TAX COURT OPINION

Case: Ray G. Southwell
Docket Number: 21117-11
Judge: Marvel
Opinion Type: bench
Filed: 07/02/2012
Pages: 14

DEM UNITED STATES TAX COURT WASHINGTON, DC 20217 RAY G. SOUTHWELL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 21117-11. ) ) ) ) ) ORD E R Pursuant to Rule 152(b), Tax Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioner and to respondent a copy of the pages of the transcript of the proceedings of the above case before Judge L. Paige Marvel at Anchorage, Alaska, on June 20, 2012, containing her oral findings of fact and opinion. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) L. Paige Marvel Judge Dated. Washington, D.C. July 2, 2012 SERVED Jul 02 2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Z8 19 20 21 22 23 24 25 3 Bench Opinion by Judge L. Paige Marvel June 20, 2012 Southwell v. Commissioner Docket No. 21117-11 THE COURT: 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. 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. Unless otherwise indicated, subsequent section references made ,in this bench opinion are to the Internal Revenue Code of 1986 (Code) as amended in effect for the relevant years, and Rule references are to the Tax Court Rules of Practice and Procedure (Rules). Monetary amounts have been rounded to the nearest dollar. Petitioner appeared pro se. William D. Richard appeared on behalf of respondent. Petitioner resided in Alaska when he filed his petition in this case. Petitioner was employed in 2007 and 2008 and received wages of $89,579 and $90,346 in 2007 and 2008, respectively. Petitioner also received dividends from the Alaska Permanent Fund. of $1,654 and Heritage Reporting Corporation (202) 628-4888 I 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2,0 21 22 23 24 25 $3,269 in 2007 and 2008, respectively. Petitioner failed to file Federal income tax returns for 2007 and 2008, even though he was required to do so. See sec. 6012. The record does not establish whether respondent prepared substitutes for returns for 2007 and 2008 pursuant to section 6020 (b). On June 6, 2011, respondent mailed two notices of deficiency to petitioner at his last known address - one for 2007 and one.for 2008. In the notice of deficiency for 2007, respondent determined that petitioner was liable for an income tax deficiency of $17,795 and additions to tax under sections 6651(a) (1) and (2) and 6654 of $2,329, $1,864, and $434, respectively. In the notice of deficiency for 2008, respondent determined that petitioner was liable for an income tax deficiency of $18,473 and additions to tax under sections 6651(a) (1) and (2) and 6654 of $2, 589, $1, 381, and $345, respectively. Petitioner timely filed a petition contesting respondent's determinations. Respondent concedes that petitioner is not liable for self- employment tax for 2007 and 2008. (cid:16)042Respondentalso concedes the section 6654 (a) addition to tax for 2007. Throughout these proceedings and at trial Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 55 16 17 18 19 20 21 22 23 24 25 petitioner consistently and stubbornly maintained that the U.S. Constitution permits him to refuse to file returns and pay tax. Petitioner's misguided argument led him to engage in a course of conduct that included a complete failure to abide by the Rules in preparing and presenting his case. Specifically, he failed to stipulate as required by Rule 91, he failed to respond to respondent's requests for admissions as required by Rule 90, resulting in deemed admissions, and he failed to cooperate in the preparation of the case for trial as required by Rule 70. Petitioner also declined to answer questions posed to him during the trial by both the Court and respondent's counsel. Although this Court could have dismissed this case for failure to properly prosecute or held a contempt proceeding because of petitioner's adamant refusal to answer questions during trial, the better course of action would be to decide the case on the merits, and that is the course reflected in this opinion. At the end of the trial, respondent made an oral motion for a penalty under section 6673(a) (1). This Court warned petitioner before closing argument that if petitioner continued to press his argument, the Court would consider imposing the section 6673(a) (1) penalty. Petitioner persisted in asserting 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 his argument despite the Court's warning. Income Tax Deficiencies The Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer generally bears the burden of showing they are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The U.S. Court of Appeals for the Ninth Circuit, to which an appeal in this case would lie, absent a stipulation to the contrary, see sec. 7482(b) (1) (A), has held that for the presumption of correctness to attach to the notice of deficiency in unreported income cases, the Commissioner must establish "some evidentiary foundation" connecting the taxpayer with the income-producing activity, see Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979), rev'q 67 T.C. 672 (1977), or demonstrating that the taxpayer actually received unreported income, see Edwards v. Commissioner, 680 F.2d 1268, 1270-1271 (9th Cir. 1982). If the Commissioner introduces some evidence that the taxpayer received unreported income, the burden of production shifts to the taxpayer, who must establish by a preponderance of the evidence that the deficiency was arbitrary or erroneous. See Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), 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 7 aff'q T.C. Memo. 1997-97. Because of petitioner's failure to respond to respondent's request for admissions prior to trial, petitioner is deemed to have admitted that he received the wages and dividend income at issue in this case. See Rule 90(c). We also draw an adverse inference from petitioner's failure and refusal to answer questions by respondent's counsel about whether petitioner received the wages and dividends during 2007 and 2008. