T.C. Memo. 1997-26
UNITED STATES TAX COURT
STEPHEN P. AND SHARON L. SHERWOOD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16795-95. Filed January 15, 1997.
Stephen P. Sherwood, pro se.
Franklin R. Hise, for respondent.
MEMORANDUM OPINION
DINAN, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182.1
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable years in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
- 2 -
Respondent determined deficiencies in petitioners' Federal
income taxes, additions to tax, and penalties for the years 1991,
1992, and 1993 as follows:
Petitioner husband:
Additions to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6651(f) Sec. 6663(a)
1991 $4,718 $100 -- $3,538
1992 5,419 -- $430 --
1993 4,707 -- 124 --
Petitioner wife:
Additions to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6651(f) Sec. 6663(a)
1991 $4,713 $100 -- $3,535
1992 5,394 -- $411 --
1993 4,707 -- 124 --
The issues for decision are: (1) Whether petitioners failed
to report income in amounts determined by respondent for the
years 1991, 1992, and 1993; (2) whether petitioners are liable
for the section 6651(a)(1) addition to tax for 1991; (3) whether
petitioners are liable for the section 6651(f) additions to tax
for 1992 and 1993 for failure to file due to willful intent to
evade income taxes; (4) whether, in the event it is decided that
the failure to timely file was not due to willful intent to evade
income taxes, petitioners are liable for the delinquency penalty
under section 6651(a)(1) for 1992 and 1993; (5) whether
petitioners are liable for the section 6663(a) fraud penalty for
1991; and (6) whether, in the event it is decided the
- 3 -
underpayment for 1991 was not due to fraud, petitioners are
liable for the accuracy-related penalty under section 6662.
Some of the facts have been stipulated and are so found.
The stipulations of fact and attached exhibits are incorporated
herein by this reference. Petitioners resided in Round Rock,
Texas, on the date the petition was filed in this case.
Since the time they were married in 1962 and until the years
here in issue, petitioners had filed joint Federal income tax
returns and paid tax on their community income. As a result of
conversations with friends and their own limited research in
constitutional and tax law, petitioners concluded that they were
not citizens of the United States and were not therefore subject
to the tax laws applicable to United States citizens. Relying
upon this conclusion, petitioners each filed Forms 1040-NR as
non-resident aliens for the tax years at issue, since Form 1040-
NR requires the filing of separate returns for married couples.
Separate deficiency notices were issued by respondent to each
petitioner.
The first issue for decision is whether petitioners failed
to report income in an amount determined by respondent.
The determinations of respondent in the statutory notice of
deficiency are presumed to be correct, and petitioners bear the
burden of proving that respondent erred in her determinations.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
- 4 -
Section 61(a) includes as gross income all income from
whatever source derived including, but not limited to,
compensation for services and interest. Sec. 61(a)(1), (4). At
trial, petitioner husband acknowledged the receipt of all items
of unreported income determined by respondent for the tax years
at issue. In doing so, it became apparent that petitioners'
erroneous interpretation of the Internal Revenue Code and claim
of foreign citizenship were the only arguments which they were
interested in presenting.
We will not address petitioners' tax-protester ramblings
which were presented at trial. As was stated by the Court of
Appeals for the Fifth Circuit, "We perceive no need to refute
these arguments with somber reasoning and copious citation of
precedent; to do so might suggest that these arguments have some
colorable merit." Crain v. Commissioner, 737 F.2d 1417, 1417
(5th Cir. 1984).
Since petitioners have presented no meritorious arguments
disputing respondent's proposed deficiencies, we sustain
respondent's determinations of deficiencies in petitioners' 1991,
1992, and 1993 Federal income taxes.
The second issue for decision is whether petitioners are
liable for the section 6651(a)(1) addition to tax for 1991.
Section 6651(a)(1) provides for an addition to tax of 5
percent of the tax required to be shown on the return for each
month or fraction thereof for which there is a failure to file a
- 5 -
return, up to 25 percent in the aggregate. The addition to tax
is imposed on the net amount due, calculated by reducing the
amount required to be shown as tax on the return by any part of
the tax which is paid on or before the date prescribed for
payment of the tax. Sec. 6651(b)(1). The flush language of
section 6651(a) provides that in the case of a failure to file
within 60 days of the date prescribed for the filing of such
return, unless it is shown that such failure is due to reasonable
cause and not due to willful neglect, the addition to tax under
section 6651(a)(1) shall not be less than the lesser of $100 or
100 percent of the amount required to be shown as tax on such
return. See Patronik-Holder v. Commissioner, 100 T.C. 374, 379-
381 (1993).
Petitioners bear the burden of proving that respondent's
determinations that they were negligent are incorrect. Rule
142(a); Cluck v. Commissioner, 105 T.C. 324, 339 (1995).
