Court Opinion

ID: 4338898
Source: CourtListenerOpinion
Date Created: 2018-11-14 04:08:25.402485+00
Date Added: 2024-06-11T14:05:57.358377
License: Public Domain

T.C. Memo. 2011-275

                 UNITED STATES TAX COURT

WILLIAM J. LICHA AND ALICIA T. LICHA, A.K.A. ALICIA TOVAR,
                      Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent

 Docket No. 14382-08.             Filed November 17, 2011.

     R determined that Ps underreported income and claimed
excess deductions and expenses, causing deficiencies in
Federal income taxes, and are liable for accuracy-related
penalties pursuant to sec. 6662(a), I.R.C., for their 2001
through 2006 tax years.

     Held: After a small concession by R with respect to
2006, Ps are liable for the remaining deficiencies and sec.
6662(a), I.R.C., penalties.

William J. Licha, for petitioners.

Kris H. An, for respondent.
                                 - 2 -

                MEMORANDUM FINDINGS OF FACT AND OPINION

     WHERRY, Judge:    This case is before the Court on a petition

for redetermination of income tax deficiencies that respondent

determined for petitioners’ 2001 through 2006 tax years.1   After

respondent conceded $345 of petitioners’ 2006 capital gain, the

issues for decision are:

     (1) Whether petitioners failed to report on Schedules C,

Profit or Loss From Business, gross income of $48,000, $85,000,

$91,073, $276,371, $172,367, and $90,523, for the 2001 through

2006 tax years, respectively;

     (2) whether petitioners received other unreported income of

$7,500, $22,000, and $9,626 for the 2002 through 2004 tax years,

respectively;

     (3) whether petitioners are entitled to deduct additional

Schedule C expenses over and above those respondent allowed for

the 2001 through 2006 tax years;

     (4) whether petitioners had unreported capital gains of

$123,778 for 2003 and $123,720 for 2006;

     1
      Petitioner wife did not attend the trial. Petitioner
husband (Mr. Licha) explained that she knew about the trial and
had authorized him to represent her but that she does not
understand English or petitioners’ finances.
                               - 3 -

      (5) whether petitioners are liable for section 6662(a)

accuracy-related penalties for the 2001 through 2006 tax years;2

and

      (6) whether Mr. Licha is liable for a penalty under section

6673.

                         FINDINGS OF FACT

      At the time they filed their petition with this Court,

petitioners resided in California.     Mr. Licha is a self-employed

contractor who owned a construction company which served

primarily as a framing subcontractor during the years at issue.

      Petitioners timely filed their Forms 1040, U.S. Individual

Income Tax Return, for 2001 through 2006.    Petitioners hired

Jagit Arora, an enrolled agent, who for the 2001 year worked for

Jackson Hewitt Tax Service and thereafter for himself, and/or tax

associates Neelu Arora and Harleen Chadha to prepare their 2001

through 2006 tax returns but did not provide them with any

documentation.   Mr. Licha would simply tell Mr. Arora or his

associate “what I made total after I’d paid all my deductions,

expenses, insurance, repairs and all this other stuff.”

      For each of the 2001, 2002, 2003, and 2004 tax years

petitioners reported on Schedule C income of $25,000 and no

expenses.   For the 2005 tax year petitioners reported on Schedule

        2
      All section references are to the Internal Revenue Code of
1986, as amended and in effect for the years at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
                                - 4 -

C income of $26,070 with no expenses, and for the 2006 tax year

they reported on Schedule C income of $29,125 with no expenses.

Petitioners stipulated that they did not specify any of the

expenses related to the construction business.    Mr. Licha did not

maintain any records related to his construction business.

Petitioners reported only the net income from the business on

their tax return without any breakdown of gross receipts and

expenses.   In fact, Mr. Licha knew what he earned and what his

expenses were only by looking at his bank account balances.

     During the years at issue petitioners had a checking account

with Bank of America which Mr. Licha used as his primary business

account.    Petitioners also had accounts with Wells Fargo Bank and

Citibank during the years at issue.

