TAX COURT OPINION

Case: Kevin Curtis Agren
Docket Number: 23781-10
Judge: Morrison
Opinion Type: bench
Filed: 03/20/2012
Pages: 18

UNITED STATES TAX COURT WASHINGTON, DC 20217 KEVIN CURTIS AGREN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 23781-10. ) ) ) ) ORDER OF SERVICE OF TRANSCRIPT Pursuant to Rule 152(b), Tax Court Rules of Practice of Procedure, there is transmitted herewith to petitioner and to respondent a copy of the pages of the transcript of the trial of the above case before Judge Richard T. Morrison, at Tampa, Florida, on February 10, 2012, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Richard T. Morrison Judge Dated: Washington, D.C. March 20, 2012 I 3 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 Judge Richard T. Morrison Kevin Curtis Agren v. Commissioner Docket No. 23781-10 February 10, 2012 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, and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, all references to sections are to sections of the Internal Revenue Code in effect for the year 2007, and all references to Rules are to the Tax Court Rules of Practice and Procedure. By a statutory notice of deficiency dated July 28, 2010, the IRS determined a deficiency in the federal income tax of the petitioner, Mrl Kevin Agren, for the year 2007, in the amount of $46,818, plus an addition to tax under section 6654 (a) of $1,415.46, an addition to tax under section 6651(f) of $33,943.05, and an addition to tax under section 6651(a) (2). The first issue is whether Aggen received and failed to report wages of $179,841 from Kelby 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 Media Group, Inc., and interest income of $31 from Countrywide Bank, FSB, in the year 2007. Agren admits that he received and failed to report this wage income and interest income. The second issue is whether Agren is liable for the section 6651(f) addition to tax for the year 2007. We hold that he is liable. The third issue is whether Agren is liable for the section 6651(a) (2) addition to tax for the year 2007. We hold that he is liable. The fourth issue is whether Agren is liable for the section 6654 (a) addition to tax for the year 2007. We hold that he is liable. On October 26, 2010, Agren filed a petition contesting all of the IRS's determinations. On February 2, 2011, the IRS filed its answer. The time within which Agren could file a reply to the answer expired on March 21, 2011. Rule 37(a). On March 28, 2011, the IRS filed a motion for entry of an order deeming the admission of any undenied allegations in paragraph 8 of the answer. By order of March 29, 2011, the Court ordered that if Agren did not file a reply by April 19, 2011, it would grant the IRS's motion. Agren did not file a reply. On May 16, 2011, the Court granted the IRS's motion that 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 5 allegations set forth in paragraph 8 of the answer be deemed admitted. Trial of this case was conducted on February 7, 2012, in Tampa, Florida. The parties' stipulation of facts, with Exhibits 1-J through 21-J, was admitted into evidence and is incorporated herein. Agren testified that his failure to file a tax return was not fraudulent because he had believed at the time that he was exempt from federal income taxation. Findings of Fact At the time he filed his petition, Agren resided in Florida. In 1998, Agren became involved with an organization called American Rights Litigators. His involvement began when he paid $8,000 to attend a financial seminar. He then paid American Rights Litigators $4,000 to $5,000, plus yearly fees, to help him avoid the payment of federal income taxes. With the help of American Rights Litigators, Agren initially employed a strategy of refusing to file Forms 1040, U.S. Individual Income Tax Return, and attempting to avoid the withholding of federal income tax from his wages. In 2003, Agren submitted a Form W-4, Employee's Withholding Allowance Certificate, to his employer, Kelby Media Group, Inc., on which he falsely 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 asserted that he was exempt from federal income tax withholding because he had no tax liability. Relying on this form, Kelby Media Group, Inc.)did not withhold A any income tax for Agren for the years 2003 and 2004. In 2005, after the IRS began asking him about his failure to file returns, Agren modified his strategy and began filing Forms 1040. In July 2005, he filed Forms 1040 for 1998, 1999, 2000, 2001, 2002, and 2003. The forms contained zeros in each of the various lines for income. Agren attached to the Forms 1040 substitutes for Forms W-2, Wage and Tax Statement, on which he claimed that the real Forms W-2 submitted by his employer were incorrect and that his employer's records showed that he was paid $0 in wages. In filling out the false paperwork, Agren was assisted by Randall White, a paralegal in Jupiter, Florida. White was recommended to Agren by.American Rights Litigators. In 2005, Agren submitted a Form W-4 to Kelby Media Group, Inc., on which he falsely asserted that he was exempt from federal income tax withholding because he had no tax liability. Relying on this form, Kelby Media Group, Inc., did not withhold any income tax for Agren for the years 2005, 2006, and 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 On March 1, 2006, the IRS sent Agren a letter informing him that he had submitted a frivolous