Wadsworth v. Commissioner

T.C. Memo. 1997-238

UNITED STATES TAX COURT

JOHN WADSWORTH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3259-96. Filed May 22, 1997.

David M. Kirsch, for petitioner.

Usha Ravi, 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. Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue. All

Rule references are to the Tax Court Rules of Practice and
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Procedure. Respondent determined deficiencies in petitioner's

Federal income taxes and additions to tax as follows:

Additions to Tax
Year Deficiency Sec. 6651(a) Sec. 6654(a)

1989 $7,326 $1,832 $496
1990 6,326 1,582 416
1991 5,097 1,274 295
1992 4,501 1,125 193

After concessions by respondent,1 the issues for decision

are: (1) Whether petitioner had unreported income for the years

1989, 1990, 1991, and 1992; (2) whether petitioner is liable for

self-employment taxes for the years in issue; (3) whether

petitioner is liable for additions to tax pursuant to section

6651(a)(1) for the years in issue; and (4) whether petitioner is

liable for additions to tax pursuant to section 6654(a) for the

years in issue.

A few of the facts have been stipulated and are so found.

Petitioner resided in Oakview, California, when he filed his

petition.

By letter dated April 1, 1994, Revenue Agent John F. Murphy

informed petitioner that he had been identified as a nonfiling

taxpayer and a participant in an organized movement named the

Pilot Connection. The last record respondent had of a filed

return from petitioner was for the year 1988. Petitioner was

1
Respondent concedes that petitioner's income for the
years in issue, as determined by the Bureau of Labor Statistics
data, should be reduced by the amounts attributed to petitioner
as payments made for Social Security and Federal income taxes.
 - 3 -

informed that his 1989 through 1992 tax years were under

examination and respondent scheduled a conference with petitioner

for April 16, 1994. Petitioner did not attend the April 16,

1994, proposed conference. By letter dated April 18, 1994, John

B. Kotmair, Jr., petitioner's then representative,2 informed

respondent's auditing agent that petitioner had given him a power

of attorney to represent him. Mr. Kotmair then set forth the

conditions under which he and petitioner would meet with the

auditing agent. Those conditions were, inter alia, that the

auditing agent was to provide Mr. Kotmair:

1. A copy of the guidelines for the meeting;

2. All the specific information and/or documents that
are sought;

3. The home address, telephone number, proper name,
job title and employee number of John F. Murphy; the
District Director; Group Manager; and any other
Internal Revenue Service employees connected with this
instant action. The authority for this inquiry is
found within: U.S. v. Roundtree, 420 F.2d 845; and,

4. Copy of the notification or order, made pursuant to
Delegation Order 24 requiring Mr. Wadsworth to keep
books and records for submission, upon demand, to the
Internal Revenue Service;

5. Copy of the District Office Delegation Order
authorizing Mr. Wadsworth's records to be summoned and
testimony to be required;

6. The bond number of all agents who will have access
to the information they are demanding.

2
John B. Kotmair was convicted of willfully failing to
file income tax returns for 1975 and 1976 in violation of section
7203. See Kotmair v. Commissioner, 86 T.C. 1253 (1986).
 - 4 -

Upon the receipt of the above information and
documents, and a meeting is scheduled, please be
advised that we will tape record the meeting and be
bringing two witnesses to it.

After receiving Mr. Kotmair's letter dated April 18, 1994,

respondent did not further attempt to contact petitioner before

issuing her statutory notice of deficiency.

In her notice of deficiency, respondent determined

petitioner's income for the years in issue based upon data

derived from the Bureau of Labor Statistics (BLS) and

respondent's Information Returns Master File (IRMF).

By notice dated July 31, 1996, this case was set for trial

at the trial session of the Court at San Francisco, California,

beginning on October 21, 1996.

On October 8, 1996, respondent served upon petitioner a

subpoena duces tecum, requiring petitioner to produce certain

documents on October 21, 1996, at the call of the calendar of the

trial session of the Court in San Francisco. The subpoena duces

tecum stated:

The Petition filed in John Wadsworth v.
Commissioner, Docket No. 3259-96, states that you, John
Wadsworth, did not have any taxable income during the
years 1989 through 1992.

1. Please bring any and all documents that evidence
receipt of nontaxable income (such as amounts derived
from loans, gifts, bequests, inheritances, etc.) by you
during the years 1989 through 1992.

2. Please bring any and all documents that show the
identity of the person who owns the property located at
2600 Valley Meadow Court, Oakview, California 93022 at
which you reside (if you are leasing the property,
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please bring copies of any rental agreement between you
and the lessor).

At the call of the calendar in San Francisco, California, on

October 21, 1996, at approximately 11:00 a.m., petitioner moved

to quash respondent's subpoena duces tecum on the ground that

"compliance therewith would interfere with his constitutional

rights, specifically his rights under the Fifth Amendment."

The Court informed the parties that the motion to quash would be

reviewed during the noon recess and that the Court would rule on

the motion late in the afternoon.