     Petitioners did not provide any documentation to the

examining agent; therefore, during the examination, a revenue

agent summoned all of petitioners’ bank account records and

conducted a bank deposits analysis.     The revenue agent examined

all of petitioners’ deposits and “if they were clearly for his

construction business, they were made out to Licha Construction

or the memo would say for a remodel or framing, then * * * [she]

determined that they were gross receipts from his business”.

     After the examination the revenue agent met with Mr. Licha

and reviewed respondent’s proposed adjustments; at the meeting

she allowed additional expenses on the basis of Mr. Licha’s
                                    - 5 -

reasonable oral explanations regarding specific expenses.                After

reviewing petitioners’ bank account records and considering Mr.

Licha’s oral statements, the revenue agent determined the

following adjustments to petitioners’ construction business

accounts as shown in table 1.

                                   Table 1

Tax year               2001     2002      2003       2004       2005      2006
Gross receipts       $48,000   $85,000   $91,073   $276,371   $172,367   $90,523
Expenses
  (Other, labor,      40,009   39,827    28,068    176,913     95,584    80,951
   materials)
   Net profit          7,991   45,173    63,005     99,458     76,783     9,572

     The revenue agent also determined that petitioners had

unreported income unrelated to the construction business of

$7,500, $22,000, and $9,626 for the 2002, 2003, and 2004 tax

years, respectively.      In addition the revenue agent allowed

itemized deductions for taxable years 2001 through 2003 of

$13,611, $21,442, and $21,654, respectively in lieu of the lesser

amounts petitioners claimed on their tax returns.

     On or about May 26, 1988, petitioners purchased a property

at 19314 Valerio Street, Los Angeles, California (Valerio

property).      On November 13, 2003, Mr. Licha exchanged the Valerio

property as part of a like-kind exchange.           An element of the

transaction was the use of the buyer’s purchase payment, in part,

to pay off Mr. Licha’s loan against the Valerio property of
                                       - 6 -

$163,873.25.     In return Mr. Licha received a property at 20036

Community Street, Winneika, California (Community property).

     On or about April 20, 2006, petitioners sold the Community

property as part of another like-kind exchange and received

property at 2700 Columbus Street SE, Albany, Oregon (Columbus

property) in return.        Petitioners also received $131,563.39

denominated in the closing documents as “boot” as a result of the

exchange.      On or about November 27, 2006, petitioners sold the

Columbus property for $229,900.

     On March 12, 2008, respondent sent petitioners a notice of

deficiency determining deficiencies in income taxes and section

6662(a) penalties as shown in table 2.

                                      Table 2

Tax year          2001     2002        2003         2004       2005        2006
Deficiency       $2,020   $14,845   $43,202.00   $34,721.00   $26,030   $20,293.00
Sec. 6662(a)
  penalty          404     2,969      8,640.40    6,944.20     5,206     4,058.60

    Total         2,424   17,814     51,842.40   41,665.20    31,236    24,351.60

     On or around May 31, 2008, Mr. Licha responded to the notice

of deficiency by mailing a “PETITION OF PROTEST AND NOTICE OF

APPEAL” to the Internal Revenue Service (IRS), stating that “I

hereby, refuse this demand, for cause, based upon errors in fact

and law.     I am not liable for the payment of this unsubstantiated

and unattested demand.”           Among other things, Mr. Licha demanded
                                 - 7 -

that the IRS send him all laws, regulations, and instructions he

would need for “perfecting my appeal” and “Your full legal name,

a Copy of your Identification Card, Badge and Bond Numbers and

your Social Security Numbers.”    Mr. Licha concluded by stating

that “Failure to respond to this Notice within 10 days will mean

you have acquiesced to this error and have cancelled this

demand.”   The IRS returned Mr. Licha’s document with a letter

explaining that he must send the petition to this Court and that

the IRS could not forward it.