purported tax return dated July 5, 2005. The letter requested that Agren submit a corrected return within 30 days. The letter warned Agren that there are people who encourage others to violate the tax laws by arguing that there is no requirement to pay taxes, and that people who follow this advice could end up paying penalties. The letter also warned Agren that persons who violate the tax laws may be subject to criminal prosecution and imprisonment. The letter told Agren that the IRS.would not respond to future correspondence from him and that the IRS's lack of response to future correspondence would not convey agreement or acceptance of his arguments. On March 13, 2006, Agren responded by asking 16 questions about the March 1, 2006 letter, including the question "What is your definition of 'frivolous'"? Agren demanded a response to his questions within 30 days. The letter was prepared with the assistance of paralegal Randall White. During 2007, Agren received the following income: (1) wages in the amount of $179,841 from Kelby Media Group, Inc., and (2) interest income in the amount of $31 from Countrywide Bank, FSB. 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 . During 2007, there was no withholding of federal income tax from Agren's wages. Agren did not make any estimated tax payments for the year. For 2007, Kelby Media Group, Inc., prepared a correct Form W-2. On the Form W-2, Kelby Media Group, Inc., reported that it paid $179,841.26 in wages and other compensation to Agren. The form reported that Kelby Media Group, Inc., had made no withholdings for "Federal income tax", but that it had withheld $6,045 in "Social security tax" and $2,720.90 in "Medicare tax". Thë total of these amounts -- which comprise the Federal Insurance Contributions Act (FICA) taxes withheld by Kelby Media Group, Inc., from Agren's wages -- is $8,765.90. We surmise that Kelby Media Group, Inc., gave a copy of the Form W-2 to both the IRS and Agren. On or about April 14, 2008, Agren submitted to the IRS a Form 1040 purporting to be a tax return for the year 2007. On the Form 1040, Agren placed zeros on the lines for income. He failed to report his wages from Kelby Media Group, Inc. He also failed to report his interest income from Countrywide Bank, FSB. On the Form 1040, Agren falsely reported that $8,766 was withheld from his wages for federal income tax. On the Form 1040, Agren requested a refund 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 9 $8,766. Agren created a Form 4852, Substitute for Form W-2, which he attached to the Form 1040 that he submitted to the IRS for the year 2007. The Form 4852 purported to be a correction of the Form W-2 from Kelby Media Group, Inc. On the Form 4852, Agren stated.that he had zero wages, zero Social Security wages, and zero Medicare wages and tips, based on "Records provided by the payor listed on line 5" (i.e., Kelby Media Group, Inc.). He signed the Form 4852 under penalties of perjury. Agren created a second Form 4852 that he attached to the Form.1040 that he submitted to the IRS. The second Form 4852 purported to be a correction óf an information return from Countrywide Bank, FSB. .On the second Form 4852, Agren stated that he received.zero income from Countrywide Bank, FSB, based on "Records provided by the payor listed on line 5" (i.e., Countrywide Bank, FSB). He signed the Form 4852 under penalties of perjury. On September 2, 2008, the IRS informed Agren that the Form 1040 he submitted for the tax year 2007 was frivolous. The IRS sent Agren Publication 2105, entitled "Why.Do I Have to Pay Taxes?" The IRS asked Agren to send a corrected return within 30 days. 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 Agren responded by writing a letter containing frivolous arguments. The IRS prepared a substitute return under section 6020(b) for the year 2007. After receiving the notice of deficiency dated July 28, 2010, Agren again turned to American Rights Litigators and paralegal Randall White, paying them $5,000. With White's help, Agren filed a Tax Court petition containing frivolous positions such as the theory that wages are not considered income. The petition was filed on October 26, 2010. In February 2011, the IRS seized Agren's bank account to collect unpaid taxes. It was only then that Agren realized that he should give up his efforts to avoid paying income tax. Agren claims that on March 7, 2011, he mailed the IRS Forms 1040 for 1998 through 2010 (inclusive), that the Form 1040 for 2007 reported that he earned $179,841 in wages during 2007, and that the Form 1040 for 2007 reported that he owed a tax liability of $34,025. We believe he mailed these forms as he claims. Paragraph 4 of the stipulation of facts states: "Petitioner did not file a Form 1040 Individual Income Tax Return for the year 2007." We construe this stipulation to mean that Agren never filed a Form 1040 that qualified as a Heritage Reporting Corporation (202) 628-4888 11 - 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 valid tax return for the year 2007; we consider~both parties to have acquiesced that the Form 1040 filed on March 7, 2011, was too late to be considered a valid return. At trial, Agren admitted to the Court for the first time that his position that wages are not income is flawed. He said that before February 2011, he had been misled by American Rights Litigators and by paralegal Randall White into thinking that wages were not income, and that therefore his conduct was not fraudulent. 