T.C. Memo. 2014-133
UNITED STATES TAX COURT
STEVEN T. WALTNER AND SARAH V. WALTNER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1729-13. Filed July 3, 2014.
Donald W. Wallis, for petitioners.
Matthew A. Houtsma and Michael W. Lloyd, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determined a deficiency in petitioners’ 2008
Federal income tax of $8,801 and an accuracy-related penalty under section
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[*2] 6662(a) of $1,760.1 After the parties raised additional issues in the pleadings,
the issues for decision are: (1) whether respondent issued the notice of deficiency
before the period of limitations on assessment expired; (2) if so, whether
petitioners failed to report wage income for 2008; (3) whether petitioners failed to
report income from the sale or exchange of property for 2008; (4) whether
petitioners are liable for an accuracy-related penalty under section 6662(a) or,
alternatively, an addition to tax under section 6651(a)(1) for 2008; (5) whether
petitioners are liable for a penalty under section 6673(a)(1) for maintaining
frivolous or groundless positions in this Court; and (6) whether petitioners’
counsel should be required to pay respondent’s excessive litigation costs under
section 6673(a)(2) or be sanctioned under Rule 33(b).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of
facts is incorporated herein by this reference. When they petitioned this Court,
Steven T. Waltner resided in California and Sarah V. Waltner resided in Arizona.
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code), as amended and in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure. Some monetary
amounts have been rounded to the nearest dollar.
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[*3] I. Mr. Waltner’s 2008 Employment Income
During 2008 Mr. Waltner was an employee of TEKsystems, Inc.
(TEKsystems), Spherion Atlantic Enterprises, LLC (Spherion Atlantic), and Perot
Systems Corp. (Perot Systems). During that year TEKsystems, Spherion Atlantic,
and Perot Systems paid to Mr. Waltner $33,559, $210, and $41,957, respectively.
II. Mr. Waltner’s Citigroup Account
During 2008 Mr. Waltner had an investment account with Citigroup Global
Markets, Inc. (Citigroup). On May 16, 2008, Mr. Waltner sold shares in a mutual
fund that he owned through his Citigroup account for $5,905, and on May 21,
2008, he withdrew that amount from his Citigroup account.
III. Petitioners’ Purported Return
On August 11, 2009, petitioners filed a purported joint Form 1040, U.S.
Individual Income Tax Return, for 2008 (2008 return). On their 2008 return
petitioners reported IRA distributions of $22,661 and zero wages or other income.
They claimed a student loan interest deduction of $738, leaving them with
adjusted gross income of $21,923. After claiming itemized deductions of $26,624
and exemptions of $7,000, they reported taxable income and total tax of zero.
They also reported income tax withheld, total payments, and an overpayment of
$10,679.
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[*4] Petitioners attached to their 2008 return three Forms 4852, Substitute for
Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., corresponding to Forms W-2, Wage and Tax Statement, that Mr.
Waltner received from his employers in 2008. On the Form 4852 relating to his
employment with TEKsystems Mr. Waltner reported wages, tips, and other
compensation of zero, Federal income tax withheld of $2,069, Social Security tax
withheld of $2,081, and Medicare tax withheld of $487. On the Form 4852
relating to his employment with Spherion Atlantic Mr. Waltner reported wages,
tips, and other compensation of zero, State income tax withheld of $2, Social
Security tax withheld of $13, and Medicare tax withheld of $3. On the Form 4852
relating to his employment with Perot Systems Mr. Waltner reported wages, tips,
and other compensation of zero, Federal income tax withheld of $2,673, State
income tax withheld of $486, Social Security tax withheld of $2,601, and
Medicare tax withheld of $608. On all three Forms 4852 Mr. Waltner stated that
he determined these amounts from “[p]ersonal knowledge and records provided by
the company listed as ‘payer’” and that he had made no efforts to obtain correct
Forms W-2 from his employers.
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[*5] Petitioners also attached to their 2008 return a document purporting to be a
“correcting Form 1099-B” relating to the distributions Mr. Waltner received from
his Citigroup account in 2008. On the “correcting Form 1099-B” he reported that
he had received gross proceeds less commissions from Citigroup of zero and
stated that “[t]his correcting Form 1099-B is submitted to rebut a document known
to have been submitted by the party identified above as ‘Payer’ and ‘Broker’
which erroneously alleged a payment to the party identified above as ‘Steve T.