The case was recalled from the calendar at 4:20 p.m. on

October 21, 1996, at which time the Court informed the parties

that petitioner's motion to quash subpoena was denied. The Court

further informed the parties that the Court would read into the

record on the following day, October 22, 1996, at 3:00 p.m., the

reasons for denying the motion to quash, and the Court did so.

The Court ruled:

The Fifth Amendment privilege against self-
incrimination protects an individual from being
compelled to disclose information that could reasonably
be expected to furnish evidence needed to prosecute the
claimant for a crime; Kastiger v. United States, 406
U.S. 441 at page 445, 1972.

It therefore, applies only when the possibility of
self-incrimination is a real danger, not a remote and
speculative possibility; Zicarelli v. The New Jersey
State Commission of Investigation, 406 U.S. 472 at page
478, 1972.

The claimant must be faced with substantial
hazards of incrimination from the information sought,
and:
 - 6 -

"The witness is not exonerated from
answering merely because he declares that in
doing so he would incriminate himself. His
say - so does not of itself establish the
hazard of incrimination. It is for the Court
to say whether this silence is justified."

Hoffman v. Commissioner, 341 U.S. 479 at page 486,
1951. In determining whether there was a hazard of
incrimination the Court first determined whether the
information is incriminating in nature. See United
States v. Rylander, 460 U.S. 752, 1983.

We are satisfied that the information sought by
the subpoena is not incriminating in nature, since it
would consist only of a report of nontaxable income and
the name of the owner of petitioner's residence. There
was no evidence in the record to indicate that
respondent is currently conducting a criminal
investigation of petitioner or has any intention of
doing so in the future.

Petitioner's claim of privilege is based on sheer
speculation as to what might happen if he produced the
subpoenaed information. As it was stated in
Steinbrecher v. Commissioner, 712 F.2d 195, Court of
Appeals 5, 1983, petitioner's asserted fear of
incrimination is far more attenuated than the fear of
prosecution dismissed by the Supreme Court in
Zicarelli, supra.

Upon full consideration of the record before us,
we deny petitioner's motion to quash subpoena duces
tecum, which was filed October 21st, 1996.

The case was set for trial for Tuesday, October 29, 1996, at

2:00 p.m.

When this case was called for trial at 2:00 p.m. on October

29, 1996, counsel for respondent informed the Court that

petitioner had not responded to respondent's subpoena duces

tecum. Respondent, therefore, did not have in hand the documents

requested by her in her subpoena duces tecum. Respondent then
 - 7 -

orally moved to dismiss the case for failure to properly

prosecute pursuant to Rule 123(b). The Court denied the motion.

Counsel for petitioner, David M. Kirsch, explained to the

Court why petitioner, upon Mr. Kirsch's advice, refused to

respond to respondent's subpoena duces tecum despite the Court's

denial of petitioner's motion to quash. Mr. Kirsch stated:

I am profoundly uncertain that Mr. Wadsworth can
say anything at all, even for example, I don't have any
documents without waiving his privilege. I just don't
know what the state of the law is there."

The determinations of the Commissioner in her statutory

notice of deficiency are presumed to be correct, and petitioner

has the burden of proving otherwise. Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933). A taxpayer is required to

maintain records that are sufficient to enable the Commissioner

to determine his correct income tax liability. Sec. 6001;

Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965); sec.

1.6001-1(a), Income Tax Regs.

At trial, petitioner refused to proceed to carry his burden

of proof, relying on his claimed rights under the Fifth

Amendment.

Some courts have recognized a limited exception to this

general rule where the Commissioner alleges that the taxpayer has

unreported income. In some cases, the deficiency determination

must be supported by some evidentiary foundation linking the

taxpayer to the alleged illegal income producing activity. See
 - 8 -

Petzoldt v. Commissioner, 92 T.C. 661, 688 (1989); Fitzpatrick v.

Commissioner, T.C. Memo. 1997-158. There is not in this record a

scintilla of evidence that respondent ever considered a criminal

investigation of petitioner for the years in issue. As we have

previously stated in Petzoldt v. Commissioner, supra at 684-685:

A valid assertion of the privilege against self-
incrimination, however, is not a "substitute for
evidence that would assist in meeting a burden of
production," for to adopt such a view "would convert
the privilege from the shield against compulsory self-
incrimination which it was intended to be into a sword
whereby a claimant asserting the privilege would be
freed from adducing proof in support of a burden which
would otherwise have been his." United States v.
Rylander, 460 U.S. 752, 758 (1983); see also
Steinbrecher v. Commissioner, 712 F.2d 195, 198 (5th
Cir. 1983), affg. a Memorandum Opinion of this Court.
Cf. United States v. Green, 757 F.2d 116, 123 (7th Cir.
1985). This is true with respect to a taxpayer's
meeting his burden of proof with respect not only to
respondent's determinations as to underlying
deficiencies, Steinbrecher v. Commissioner, supra, but
also to additions to tax under sections 6651(a)(1),
6653(a)(1), and 6653(a)(2). Moore v. Commissioner, 722
F.2d 193, 196 (5th Cir. 1984), affg. a Memorandum
Opinion of this Court. [Fn. omitted.]