     Mr. Licha then timely mailed the above mentioned “PETITION

OF PROTEST AND NOTICE OF APPEAL” to this Court along with the

letter from the IRS.   It was received and filed as petitioners’

petition on June 11, 2008.   On July 7, 2008, respondent filed a

motion to dismiss for failure to state a claim upon which relief

can be granted.   On July 10, 2008, petitioners were ordered to

respond to the motion and/or file an amended petition containing

any assignments of error that they alleged respondent had made.

     On August 13, 2008, petitioners filed an amended petition

with the Court.   Petitioners objected to every adjustment

respondent made in the notice of deficiency, in some instances

alleging that they were owed a refund, and listed a variety of

statutes they believed applied.    The amended petition states that

     44 U.S.C.S. 3512 states No person shall be subject to
     any PENALTY, if the INFORMATION COLLECTION REQUEST
     involved DOES NOT display a current OMB control No. per
     the Paperwork Reduction Act of 1980,(CFR page v). none
                                - 8 -

     [sic] of the forms the IRS used to make additional
     assessment of Taxes and Penalties have VALID OMB
     CONTROL NUMBERS.

     Mr. Licha also wonders, at the start of the last page of the

amended petition:   “Does the IRS have a PERSONABLE [sic] problem

against Me”.   He states that

     Individuals who are citizens or residents of the United
     States and SUBJECT to its Jurisdiction. Title 27 USC -
     Judiciary and Judicial Procedures sec.297(a)(b) states
     the 50 Freely Associated Compact States are Countries,
     and 27 USC sec. 1746 (1)(2),states - WITHOUT the United
     States is the United States of America, and WITHIN the
     United States is Its Territores, Possessiones or
     Commwealths. [sic] Therefore I DETERMINED what I pay a
     Tax on is 26 USC 911(d)(2)(A)(B) based on 26 USC 911
     (b)(1)(A) - Foreign Earned Income, as California is a
     Foreign Country to the United States, and Claim 26 USC
     7701 (b)(B), as I am a Citizen and resident of the
     Republic State of California * * *. I have never made
     over $30,000.00 for the years 2001-2006, as the Illegal
     Mexicam [sic] Immigrants have taken over the
     Construction in Los Angelos [sic].

      A trial was held on September 17, 2010, in Los Angeles,

California.

     Petitioners’ pretrial memorandum inter alia does not dispute

receipt of unreported income or allege that respondent

erroneously excluded expenses from petitioners’ construction

business.   Instead, Mr. Licha argues that he is not a citizen of

the United States and, therefore, this Court does not have

jurisdiction over him.   Mr. Licha also reiterates his argument

with regard to Office of Management and Budget (OMB) control

numbers that “The 1040 Return Forms for the years 2001 to 2006 Do

Not Display a VALID OMB CONTROL NO. * * *.   No person can be
                                   - 9 -

ADVERSELY EFFECTED [sic] by a matter REQUIRED to be published in

the Federal Register and NOT so published.”

     At trial the Court attempted to explain to Mr. Licha that

the OMB control numbers argument has been rejected by this Court

and Courts of Appeals and provided him with copies of the

caselaw.    Mr. Licha was advised that this Court is not the proper

forum for expressing disagreement with the Federal Government’s

tax laws and policies and that he should instead take them up

with his elected representatives.      At trial this Court warned Mr.

Licha that if he made frivolous arguments and/or pursued his case

merely for delay in addressing his tax obligations he could be

subject to a penalty under section 6673.

                                  OPINION

I.   Jurisdiction and Burden of Production

     A.    Jurisdiction

     We begin by confirming our jurisdiction in this case.     Our

jurisdiction to redetermine a Federal income tax deficiency

depends on the issuance of a valid notice of deficiency and a

timely filed petition.    Secs. 6212(a), 6213(a), 6214(a); Monge v.

Commissioner, 93 T.C. 22, 27 (1989).