Waltner’ of ‘gross proceeds’ in connection with a ‘trade or business.’”
IV. Petitioners’ Refund Suit
Petitioners filed a suit in the U.S. Court of Federal Claims, seeking to
recover refunds of allegedly overpaid Federal income tax for 2003-08. See
Waltner v. United States, 98 Fed. Cl. 737, 739 (2011), aff’d, 679 F.3d 1329 (Fed.
Cir. 2012). The Court of Federal Claims dismissed petitioners’ refund suit with
respect to 2004-08 because it held that it lacked jurisdiction. See id. at 761. It
explained as follows:
[P]laintiffs in this case did not submit sufficient information for tax
years 2004, 2005, 2006, 2007, and 2008 for any of the plaintiffs’
returns to be considered valid tax returns. For each of the tax years,
the plaintiffs claim zero in tax liability, allege that no wages were
received by plaintiffs, and allege that the amount of dividends
received each year was zero. The plaintiffs did not provide the IRS
with sufficient information for the tax years at issue, such that the IRS
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[*6] could calculate their tax liability, and therefore, the returns filed
by the plaintiffs were neither proper returns or proper claims for
refund. As the plaintiffs failed to file properly completed, timely
returns for each of the tax years at issue, the court lacks jurisdiction
for the plaintiffs’ claims for refund tax years 2004, 2005, 2006, 2007,
and 2008.
Id.
The U.S. Court of Appeals for the Federal Circuit affirmed the dismissal of
petitioners’ refund suit. See Waltner, 679 F.3d at 1334. The Court of Appeals
explained as follows:
We agree * * * that a form that contains zeros in place of any
reportable income does not constitute a valid tax return; it is not
“properly executed” for purposes of § 301.6402-3(a)(5)[, Proced. &
Admin. Regs.,] and does not meet the specificity requirements
imposed by § 301.6402-2(b)(1)[, Proced. & Admin. Regs]. Here,
taxpayers submitted amended returns for 2004, 2005, and 2006 in
which they replaced the income they previously reported, which was
consistent with third-party information provided to the IRS, with
zeros and inserted a string of zeros in their 2007 and 2008 tax returns
that directly contradicted W-2s and other forms submitted by third
parties to the IRS. The taxpayers admittedly took no action to obtain
“corrected” third party forms that would corroborate their claims of
zero taxable income. Thus, the taxpayers’ amended returns for 2004,
2005, and 2006, as well as their returns for 2007 and 2008 do not
implicate an “honest and reasonable intent to supply information
required by the tax code” or rise to the level of specificity required by
regulation. None of the forms submitted by the taxpayers constitute
“properly executed” returns that can serve as claims for refund over
which the Court of Federal Claims has jurisdiction. We affirm the
dismissal of the taxpayers’ claims for tax refund for lack of
jurisdiction.
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[*7] Id. (fn. ref. omitted). On October 1, 2012, the Supreme Court of the United
States denied the petition for certiorari in petitioners’ refund suit. See Waltner v.
United States, 133 S. Ct. 319 (2012).
V. Notice of Deficiency and the Pleadings in This Case
On October 17, 2012, respondent mailed to petitioners the notice of
deficiency in this case. In the notice respondent determined that petitioners are
liable for tax on Mr. Waltner’s wage income for 2008 and for an accuracy-related
penalty under section 6662(a).
Petitioners timely petitioned this Court, asserting only frivolous or
irrelevant objections to the adjustments in the notice of deficiency. Although
respondent initially processed petitioners’ 2008 purported return and issued the
aforementioned notice of deficiency as if petitioners had filed a 2008 return, in his
answer respondent asserted that (1) petitioners are precluded by the doctrine of
collateral estoppel from arguing that their 2008 return was a valid return, and (2)
petitioners are therefore liable for an addition to tax under section 6651(a)(1) for
failing to timely file a required return for 2008.
In an amendment to petition, petitioners asserted that the statute of
limitations on assessment bars respondent from assessing or collecting the
amounts determined in the notice of deficiency. In an answer to amendment to
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[*8] petition respondent asserted that the statute of limitations on assessment does
not apply because petitioners are precluded from arguing that the 2008 return was
valid.