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), aff'd, 162 F.2d 513 (10th Cir. 1947). Accordingly, respondent has satisfied his initial burden of production under Weimerskirch v. Commissioner, 596 F.2d 358, and the burden of production shifted to petitioner to prove that respondent's adjustments in the notices of deficiency were arbitrary or erroneous. In addition, petitioner does not contend that section 7491(a) shifts the burden of proof to respondent, and the record establishes that petitioner does not satisfy the section 7491(a) (2) requirements. Consequently, petitioner bears the burden of proof and the burden of production with respect to all adjustments affecting his liability for the income tax deficiencies. Petitioner did not contest at trial that he 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 received wage and dividend income during 2007 and 2008 in the amounts determined by respondent. His sole argument was that he has a constitutional right to refuse to file a Federal income tax return and to pay Federal income tax. This argument is frivolous. The Code imposes a tax on the taxable income of every individual. See sec. 1. For purposes of calculating taxable income, section 61(a) (1) defines gross income as all income from whatever source derived, including compensation for services. Any person with income in an amount sufficient to require the filing of a return must file that return by the applicable due date. Petitioner's argument that he has a constitutional right to refuse to file a Federal income tax return and to pay Federal income tax is yet another form of the often-rejected argument that filing returns and paying taxes are only voluntary and not obligatory. The Federal courts, including this Court, have consistently rejected this argument in all of its forms as frivolous. See, e.g., Wilcox v. Commissioner, 848 F.2d 1007, 1008 (9th Cir. 1988), aff'q T.C. Memo. 1987-225; United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993); Woods v. Commissioner, 91 T.C. 88, 90-91 (1988). We also reject the argument, implicit in 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 petitioner's position, that the Code does not require him to file a Federal income tax return. Section 6011 provides that any person liable "for any tax imposed by this title * * * shall make a return or statement according to the forms and regulations prescribed by the Secretary [of the Treasury]." Section 6012, entitled "Persons required to make returns of income", provides that an individual who has gross income for a taxable year in excess of a specified amount shall file a tax return. "Shall," as used in section 6012, means that a taxpayer must file an income tax return when required to do so by such section. United States v. Drefke, 707 F.2d 978, 981 (8th Cir. 1983). The return that a taxpayer must file, if required to do so under sections 6011 and 6012, must conform to the forms and regulations prescribed by the Secretary of the Treasury (Secretary). See sec. 1.6011-1(a), Income Tax Regs. The Form 1040, U.S. Individual Income Tax Return, is the form prescribed by the Secretary for use by individual taxpayers in filing returns. See sec. 6012(b). Petitioner's gross income in both years exceeded the amounts specified in section 6012. Therefore, he was required to file returns, i.e., Forms 1040, and pay taxes imposed in accordance with section 1(a) for 2007 and 2008. See 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 sec. 6012. We need not refute petitioner's logic any further with somber reasoning or citation of precedent because doing so might suggest it might have colorable merit. See Wnuck v. Commissioner, 136 T.C. 498, 501, 512 (2011). As we have recently stated, taxpayers who present frivolous arguments in this Court should not expect to see them addressed in opinions of this Court. Id. at 513. In calculating petitioner's income tax deficiencies for 2007 and 2008, respondent gave petitioner the benefit of the standard deduction, allowed petitioner a personal exemption deduction, and used a married filing separate filing status. Petitioner neither challenged these items nor introduced any credible evidence that he was entitled to itemized deductions, additional exemption allowances, or a different filing status. In fact, petitioner refused to answer any question regarding his marital status during the years at issue. Consequently, we sustain respondent's determinations with respect to the income tax deficiencies for 2007 and 2008. Additions to Tax We turn now to the additions to tax. 