     B.    Burden of Production

     Section 61(a) specifies that “Except as otherwise provided”,

gross income includes “all income from whatever source
                                - 10 -

derived”.     The Commissioner’s determination of a taxpayer’s

liability for an income tax deficiency is generally presumed

correct, and the taxpayer bears the burden of proving that the

determination is improper.     See Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

     The Court of Appeals for the Ninth Circuit, to which an

appeal would lie absent a stipulation to the contrary, has held

that where unreported income is involved, the presumption of

correctness applies only after the Commissioner introduces some

substantive evidence that the taxpayer received unreported

income.     Edwards v. Commissioner, 680 F.2d 1268, 1270 (9th Cir.

1982); Weimerskirch v. Commissioner, 596 F.2d 358, 360-362 (9th

Cir. 1979), revg. 67 T.C. 672 (1977).     If the Commissioner

introduces such evidence, the burden shifts to the taxpayer to

show by a preponderance of the evidence that the deficiency was

arbitrary or erroneous.3    See Hardy v. Commissioner, 181 F.3d
1002, 1004 (9th Cir. 1999), affg. T.C. Memo. 1997-97.

         Respondent has introduced sufficient evidence connecting

petitioners with the unreported income.     Petitioners and

respondent stipulated over 84 exhibits, including petitioners’

bank account transactions evidencing income and expenses of the

     3
      Although sec. 7491(a) may shift the burden of proof to the
Commissioner in specified circumstances, petitioners have fallen
far short of satisfying the prerequisites under sec. 7491(a)(1)
and (2) for such a shift.
                              - 11 -

construction business, as well as documentation related to

petitioners’ real estate transactions.   Consequently,

respondent’s determination is entitled to the presumption of

correctness.4

II. Limitations Periods

     In the amended petition, Mr. Licha seems to argue that he

believes the limitations periods for the 2001, 2002, and 2003 tax

years have expired.   As Mr. Licha properly notes, section

6501(e)(1)(A) applies and extends the limitations period to 6

years “If the taxpayer omits from gross income an amount properly

includable therein which is in excess of 25 percent of the amount

of gross income stated in the return”.

     As shown in table 1, supra p. 5, respondent determined

petitioners’ unreported Schedule C gross income to be:   $48,000,

$85,000, $91,073, $276,371, $172,367, and $90,523, for 2001

through 2006, respectively.   All of the omissions are well above

25 percent of the amounts petitioners reported in income.

     4
      Even if he was alleging that the unreported income was
incorrect and arbitrary, Mr. Licha’s tacit acknowledgment that he
received alleged income is enough “minimal evidence” for the
presumption of correctness to attach to the notice of deficiency.
Mr. Licha does not deny that he received income. See Havrilla v.
Commissioner, 978 F.2d 1265 (9th Cir. 1992) (affirming Tax
Court’s dismissal after the taxpayer had argued that the
Commissioner failed to meet his burden of demonstrating that the
taxpayer owed taxes on unreported income, yet the taxpayer did
not dispute the receipt of wages, arguing instead only that the
income was not taxable), affg. without published opinion T.C.
Memo. 1991-497.
                               - 12 -

Therefore, section 6501(e)(1)(A) applies in this case.

Respondent sent petitioners the notice of deficiency on March 12,

2008, which is less than 6 years from the April 15, 2002, filing

deadline for petitioners’ 2001 tax year, and the notice is

therefore valid.   This same is true for the 2002 and 2003 tax

years at issue.

III. Recordkeeping Requirements

     The taxpayer must maintain records adequate to substantiate

his income and deductions.   Sec. 6001 (the taxpayer “shall keep

such records”); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992).   As in this case, when the taxpayer fails to maintain

adequate books and records, the Commissioner is authorized to use

whatever method he deems appropriate to determine the existence

and amount of the taxpayer’s income so long as it clearly

reflects income.   Sec. 446(b); Mallette Bros. Constr. Co., Inc.

v. United States, 695 F.2d 145, 148 (5th Cir. 1983).     The

Commissioner has wide discretion in determining which method to

apply, and reconstruction of the taxpayer’s income “need only be

reasonable in light of all surrounding facts and circumstances.”