On the day of trial respondent filed an amendment to answer to amendment
to petition. In the amendment to answer to amendment to petition respondent
asserted that petitioners are liable for tax on the distributions from Mr. Waltner’s
Citigroup account.
VI. Pretrial and Trial Proceedings in This Case
On August 13, 2013, we set this case for trial on the Court’s January 13,
2014, trial session in Phoenix, Arizona. On November 14, 2013, petitioners’
counsel entered an appearance. On November 15, 2013, petitioners moved to
change the place of trial to Jacksonville, Florida. We denied petitioners’ motion.
On December 30, 2013, petitioners filed a pretrial memorandum. It was
signed by petitioners’ counsel and contained arguments that are meritless and
often frivolous.
We subsequently changed the trial date to March 3, 2014, and we held a
trial on that date. Neither petitioners’ counsel nor Mr. Waltner appeared at trial.
Instead, Mrs. Waltner appeared on behalf of petitioners. She introduced no
evidence to support the positions that petitioners took on their 2008 return, and
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[*9] she declined to make a closing argument after trial.2 She did, however, insist
that the positions petitioners took on their 2008 return were correct.
VII. Frivolous Submission Penalty Under Section 6702 (Docket No. 21953-12L)
In March 2010 respondent sent to petitioners a letter informing them that
their 2008 return was frivolous and offering them a chance to submit a corrected
return. Waltner v. Commissioner, T.C. Memo. 2014-35, at *4. Petitioners failed
to do so, and respondent assessed a $5,000 penalty under section 6702 and issued
to Mr. Waltner a notice of penalty charge, informing him of the assessed penalty.
See id. Respondent issued a notice of intent to levy to Mr. Waltner to collect the
section 6702 penalty. See id. Mr. Waltner requested a hearing, and respondent
subsequently issued a Notice of Determination Concerning Collection Action(s)
Under Section 6320 and/or 6330, sustaining the proposed levy. See id. at *4-*6.
Mr. Waltner petitioned this Court at docket No. 21953-12L. After lengthy
and contentious pretrial proceedings Mr. Waltner paid the section 6702 penalty
and sought to have the case dismissed as moot. See id. at *20-*21. By then,
2
Mrs. Waltner asked to submit posttrial briefs, but we determined, in our
discretion--in part on the basis of the arguments advanced in petitioners’ pretrial
memorandum--that any posttrial briefing by petitioners would not assist us in
deciding this case. See Rule 151(a).
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[*10] however, respondent had filed a motion to impose a penalty under section
6673(a)(1) on Mr. Waltner. See id. at *21-*22.
On February 27, 2014, less than a week before trial in this case, we granted
respondent’s motion and imposed a section 6673(a)(1) penalty of $2,500 on Mr.
Waltner. See id. at *62-*63. Additionally, we explained at great length why the
positions that petitioners took on their 2008 return--and throughout the litigation
in that case--are frivolous and without merit. See id. at *24-*62.
OPINION
I. Burden of Proof
Generally, the Commissioner’s determination of a deficiency is presumed
correct, and the taxpayer bears the burden of proving that the determination is
improper. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
However, if the Commissioner raises a new matter, seeks an increase in a
deficiency, or asserts an affirmative defense, the Commissioner has the burden of
proof as to the new matter, increased deficiency, or affirmative defense. Rule
142(a)(1).
Additionally, under section 7491(a)(1), if a taxpayer produces credible
evidence with respect to any factual issue relevant to ascertaining the taxpayer's
liability for any tax imposed by subtitle A or B of the Code and satisfies the
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[*11] requirements of section 7491(a)(2), the burden of proof on any such issue
shifts to the Commissioner.3 Because petitioners have failed to introduce any
credible evidence with respect to any factual issue in this case, the burden of proof
remains on them.
The U.S. Court of Appeals for the Ninth Circuit, to which an appeal in this
case appears to lie absent a stipulation to the contrary, see sec. 7482(b)(1)(A), (2),
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’g 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 shifts to the taxpayer. See
Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), aff’g T.C. Memo.
1997-97.
3
“‘Credible evidence is the quality of evidence which, after critical analysis,
the court would find sufficient upon which to base a decision on the issue if no
contrary evidence were submitted (without regard to the judicial presumption of
IRS correctness).’” Higbee v. Commissioner, 116 T.C. 438, 442 (2001) (quoting
H.R. Conf. Rept. No. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995).