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 Respondent determined that petitioner was liable for the additions to tax under sections 6651(a) (1) and (2) and 6654. The Commissioner has the initial burden of production with respect to additions to tax. Sec. 7491(c). Once the Commissioner has met his burden, the taxpayer must come forward with.sufficient evidence that it is inappropriate to impose the addition to tax. See Higbee v. Commissioner, 116 T.C.. 438, 446-447 (2001). We address each addition to tax below. Section 6651(a) (1) imposes an addition to tax for failure to timely file a return of 5% of the tax required to be shown on the return for each month during which such failure continues, not to exceed 25% in the aggregate, unless it is shown that such failure is due to reasonable cause and is not due to willful neglect. Respondent satisfied his burden of production under section 7491(c) with a deemed admission that petitioner failed to file returns for 2007 and 2008. Petitioner did not argue that his failure to timely file his 2007 and 2008 returns was due to reasonable cause, and he presented no credible evidence on the issue. Accordingly, we sustain respondent's determinations ·as to the section 6651(a) (1) additions to tax for 2007 and 2008. 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 Section 6651(a) (2) imposes an addition to tax for failure to pay timely the amount of tax shown on a return. The section 6651(a) (2) addition to tax applies only when an amount of tax is shown on a return. Cabirac v. Commissioner, 120 T.C. 163, 170 (2003). A return made by the Commissioner or his delegate under section 6020(b) is treated as the return filed by the taxpayer for purposes of determining whether the section 6651(a) (2) addition to tax applies. Sec. 6651(g) (2); Wheeler v. Commissioner, 127 T.C. 200, 208-209 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008). Where the taxpayer did not file a return, the Commissioner must introduce evidence that he prepared a substitute for return satisfying the requirements under section 6020(b) to satisfy his burden of production with respect to the section 6651(a) (2) addition to tax. Wheeler v. Commissioner, 127 T.C. at 209. Petitioner did not file 2007 and 2008 returns and respondent did not introduce any evidence that the Commissioner or his delegate prepared substitutes for return for 2007 and 2008 under section 6020(b). Accordingly, respondent has not satisfied his initial burden under section 7491(c) and the record does not permit us to conclude that the 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 6651(a) (2) additions to tax are appropriate. We reject respondent's determinations with respect to the section 6651(a) (2) additions to tax for 2007 and 2008. Section 6654 imposes an addition to tax for 13 underpayment of a required installment of estimated - tax. Each required installment of estimated tax is equal to 25% of the "required annual payment", which in turn is equal to the lesser of (1) 90% of the tax shown on the taxpayer's return for that year (or, if no return is filed, 90% of his or her tax for such year), or (2) if the taxpayer filed a return for the immediately preceding year, 100% of the tax shown on that return. Sec. 6654 (d) (1) (A) and (B). Respondent concedes that petitioner is not liable for the section 6654(a) addition to tax for 2007. With respect to 2008, respondent satisfied his burden of production under section 7491(c) by showing that petitioner had a required annual payment of estimated tax. Petitioner presented no evidence or argument with respect to section 6654. Therefore, we sustain respondent's determination that petitioner is liable for section 6654 (a) addition to tax for 2008. Section 6673(a) (1) Penalty Section 6673(a) (1) authorizes the Tax Court to require a taxpayer to pay to the United States 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 14 penalty not in excess of $25,000 when it appears that the taxpayer instituted or maintained proceedings primarily for delay or that the taxpayer's position in such proceeding is frivolous or groundless. See also Burke v. Commissioner, 124 T.C. 189, r (2005). Respondent asks us to impose the section 6673(a) (1) penalty. . Despite several warnings at trial, petitioner advanced an argument that we have rejected on numerous occasions as frivolous. We shall impose the penalty in our discretion because the Court repeatedly warned petitioner about the nature of his argument and, during the trial, gave petitioner an opportunity to avoid the penalty by retracting his argument. He refused to do so, repeating the argument throughout the trial and during his closing argument, thereby unduly extending the trial and prolonging these proceedings. In the exercise of our discretion, we impose a penalty under section 6673(a) (1) of $3,000. In addition, we warn petitioner that if he continues to maintain frivolous positions in future cases, we may impose a penalty under section 6673(a) (1) again, most likely in a substantially larger amount, up to and including the maximum amount, $25,000. 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 15 We have considered the remaining arguments made by the parties and, to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit. To reflect the foregoing, decision will be entered under Rule 155. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE . (Whe reupon, at 9 : 16 a . m . , t he bench opinion in the above-entitled matter was concluded.) . // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888