Gowni v. Commissioner, T.C. Memo. 2004-154.

     Petitioners did not present any documentation concerning the

property swaps other than the documents respondent had subpoenaed

from the mortgage companies.   The documentation is sparse at

best, and this Court cannot determine with precision petitioners’
                              - 13 -

basis in the original property and thus cannot compute the

capital gains resulting from the transactions.     We note that

under section 1031(b) taxpayers must recognize the fair market

value of any boot received in an exchange.     Respondent determined

that petitioners had capital gains in the amounts of the boot

they received in the transactions minus what he determined were

closing costs.   Mr. Licha did not refute these determinations or

address this issue on brief or at trial and did not present any

additional documentation of his original basis.     As petitioners

had the burden of proof and completely failed to satisfy it, they

are liable for the additional tax on capital gains respondent

determined.

IV.   Bank Deposits Method of Proof

      Respondent used the bank deposits method of proof to

reconstruct petitioners’ income for 2001 through 2006.     “Deposits

in a taxpayer’s bank account are prima facie evidence of income,

and the taxpayer bears the burden of showing that the deposits

were not taxable income but were derived from a nontaxable

source.”   Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir.

2000), affg. T.C. Memo. 1998-121.     “The bank deposits method

assumes that all money deposited in a taxpayer’s bank account

during a given period constitutes taxable income, but the

Government must take into account any nontaxable source or

deductible expense of which it has knowledge.”     Clayton v.
                               - 14 -

Commissioner, 102 T.C. 632, 645-646 (1994) (citing DiLeo v.

Commissioner, 96 T.C. 858, 868 (1991), affd. 959 F.2d 16 (2d Cir.

1992)).   After the deposits have been shown to be “in the nature

of income and to exceed what the taxpayers had reported as

income, it became the taxpayers’ responsibility” to show that the

deposits were nontaxable.    Dodge v. Commissioner, 981 F.2d 350,

354 (8th Cir. 1992), affg. in part and revg. in part 96 T.C. 172

(1991).

      Mr. Licha invoked the jurisdiction of this Court but has

not denied receiving, and at trial did not produce evidence or

rebut respondent’s determination that he received and failed to

report, gross income of:    $48,000, $85,000, $91,073, $276,371,

$172,367, and $90,523, for 2001 through 2006, respectively.

Rather, Mr. Licha argues that he does not owe the deficiencies

because they have not been properly determined, he is not a U.S.

citizen, and   the Forms 1040 did not contain the proper OMB

control numbers.   Mr. Licha also did not attempt to identify

expenses or provide any further documentation not already

stipulated with regard to his construction business or his

property swaps.

     Mr. Licha’s arguments are without merit and lack factual and

legal foundation; hence “we are not obligated to exhaustively

review and rebut petitioner’s misguided contentions.”    See

Sanders v. Commissioner, T.C. Memo. 1997-452.    Writing detailed
                              - 15 -

opinions “to refute these arguments with somber reasoning and

copious citation of precedent * * * might suggest that these

arguments have some colorable merit.”   See Crain v. Commissioner,

737 F.2d 1417, 1417 (5th Cir. 1984); see also Nieman v.

Commissioner, T.C. Memo. 1993-533 (taxpayer’s absurd arguments

that he was a citizen of Illinois, not a citizen of the United

States, and therefore he did not owe Federal income taxes were

“no more than stale tax protester contentions long dismissed

summarily by this Court and all other courts which have heard

such contentions”); Solomon v. Commissioner, T.C. Memo. 1993-509,

affd. without published opinion 42 F.3d 1391 (7th Cir. 1994).

     Mr. Licha repeatedly argued that his Forms 1040 lacked valid

OMB control numbers, even after he had been warned by the Court

that the argument was frivolous and he was provided with caselaw

to that effect.   We remind Mr. Licha that in Lewis v.

Commissioner, 523 F.3d 1272, 1277 (10th Cir. 2008), affg. T.C.