Petitioners' 1991 Federal income tax returns were due on April
15, 1992. Sec. 6072(a); sec. 1.6072-1(a), Income Tax Regs.
Respondent contends that petitioners' submission of Forms 1040-NR
constituted a filing of their 1991 Federal income tax returns on
July 18, 1992. Petitioners have not offered any evidence to show
that their delay in filing their 1991 return was due to
reasonable cause rather than their willful neglect. Accordingly,
respondent's determinations that petitioners are each liable for
a $100 addition to tax under section 6651(a)(1) are sustained.
- 6 -
The third and fourth issues for decision are whether
petitioners are liable for the section 6651(f) addition to tax
for 1992 and 1993. Respondent determined in the alternative that
the section 6651(a)(1) addition to tax would apply in the event
it was decided that the failure to file was not fraudulent. As
noted infra, respondent bears the burden of proving fraud issues
by clear and convincing evidence. Section 7454(a); Rule 142(b).
Section 6651(f) provides that the section 6651(a)(1)
addition to tax shall be increased to 15 percent of the tax
required to be shown on the return for each month or fraction
thereof for which there is a failure to file a return, up to 75
percent in the aggregate, where such failure to file is
fraudulent.
It would be repetitive to discuss the reasons why we are
unconvinced that petitioners acted fraudulently in failing to
file their 1992 and 1993 returns as the reasons enumerated infra
in regard to the 1991 fraud penalty are similarly relevant for
these taxable years. However, we must still address respondent's
alternative determination that petitioners are liable for the
section 6651(a)(1) addition to tax for 1992 and 1993.
Irrespective of the fact that respondent has taken an
inconsistent position with regard to petitioners' Forms 1040-NR,2
2
For 1991, respondent accepted petitioners' Forms 1040-
NR as a filing of a return. However, for 1992 and 1993,
respondent determined that these Forms 1040-NR did not constitute
a filing.
- 7 -
respondent's determinations that petitioners failed to file
sufficient tax returns are presumed to be correct and petitioners
bear the burden of proving her determinations erroneous. Rule
142(a); Cluck v. Commissioner, supra at 339.
Section 6011(a) requires all taxpayers to make a return or
statement according to the forms and regulations prescribed by
the Secretary. A document constitutes a valid return if it
contains sufficient data from which respondent can compute and
assess a tax liability. McCaskill v. Commissioner, 77 T.C. 689,
696-697 (1981).
Respondent's position is that petitioners' submitted Forms
1040-NR for 1992 and 1993 do not constitute valid income tax
returns. We agree with respondent. Petitioners have not proven
that the Forms 1040-NR sufficiently listed items of gross income,
deductions, or calculations of taxes by which their proper tax
liability could be ascertained. The attachment of Forms W-2 does
not substitute for information required to be shown on the
returns. See Beard v. Commissioner, 82 T.C. 766, 779 (1984).
As was the case with their failure to file a timely return
for 1991, petitioners have not shown that such failure was due to
reasonable cause. Therefore, respondent's determinations that
petitioners are liable for the section 6651(a)(1) addition to tax
for 1992 and 1993 are sustained.
The fifth issue for decision is whether petitioners are
liable for the section 6663(a) fraud penalty for 1991. In her
- 8 -
deficiency notice, respondent determined that the section 6662(a)
accuracy-related penalty would apply in the event it was decided
that the underpayment was not due to fraud. A prerequisite to
the applicability of sections 6662 and 6663 is that a return of
tax, other than one prepared by respondent pursuant to section
6020(b), is filed. Sec. 6664(b); Clayton v. Commissioner, 102
T.C. 632, 652-653 (1994).
Section 6663(b) provides that if respondent establishes that
any part of any underpayment of tax required to be shown on a
return is due to fraud, the entire underpayment is treated as
attributable to fraud and subjected to a 75-percent penalty
unless the taxpayer establishes that some part of the
underpayment is not attributable to fraud. Respondent bears the
burden to prove by clear and convincing evidence an underpayment
for each year and that some part of the underpayment for each
year was due to fraud. Section 7454(a); Rule 142(b); Clayton v.
Commissioner, supra at 646.
Fraud is established by proving that a taxpayer intended to
evade tax believed to be owing by conduct intended to conceal,
mislead, or otherwise prevent the collection of such tax.
Clayton v. Commissioner, supra at 647. Direct evidence of the
requisite fraudulent intent is seldom available, but fraud may be
proved by examining circumstantial evidence indicative of the
taxpayer's motives. Recklitis v. Commissioner, 91 T.C. 874, 910
(1988). Over the years, courts have developed various factors,
- 9 -
or "badges", which tend to establish the existence of fraud. See
Clayton v. Commissioner, supra at 647.