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[*12] The parties stipulated that Mr. Waltner worked for TEKsystems, Spherion
Atlantic, and Perot Systems in 2008 and that he was paid by these employers
amounts totaling $75,726 in 2008. Respondent has therefore met his burden of
showing that petitioners were connected to an income-producing activity and
received unreported income. See Edwards v. Commissioner, 680 F.2d at
1270-1271; Weimerskirch v. Commissioner, 596 F.2d at 361-362. Accordingly,
the burden of proof on this issue remains on petitioners.
Respondent first asserted that petitioners are liable for tax in connection
with the sale or exchange of property in Mr. Waltner’s Citigroup account in an
amendment to answer to amendment to petition. Accordingly, the burden of proof
on this issue is on respondent. See Rule 142(a)(1).
The statute of limitations is an affirmative defense, and the party asserting it
must specifically plead it and carry the burden of showing its applicability. See
Rules 39, 142(a); Robinson v. Commissioner, 117 T.C. 308, 312 (2001); Adler v.
Commissioner, 85 T.C. 535, 540 (1985). Petitioners properly pleaded the statute
of limitations as a defense in an amendment to petition. Accordingly, the burden
of proof on this issue is on petitioners. However, respondent bears the burden of
proving that an exception to the general three-year period of limitations applies.
See Harlan v. Commissioner, 116 T.C. 31, 39 (2001) (citing Reis v.
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[*13] Commissioner, 142 F.2d 900 (6th Cir. 1944), aff’g 1 T.C. 9 (1942));
Bardwell v. Commissioner, 38 T.C. 84, 92 (1962), aff’d, 318 F.2d 786 (10th Cir.
1963). Additionally, to the extent that respondent relies on the doctrine of
collateral estoppel to preclude petitioners from arguing that their 2008 return was
valid, the burden of proof is on respondent. See Rules 39, 142(a).
II. Statute of Limitations
A. Generally
Generally, an assessment of tax must be made within three years after a
taxpayer files a return. See sec. 6501(a). However, if the taxpayer did not file a
return, an assessment of tax may be made at any time. See sec. 6501(c)(3). To be
considered as having filed a return, a taxpayer must have filed a valid return. See
Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff’d, 793 F.2d 139 (6th Cir.
1986). Under Beard, a valid return is one that (1) contains sufficient data to
calculate a tax liability, (2) purports to be a return, (3) represents an honest and
reasonable attempt to satisfy the requirements of the tax law, and (4) is executed
by the taxpayer under penalties of perjury. See id.; see also Appleton v.
Commissioner, 140 T.C. 273, 284-285 (2013). A taxpayer who files a document
that purports to be a Federal income tax return but which contains only zeros on
the relevant lines has not filed a valid return because it does not contain sufficient
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[*14] information for the Commissioner to calculate and assess a tax liability. See
Cabirac v. Commissioner, 120 T.C. 163, 169 (2003).
Additionally, the three-year limitations period is extended to six years “[i]f
the taxpayer omits from gross income an amount properly includible therein”,4 sec.
6501(e)(1)(A), such amount “is in excess of 25 percent of the amount of gross
income stated in the return”, id., and that amount is not “disclosed in the return, or
in a statement attached to the return, in a manner adequate to apprise the Secretary
of the nature and amount of such item”, sec. 6501(e)(1)(A)(ii).
In applying section 6501(e)(1)(A)(ii), we must consider whether an
adjustment to the taxpayer’s gross income might be apparent from the face of the
return to the “reasonable man”. Univ. Country Club, Inc. v. Commissioner, 64
T.C. 460, 471 (1975). Although section 6501(e)(1)(A)(ii) does not require that the
return disclose the exact amount of the omitted income, “[t]he disclosure must be
more substantial than providing a clue that would intrigue the likes of Sherlock
Holmes but need not recite every underlying fact.” Highwood Partners v.
Commissioner, 133 T.C. 1, 21 (2009) (citing Quick Trust v. Commissioner, 54
T.C. 1336, 1347 (1970), aff’d, 444 F.2d 90 (8th Cir. 1971)).