Memo. 2007-44, the Court of Appeals stated that the arguments

related to the OMB control numbers “have no merit and cannot be

supported by caselaw.   We hold that Form 1040 satisfies the PRA

[Paperwork Reduction Act] requirements”.

     As Mr. Licha did not challenge respondent’s determination

that he received and failed to report income of $48,000, $85,000,

$91,073, $276,371, $172,367, and $90,523 for 2001 through 2006,

respectively, and did not attempt to identify additional expenses
                              - 16 -

or provide any documentation with regard to his construction

business or his property swaps, we sustain the deficiencies

respondent determined for petitioners’ tax years at issue.

V.   Section 6662(a) Penalties

     Respondent determined that petitioners are liable for

section 6662(a) accuracy-related penalties for their 2001 through

2006 tax years.   Pursuant to section 7491(c), the Commissioner

has the burden of production with respect to a taxpayer’s

liability for a penalty and is, therefore, required to “come

forward with sufficient evidence indicating that it is

appropriate to impose the relevant penalty.”   See Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).   However, “once the

Commissioner meets his burden of production, the taxpayer must

come forward with evidence sufficient to persuade a Court that

the Commissioner’s determination is incorrect.” Id. at 447.

     Subsection (a) of section 6662 imposes an accuracy-related

penalty of 20 percent of the portion of any underpayment

attributable to causes specified in subsection (b).   Respondent

asserts two causes justifying the penalty:   A substantial

understatement of income tax, subsec. (b)(2), and negligence,

subsec. (b)(1).

     There is a “substantial understatement” of income tax for

any tax year where the amount of the understatement exceeds the

greater of (1) 10 percent of the tax required to be shown on the
                                - 17 -

return for the tax year or in the case of an individual (2)

$5,000.   Sec. 6662(d)(1)(A).   “‘[N]egligence’ includes any

failure to make a reasonable attempt to comply with the

provisions of this title” (i.e., the Internal Revenue Code).

Sec. 6662(c).   Under caselaw, “‘Negligence is a lack of due care

or the failure to do what a reasonable and ordinarily prudent

person would do under the circumstances.’”    Freytag v.

Commissioner, 89 T.C. 849, 887 (1987) (quoting Marcello v.

Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. on this

issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299), affd. 904 F.2d
1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

     Respondent met his burden of production under both causes,

and Mr. Licha addressed the section 6662(a) penalties only in

reference to his OMB control numbers argument discussed above.

Mr. Licha presented no evidence that he had reasonable cause for

any portion of any underpayment.5    Petitioners are liable for the

penalties.6

     5
      There is an exception to the sec. 6662(a) penalty when a
taxpayer can demonstrate: (1) Reasonable cause for the
underpayment and (2) that the taxpayer acted in good faith with
respect to the underpayment. Sec. 6664(c)(1).
     6
      We note that Mr. Licha did not argue that he relied on his
tax return preparer(s), nor could he, as he did not supply them
with the necessary business records. See Neonatology Associates,
P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221
(3d Cir. 2002).
                              - 18 -

VI.   Section 6673 Penalty

      We again remind Mr. Licha that section 6673(a)(1) authorizes

us to impose a penalty not in excess of $25,000 on a taxpayer for

instituting or maintaining proceedings primarily for delay or in

which the taxpayer’s position is frivolous or groundless.      “A

position maintained by the taxpayer is ‘frivolous’ where it is

‘contrary to established law and unsupported by a reasoned,

colorable argument for change in the law.’”      Williams v.

Commissioner, 114 T.C. 136, 144 (2000) (quoting Coleman v.

Commissioner, 791 F.2d 68, 71 (7th Cir. 1986)).     We have

exercised restraint in not penalizing petitioners under section

6673.   However, if Mr. Licha insists on continuing his tax-

protester rhetoric in this Court, we will be inclined to impose a

section 6673 penalty in the future.

      The Court has considered all of petitioners’ contentions,

arguments, requests, and statements.     To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

      To reflect the foregoing,

                                       Decision will be entered

                                  under Rule 155.