attached to Petitioners' Objection, regarding their position that the INS had violated the terms of the settlement agreement, had violated the ERISA laws, their position that the IRS was complicit in those violations, and other things. Upon receiving the statement of issues, the Court was concerned by the fact that such a great volume of apparently extraneous material would be placed in the record of the case, and by the possible unfairness to respondent, whose counsel would have to analyze and 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 19 address each of the documents, only days before trial. Accordingly, to prevent any unfairness, the Court returned petitioners' statement of issues and attached documents to petitioners at the start of trial. For the same reason, the Court also returned to petitioners the documents that were mailed to the Court attached to a so-called "yellow sticky" with nothing more than the name of the case and the docket number. At the start of trial, the Court noted for the record that it had not received petitioners' pretrial memorandum. By Order dated April 27, 2011, the parties had been ordered to file pretrial memoranda no later than May 10, 2011, and they were warned that "The Court may impose appropriate sanctions, including dismissal, for any unexcused failure to comply with this Order." Respondent's counsel stated that she had received a document entitled, Addendum to Pretrial Memorandum for Petitioner [sic]. The Court directed that it would accept that document as petitioners' pretrial memorandum and file it as such, notwithstanding the fact that, as of that time, the Court had not received it. That document was subsequently delivered to the Court, well after the due date. 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 26 27 28 29 30 31 32 33 20 Petitioners' pretrial memorandum makes it clear that petitioners' position in this case is based upon the matters decided by the Court in their case at docket no. 18472-05S, discussed above. Petitioners' pretrial memorandum states as follows: The relevant provisions of "Petitioners filed a return for Tax Year in Las Vegas, Nevada 2000; and the Tax Court found no taxable income on the same facts as the respondent now alleges to constitute taxable income. the Internal Revenue Code have remained constant; and the same sources of petitioners' economic benefit are still excludible from taxable income. party amounts are still incorrectly reported to the IRS, as taxable; and the Respondent still believes ignorance of willful blindness is an affirmative defense against negligence and reckless disregard of the Internal Revenue Code, Treasury Regulations , and IRS Rules . " the law and the The third During the trial, the Court struggled to follow the logic of petitioners' argument. The Court believed that petitioners would address the adjustments determined in the notices of deficiency. As to those matters, however, petitioners had nothing to say. They focuse their efforts on their position that the INS had, or continues to, over-withh ld employment taxes on payments, under the life annuity, described above, and on the culpability of the IRS in permitting that over-withholding to take place. It is now apparent that that is what they conceive this 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 21 proceeding to be about. It was the focus of their petition, as discussed above. It was the focus of their pretrial memorandum, as discussed above. Finally, it was the focus of argument at trial. However, that matter does not bear any connection to any of the adjustments determined in the notices of deficiency. At trial, petitioners did not specifically address any of the adjustments determined by respondent in the notices of deficiency for 2006 and 2007, including respondent' s. determination that petitioners are liable for the failure-to-file penalty for taxable year 2007. Based upon the record of this case, the adjustments determined by respondent in the notices of deficiency must be sustained. XI. In order to give effect to the foregoing, decision will be entered for respondent. XII. THIS CONCLUDES THE COURT' S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE . (Whereupon, at 4:00 p.m., the bench opinion in the above-entitled matter, was concluded.) // // Heritage Reporting Corporation (202) 628-4888