4
For purposes of sec. 6501(e)(1)(A), gross income includes those items
listed in sec. 61(a). See Daniels v. Commissioner, T.C. Memo. 2012-355, at *6-*7
(citing Carr v. Commissioner, T.C. Memo. 1978-408).
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[*15] B. Collateral Estoppel Generally
Under the doctrine of collateral estoppel, once an issue of fact or law is
“actually and necessarily determined by a court of competent jurisdiction, that
determination is conclusive in subsequent suits based on a different cause of
action involving a party to the prior litigation.” Montana v. United States, 440
U.S. 147, 153 (1979). Collateral estoppel is a judicially created equitable
principle the purposes of which are to protect the parties from unnecessary and
redundant litigation, to conserve judicial resources, and to foster certainty in and
reliance on judicial action. Id. at 153-154.
Before we may apply collateral estoppel the following five conditions must
be satisfied: (1) the issue in the second suit must be identical in all respects with
the issue decided in the first suit; (2) the issue in the first suit must have been the
subject of a final judgment entered by a court of competent jurisdiction; (3) the
person against whom collateral estoppel is asserted must have been a party or in
privity with a party in the first suit; (4) the parties must actually have litigated the
issue in the first suit and resolution of the issue must have been essential to the
prior decision; and (5) the controlling facts and applicable legal principles must
remain unchanged from those in the first suit. See Bussell v. Commissioner, 130
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[*16] T.C. 222, 239-240 (2008); Peck v. Commissioner, 90 T.C. 162, 166-167
(1988), aff’d, 904 F.2d 525 (9th Cir. 1990).
C. Analysis
Respondent contends that the three-year statute of limitations on assessment
does not apply here because (1) the doctrine of collateral estoppel bars petitioners
from arguing that their 2008 return was valid; (2) their 2008 return was in any
event invalid under Beard v. Commissioner, 82 T.C. at 777; and (3) petitioners
omitted from gross income an amount that is greater than 25% of the amount
shown on their 2008 return and they failed to properly disclose the omission.
We agree with respondent’s primary contention that the doctrine of
collateral estoppel bars petitioners from arguing that their 2008 return was valid.
In Waltner, 98 Fed. Cl. at 761, the Court of Federal Claims dismissed petitioners’
refund suit because a valid return is a prerequisite for maintaining a refund suit in
that court and the court concluded that petitioners’ 2008 return was invalid. The
Court of Appeals affirmed the dismissal of petitioners’ refund suit on that basis.
See Waltner, 679 F.3d at 1334.
All five conditions for applying collateral estoppel are met here. First, the
issue of whether petitioners’ 2008 return was valid is identical to the issue decided
against petitioners by the Court of Federal Claims. Second, although the dismissal
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[*17] in that case was not a judgment on the merits, the issue of whether the 2008
return was valid was necessarily decided by that court when it dismissed the case
for lack of jurisdiction, and that decision is entitled to preclusive effect. See
Matosantos Commercial Corp. v. Applebee’s Int’l, Inc., 245 F.3d 1203, 1209
(10th Cir. 2001) (“‘Although a dismissal for lack of jurisdiction does not bar a
second action as a matter of claim preclusion, it does preclude relitigation of the
issues determined in ruling on the jurisdiction question.’” (quoting 18 Charles
Alan Wright et al., Federal Practice and Procedure, sec. 4436 (1981))); Okoro v.
Bohman, 164 F.3d 1059, 1063 (7th Cir. 1999) (“It may seem paradoxical to
suggest that a court can render a preclusive judgment when dismissing a suit on
the ground that the suit does not engage the jurisdiction of the court. But the
paradox is superficial. A court has jurisdiction to determine its own jurisdiction.”
(citing U.S. Catholic Conference v. Abortion Rights Mobilization, Inc., 487 U.S.
72, 79 (1988), and United States v. Shipp, 203 U.S. 563, 573 (1906))). Third, the
parties in this case are identical to the parties in that case. Fourth, the issue of
whether the 2008 return was valid was fully litigated in that case. Fifth, the
controlling facts and applicable legal principles remain unchanged from those in
that case.