Respondent argues that petitioners were fully aware of their
obligation to pay Federal income tax on their income for the
years at issue since they paid tax on the same type of income in
previous years. Respondent contends that petitioners'
underpayment for 1991 is attributable to a fraudulent procurement
of a refund of withheld taxes. Respondent further asserts that
petitioners' omission of Social Security numbers on the submitted
Forms 1040-NR was intended to mislead respondent.
We find that the badges of fraud are not sufficiently
present in the facts of this case. First, petitioners filed what
they believed, albeit erroneously, to be the proper forms. We
note that respondent accepted these forms as a valid filing and
continues to rely upon such acceptance as a basis for the section
6651(a) failure to file addition to tax for 1991. Second,
petitioner husband did not attempt to stop the withholding of
taxes from his paychecks. Third, petitioner husband's omission
of his Social Security number from his Form 1040-NR does not
amount to concealment since it was listed on his submitted Form
W-2. If his intent was to conceal this information, he would not
have disclosed it to respondent in this way. We recognize that,
absent respondent's acceptance of this Form 1040-NR, the mere
attachment of a Form W-2 would not remedy a form which was
otherwise invalid for lack of sufficient information by which tax
- 10 -
liability could be calculated. Beard v. Commissioner, supra at
779. However, noncompliance does not amount to concealment on
these facts. Fourth, petitioners maintained continuous
correspondence with respondent in regard to their case. The
facts do not clearly show that petitioners intended to mislead
respondent or conceal their tax liability. Rather, the facts
show that they erroneously believed that they did not owe any
tax. As this Court has previously stated, these types of
arguments "may have been meritless, frivolous, wrongheaded, and
even stupid, but we cannot hold that they amounted to fraud
without something more. Were we to do so, every [tax] protester
case would be automatically converted into a fraud case."
Kotmair v. Commissioner, 86 T.C. 1253, 1262 (1986). We will,
however, address below the consequences of pursuing such
erroneous beliefs before this Court.
The sixth issue for decision is whether petitioners are
liable in the alternative for the section 6662(a) accuracy-
related penalty for 1991. Respondent's determinations are
presumed to be correct, and petitioners bear the burden of
proving that the penalties do not apply. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933); Bixby v. Commissioner, 58
T.C. 757, 791-792 (1972).
Section 6662(a) imposes a 20-percent penalty on the portion
of the underpayment attributable to any one of various factors,
one of which is negligence or disregard of rules or regulations.
- 11 -
"Negligence" includes a failure to make a reasonable attempt to
comply with the provisions of the Internal Revenue laws or to
exercise ordinary and reasonable care in the preparation of a tax
return. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.
"Disregard" includes any careless, reckless, or intentional
disregard of rules or regulations. Sec. 6662(c); sec.
1.6662-3(b)(2), Income Tax Regs.
We find that petitioners have failed to prove that they were
not negligent in their underpayment of tax. Although petitioners
blame respondent for their lack of knowledge, the rules and
regulations concerning their proper tax liability are readily
available to the public through various sources. Therefore, we
hold that petitioners are liable for the section 6662(a)
accuracy-related penalty for 1991.
We will next determine whether this Court should impose
sanctions upon petitioners pursuant to section 6673.
Whenever it appears to this Court that the taxpayer's
position in a proceeding before it is frivolous or groundless the
Court, in its discretion, may require the taxpayer to pay to the
United States a penalty not in excess of $25,000. Sec.
6673(a)(1)(B). A proceeding in the Tax Court is frivolous "if it
is contrary to established law and unsupported by a reasoned,
colorable argument for change in the law." Coleman v.
Commissioner, 791 F.2d 68, 71 (7th Cir. 1986). Sanctions are
properly imposed when the taxpayer knew or should have known that
- 12 -
his claim or argument was frivolous. Hansen v. Commissioner, 820
F.2d 1464, 1470 (9th Cir. 1987).
In response to the Court's questions the following evidence
was introduced at trial:
(The Court) Q Are you aware of the provisions of
section 6673 of the Internal Revenue
Code, the damages provision?
(Petitioner) A I am.
(The Court) Q And are you aware of the many cases
that have addressed themselves to
various and sundry tax protestor
arguments?
(Petitioner) A Your Honor, [respondent's] Counsel has
stated that I am a tax protestor, which
is a conclusion that has yet to be
proved.
After painstakingly listening to petitioners' groundless
arguments at trial and reading through the same in their briefs,
we conclude that petitioners are indeed tax protesters.
Petitioners' arguments include tax protester rhetoric and
legalistic gibberish, which they should have known are frivolous
under established law. Petitioners' frivolous "position" (within
the meaning of section 6673(a)(1)(B)) is that wages are immune
from tax.
In view of the foregoing, we will sua sponte exercise our
discretion under section 6673(a)(1) and require each petitioner
to pay a penalty to the United States in the amount of $2,500.
To reflect the foregoing,
Decision will be entered
under Rule 155.