1. Income Tax Deficiency Opinion The IRS determined that Agren failed to report wage income and.interest income for 2007. At trial, Agren conceded that the IRS's determination was correct. 2. ·Section 6651(f) Addition to Tax The IRS determined that Agren is liable for the section 6651(f) addition to tax for fraudulently failing to file his 2007 tax return. Although Agren mailed the IRS what purported to be a 2007 tax return, he filled in zeros for all lines where he should have reported income, and the IRS treated the Form 1040 as an invalid return. Agren 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 does not deny that he failed to file a valid return for 2007. The majority of courts, including this Court, have held that, generally, a return that contains only zeros is not a valid return. See United States v. Mosel, 738 F.2d 157 (6th Cir. 1984); United States v. Grabinski, 727 F.2d 681 (8th Cir. 1984); United States v. Rickman, 638 F.2d 182 (10th Cir. 1980); United States v. Moore, 627 F.2d 830 (7th Cir. 1980); United States v. Smith, 618 F.2d 280 (5th Cir. 1980) ; United States v. Edelson, 604 F.2d 232 (3d Cir. 1979); Cabirac v. Commissioner, 120 T.C. 163, 169 (2003) . For example, in United States v. Moore, 627 F.2d at 835, the Court of Appeals for the Seventh Circuit noted that a tax might conceivably be calculated on the basis of the zero entries; however, "it is not enough for a form to contain some income information; there must also be an honest and reasonable intent to supply the information required by the tax code." See also United States v. Mosel, 738 F.2d at 158. Accordingly, we conclude that the return Agren filed for 2007 was invalid and tantamount to failing to file a return. We must therefore consider whether Agren's failure to file a return was fraudulent. In deciding whether·a failure to file is 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 fraudulent under section 6651(f), we consider the same elements that are considered in imposing the addition to tax for fraud under former section 6653(b) and present section 6663. Clayton v. Commissioner, 102 T.C. 632, 651-653 (1994). The IRS must establish, by clear and convincing evidence, that Agren's failure to file was fraudulent. Sec. 7454 (a); Clayton v. Commissioner, 102 T.C. at 646, 651-653. The taxpayer's attempts to conceal income, mislead the IRS, or.prevent the collection of income tax may establish the requisite fraudulent intent. See Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). The allegations in paragraph 8 of the answer, which the Court has ordered admitted, resolve the question of whether Agren is liable for the section 6651(f) penalty. According to paragraph 8 of the answer, Agren acted fraudulently (1) in omitting his wage income and interest income on the Form 1040, (2) in falsely stating on the Form 1040 that $8,766 of federal income tax had been withheld from his wages, and (3) in attaching a Form 4852 to the Form 1040 falsely stating that he had zero wages. Paragraph 8 also alleges that Agren fraudulently failed to file a return within the meaning of section 6651(f), an allegation that itself establishes that Agren is Heritage Reporting Corporation (202) 628-4888 14 1 2 3 4 5 6 7 8 9 10 11. 12 13 14 15 16 17 18 liable for the penalty. Agren did not explain why he did not respond to the allegations as required by the Court's order, or why he should not be bound by the allegations Even setting aside the effect of the allegations in paragraph 8 of the answer (and our order deeming the allegations admitted), the evidence at trial showed clearly and convincingly that Agren fraudulently failed to file his 2007 tax return. Therefore, there is no cause for relieving Agren of having admitted paragraph 8 of the answer. At trial, Agren testified that he had thought that American Rights Litigators was a reputable organization, that he had believed its advice that wages were not income, and that he had therefore believed that his efforts to avoid paying the federal income tax were legitimate. We disbelieve Agren for several reasons. The false paperwork he submitted was designed to evade 19 , the federal tax laws and avoid getting caught. He 20 21 22 23 24 25 submitted false Forms W-4 to Kelby Media Group, Inc., claiming that he was exempt from tax, and successfully convinced Kelby Media Group, Inc., not to withhold income tax from his wages during 2007. He reported to the IRS on his Form 1040 that $8,766 had been withheld from his wages as federal income tax. He requested a Heritage Reporting Corporation (202) 628-4888 e 15 1 2 3 4 refund from the IRS of the withheld amount. On his Form 4852 he assured the IRS--falsely--that the fact that he did not receive any wages in 2007 was corroborated by the "records" of Kelby Media Group, 5 (cid:16)042 Inc. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 . Furthermore, Agren is an intelligent and successful media executive. He is equipped with a college degree in history and political science . We do not believe that Agren was duped by American Rights Litigators into thinking that wages were not income. .Although some of American Rights Litigators' communications with Agren look as if they were designed to deceive Agren and its other "customers", we do not believe Agren was actually deceived. His long history with the organization, among other things, convinces us that he knew that he was defrauding the federal government rather than employing a legitimate tax strategy. Agren claims that his professed belief that he did not owe taxes was based in part upon the IRS' s failure to notify him that there were problems with his tax reporting and his tax payments. Yet even after the IRS notified him that his forms were frivolous, he and his paralegal continued to submit false information to the IRS. Only in February 2011, 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 when the IRS seized his bank account for unpaid taxes, did Agren give up his scheme for avoiding the payment of federal income taxes because he realized that the scheme had failed. Agren claims that he had thought it was permissible for him to submit Forms W-4 to his employer -- forms which falsely asserted that he was exempt from tax -- because his employer never questioned the Forms W-4. Agren's claim rings shollow. He lied to Kelby Media Group, Inc. That it apparently relied on his falsehood could not plausibly have served as 'a reason for believing he was exempt from federal income tax. Agren claims that he did not attempt to hide his assets in foreign countries or embed his assets in layers of trusts. This, he says, demonstrates that he did not intend to defraud the government. However, we believe that Agren initially thought his fraud would be successful and that it was not necessary for him to hide his assets. Agren claims that he has recently begun filing correct Forms 1040 and is attempting to pay his unpaid federal income tax liabilities. We believe him, but these recent actions do not disturb our view that he fraudulently failed to file hiss2007 tax Heritage Reporting Corporation (202) 628-4888 17 1 2 . 3 4 5 6 7 8 9 return. We find that the IRS has established fraud by clear and convincing evidence. Thus Agren is liable for the section 6651(f) addition to tax for 2007. 3 . Section 6651 (a) (2) Addition to Tax Under section 7491(c), the IRS bears the burden of production for the addition to tax under section 6651(a) (2) . Consequently, the IRS must 10. produce sufficient evidence to demonstrate that the 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 addition to tax .is appropriate.. See Higbee v. Commissioner, 116 T.C. 438, .446 (2001) . Once the IRS meets its burden of production, the taxpayer must produce sufficient evidence to persuade the Court that the IRS' s determination is incorrect . Id . at 447 . Section 6651(a) (2). imposes an addition to tax if the taxpayer fails to. pay the amount of tax shown on a return. The addition applies only when an amount of. tax is shown on a return. Cabirac v. Commis sioner, 120 T . C . at 170 . Agren did not f ile a valid return for 2007. Instead, the IRS prepared a substitute return under section 6020(b). Under section 6651(g) (2), a return prepared by the IRS under section 6020(b) is treated as the return filed by the taxpayer for purposes.of determining an addition 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 18 tax under section 6651(a) (2). Cabirac v. Commissioner, 120 T.C. at 170. Agren did not pay the tax shown on the substitute return, and we find that he lacked reasonable cause for failing to pay the tax shown on the substitute return. Thus Agren is liable for the section 6651(a) (2) addition to tax for 2007. 4. Section 6654 (a) Addition to Tax Under section 7491(c), the IRS bears the burden of production for the addition to tax under section 6654 (a).. Consequently, the IRS must produce sufficient evidence to demonstrate that the addition to tax is appropriate. See Higbee v. Commissioner, 116 T.C. at 446. 'Once the IRS meets its burden of production, the taxpayer must produce sufficient evidence to persuade the Court that the IRS's determination is incorrect. Id. at 447. Section.6654 (a) imposes an addition to tax on an individual taxpayer who underpays his or her estimated tax. _A taxpayer must pay estimated tax for a particular year if he or she has a "required annual payment" for that year. Sec. 6654 (d). A "required annual payment" is defined in section 6654 (d) (1) (B) as 90 percent of the tax for that year if no return is filed for that year or the previous year. Thus to meet its burden of production, the IRS must produce, 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 for each year for which the addition is asserted, evidence that the taxpayer had a required annual payment under section 6654 (d) . For 2007, the record establishes that Agren has a tax liability, that he did not file a return for 2007, and that he did not file a.return for 2006. A substitute return is not a return for purposes of section 6654. Duma v. Commissioner, T.C. Memo. 2009-304, slip op. at 18 n.6. Therefore, the IRS's substitute return for 2007 is not considered a return for purposes of the section 6654(a) addition to tax. There were no withholdings or payments of estimated tax for 2007. And Agren does not qualify for any of the exceptions in section 6654 (e) . Thus Agren is liable for the section 6654 (a) additión to tax for 2007. . To give effect to the foregoing, decision will be entered under Rule 155. This concludes the Court's Oral Findings of Fact and Opinion in this case . (Whereupon, at 9:05 a.m., the bench opinion in the above-entitled matter was concluded.) // // // // Heritage Reporting Corporation (202) 628-4888