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[*18] Petitioners are therefore precluded by the doctrine of collateral estoppel
from arguing that their 2008 return was valid.5 Accordingly, the statute of
limitations on assessment does not bar respondent from assessing the tax at issue
because petitioners failed to file a valid return for that year.6 See sec. 6501(c)(3);
Appleton v. Commissioner, 140 T.C. at 284-285; Beard v. Commissioner, 82 T.C.
at 777.
III. Unreported Wage Income
Gross income includes “all income from whatever source derived”. Sec.
61(a). This includes compensation for services. See sec. 61(a)(1). Petitioners
bear the burden of proof on this issue. See supra part I. Petitioners failed to
introduce any evidence to support the Forms 4852 that they attached to their 2008
return. Accordingly, we sustain respondent’s determination that petitioners are
liable for tax on Mr. Waltner’s unreported wages.
5
Alternatively, even if petitioners were not precluded from arguing that their
2008 return was valid, we would still conclude that petitioners’ 2008 return was
invalid for the same reasons as those provided by the Court of Federal Claims and
the Court of Appeals in petitioners’ refund suit. See Beard v. Commissioner, 82
T.C. 766, 777 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986); see also Oman v.
Commissioner, T.C. Memo. 2010-276, 100 T.C.M. (CCH) 548, 552-555 (2010)
(applying the Beard test in a case appealable to the U.S. Court of Appeals for the
Ninth Circuit).
6
Accordingly, we need not address respondent’s alternative contention that
the six-year statute of limitations under sec. 6501(e)(1)(A) applies.
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[*19] IV. Distributions From Mr. Waltner’s Citigroup Account
Gross income also includes gains derived from dealings in property. See
sec. 61(a)(3). Gain from the sale or exchange of property must be recognized,
unless the Code provides otherwise. Sec. 1001(c). Section 1001(a) defines gain
from the sale or exchange of property as the excess of the amount realized on the
sale of the property over the adjusted basis of the property sold or exchanged. See
also sec. 1.61-6(a), Income Tax Regs. Respondent bears the burden of proof on
this issue. See supra part I. Respondent failed to introduce any evidence with
respect to Mr. Waltner’s basis in the mutual fund shares that he sold through his
Citigroup account. Accordingly, respondent has failed to prove that petitioners
are liable for tax on the amount realized from that sale.
V. Addition to Tax and Penalties
A. Burden of Proof
The Commissioner bears the burden of production with respect to a
taxpayer’s liability for additions to tax and must produce sufficient evidence
indicating that it is appropriate to impose the additions to tax. See sec. 7491(c);
Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner
carries the burden of production, the taxpayer must come forward with persuasive
evidence that the Commissioner’s determination is incorrect or that the taxpayer
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[*20] had reasonable cause or substantial authority for the position. See Higbee v.
Commissioner, 116 T.C. at 446-447. However, if the Commissioner first asserts
penalties in the answer, the Commissioner has the burden of proof as to the new
matter. See Rule 142(a)(1); Derby v. Commissioner, T.C. Memo. 2008-45, 95
T.C.M. (CCH) 1177, 1194 (2008).
Respondent first asserted an addition to tax under section 6651(a)(1) in the
answer. Accordingly, respondent has the burden of proving that petitioners are
liable for the addition to tax under section 6651(a)(1). See Rule 142(a)(1); Derby
v. Commissioner, 95 T.C.M. (CCH) at 1194.
B. Addition to Tax Under Section 6651(a)(1)
Section 6651(a)(1) authorizes the imposition of an addition to tax for failure
to timely file a return, unless it is shown that such failure is due to reasonable
cause and not due to willful neglect. See United States v. Boyle, 469 U.S. 241,
245 (1985); United States v. Nordbrock, 38 F.3d 440, 444 (9th Cir. 1994). A
failure to timely file a Federal income tax return is due to reasonable cause if the
taxpayer exercised ordinary business care and prudence but nevertheless was
unable to file the return within the prescribed time. See sec. 301.6651-1(c)(1),
Proced. & Admin. Regs. Circumstances that are considered to constitute
reasonable cause for failure to timely file a return are typically those outside of the
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[*21] taxpayer’s control, including, for example: (1) unavoidable postal delays;
(2) the timely filing of a return with the wrong office; (3) the death or serious
illness of the taxpayer or a member of the taxpayer’s immediate family; (4) a
taxpayer’s unavoidable absence from the United States; (5) destruction by casualty
of a taxpayer’s records or place of business; and (6) reliance on the erroneous
advice of an IRS officer or employee. See McMahan v. Commissioner, 114 F.3d
366, 369 (2d Cir. 1997), aff’g T.C. Memo. 1995-547. Respondent bears the
burden of proof on this issue. See supra part V.A.
We have held that respondent has established through application of
collateral estoppel that petitioners’ 2008 return was invalid. See supra part II.C.
The record shows that petitioners’ failure to file a valid 2008 return was not due to
reasonable cause and was due to willful neglect. Accordingly, petitioners are
liable for an addition to tax under section 6651(a)(1) for 2008.
C. Accuracy-Related Penalty Under Section 6662(a)
Section 6662(a) and (b)(1) and (2) authorizes the Commissioner to impose a
20% penalty on an underpayment of tax that is attributable to, among other things,
(1) negligence or disregard of rules or regulations or (2) any substantial
understatement of income tax. The penalty under section 6662(a) applies only
where a valid return has been filed. See sec. 6664(b). Because petitioners’ 2008
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[*22] return was invalid, see supra part II.C, petitioners are not liable for an
accuracy-related penalty under section 6662(a).
D. Penalty Under Section 6673(a)(1)
Under section 6673(a)(1) we may require a taxpayer to pay a penalty not in
excess of $25,000 if it appears that: (1) the taxpayer instituted or maintained
proceedings in this Court primarily for delay; (2) the taxpayer asserts frivolous or
groundless positions in this Court; or (3) the taxpayer unreasonably failed to
pursue available administrative remedies. A taxpayer’s position is frivolous or
groundless if 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)).
Despite our efforts in Waltner v. Commissioner, T.C. Memo. 2014-35, to
explain to petitioners that the positions that they took on their 2008 return and
before this Court are frivolous, they refused to withdraw their frivolous positions
in this case. At trial respondent’s counsel suggested that a penalty under section
6673(a)(1) of $5,000 with respect to each petitioner was necessary to prevent
petitioners from again asserting frivolous positions before this Court. We agree
with respondent’s suggestion that a substantial penalty is warranted, but we
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[*23] believe that both petitioners should be liable for the full amount of the
penalty imposed. Accordingly, we impose on petitioners a penalty under section
6673(a)(1) of $10,000.
E. Costs Under Section 6673(a)(2) and Sanctions Under Rule 33(b)
Under section 6673(a)(2) we may impose on any person admitted to practice
before this Court who unreasonably and vexatiously multiplies the proceedings in
any case the excessive costs reasonably incurred on account of such conduct. This
Court may sua sponte impose such costs. See Best v. Commissioner, T.C. Memo.
2014-72, at *22-*23 (citing Edwards v. Commissioner, T.C. Memo. 2002-169,
aff’d, 119 Fed. Appx. 293 (D.C. Cir. 2005), and Leach v. Commissioner, T.C.
Memo. 1993-215). Rule 33(b) sets standards in connection with counsel’s
signature on a pleading and provides that upon our own motion we may sanction
counsel for failure to meet those standards. Although we have found petitioners
deserving of a section 6673(a)(1) penalty, we believe that petitioners’ counsel may
also be deserving of a sanction for unreasonably and vexatiously prolonging these
proceedings. We will therefore order petitioners’ counsel to show cause why we
should not impose on him excessive costs pursuant to section 6673(a)(2) or
sanction him pursuant to Rule 33(b). We will also order respondent to express his
position on these issues and to provide us with his computations of the excess
- 24 -
[*24] costs, expenses, and attorney’s fees reasonably incurred on account of
petitioners’ counsel’s conduct in this case.7
We have considered the parties’ remaining arguments, and to the extent not
discussed above, conclude those arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
Appropriate orders will be issued,
and decision will be entered under Rule
155.
7
In computing the excessive costs respondent should not include costs
incurred before petitioners’ counsel entered an appearance in this case or costs
attributable to the issues of (1) whether the statute of limitations on assessment
and collection applies in this case; (2) whether petitioners had unreported income
from the sale of assets in Mr. Waltner’s Citigroup account; (3) whether petitioners
are liable for an accuracy-related penalty under sec. 6662(a); and (4) whether
petitioners are liable for an addition to tax under sec. 6651(a)(1).