Petitioner has at all times during the administrative and

litigation proceedings in this case refused to provide respondent

with any of his records which would enable respondent to

determine his income tax liability for the years in issue.

After petitioner informed the Court that he would not

present any evidence, and rested, the Court instructed respondent

to proceed with the presentation of her evidence. Respondent

called petitioner as her first witness. Petitioner was sworn by

the trial clerk and, as instructed by the trial clerk, stated his
 - 9 -

name and address. Counsel for respondent then proceeded to

question petitioner:

Q How old were you in 1989?

A Fifth Amendment.

Q Did you say Fifth Amendment?

A Um-hmm.

The Court: As to your age?

(Pause)

The Court: Very well. Next question.

Q How long have you been living at the Oakview

address, Mr. Wadsworth? The 2600 Valley Meadow court,

Oakview, California 93022. How long have you been

living at that address?

A Fifth Amendment.

* * * * * * *

Q Aren't you married, Mr. Wadsworth?

A Fifth Amendment.

Q Does your wife live with you at the Oakview address,

Mr. Wadsworth?

A Fifth Amendment.

The Court: Let's shortcut this. Ask the witness at

this time if he is going to claim the Fifth Amendment

regardless of the substance of the question asked. Ask

him that question.
 - 10 -

Q Mr. Wadsworth, are you going to claim the Fifth

Amendment for each and every question that I ask of you

regardless of what the subject matter of that question

is?

A Fifth Amendment.

The Court: Any further questions?

Ms. Ravi: No further questions, Your Honor.

The Court: The witness will step down.

Respondent's next witness was Carolyn Stello (Ms. Stello).

Ms. Stello is the owner of Collection Services (Services) and has

worked at Services since 1985. Services collects the interest

due on notes and deeds of trust executed by buyers of property

and distributes the income to the sellers (beneficiaries).

In December of 1987, petitioner became a client of Services.

He has two accounts at Services on which he is an income

beneficiary.

On July 1, 1986, petitioner and his wife, Charlotte N.

Wadsworth (Charlotte), signed an exclusive authorization and

right to sell agreement with Stello Real Estate, Inc. to sell

property located in Los Angeles, California, in which they

possessed an undivided interest. The agreement provided, in

part:

2. Terms of Sale: The purchase price shall be sixty-
four thousand and no/100 ($64,000), to be paid as
follows ($16,000 total down payment (25%), buyer to
 - 11 -

execute in favor of seller a first trust deed and note
as his interest appears in the total amount of $48,000,
payable $608.04 or more per month including 9% interest
until paid.

By letter dated October 31, 1986, Stello Real Estate

informed petitioner and Charlotte that a buyer for the property

had been found and that the buyer's offer should be accepted.

Petitioner and Charlotte authorized Stello Real Estate to sell

their interest in the property by a note dated November 3, 1986.

In that note, petitioner instructed Stello Real Estate to change

its records to show that he and Charlotte would henceforth do

business as C and C Liberty Enterprises (C and C). Petitioner

informed Stello Real Estate that C and C's Federal I.D. number

was XX-XXXXXXX. The property was sold, and this is one of the

transactions from which Services collected interest income which

it distributed to petitioner.

Ms. Stello testified that when Services first establishes an

account for a client, Services sends a thank you note to the

client and encloses an amortization schedule and a request for

the client's Social Security number. Ms. Stello did not receive

a Social Security number from petitioner.

In 1990, Ms. Stello sent a letter to petitioner informing

him that she had sent him four requests for his Social Security

number and had received no response to each of her letters. In

response to her 1990 letter, Ms. Stello received a telephone call

from petitioner during which he informed Ms. Stello that he would
 - 12 -

not give her his Social Security number, the Government was

infringing on his constitutional rights, and he does not have to

pay Federal income taxes.

Ms. Stello further testified that during the years 1989

through 1992, Services mailed interest income checks to

petitioner as a result of the accounts he maintained at Services

and that those checks were mailed to petitioner's home at 2600

Valley Meadow Court, Oakview, California.3

The parties have also agreed that in 1991, petitioner

received $11,000 as a distribution from the Estate of Alden J.

Wadsworth and taxable income from the estate in the amount of

$849.82. Furthermore, in 1991, petitioner received surrender

proceeds from Connecticut Mutual Life Insurance Company, policy

number 1965406, in the amount of $81.55. Petitioner had a gain

from the policy of $903.68. In 1991, petitioner received

surrender proceeds from Connecticut Mutual Life Insurance

Company, policy number 2140790, in the amount of $56.79.

Petitioner had a gain from this policy of $616.79.

Respondent then called as her third and last witness Revenue

Agent George Christenot (Christenot) who received petitioner's

audit file from the previous agent who was examining petitioner's

tax years 1989 through 1992. After determining that petitioner

refused to cooperate with respondent in the examination of the

3
The record does not indicate the amounts of moneys
mailed to petitioner during the years in issue by Services.
 - 13 -

years in issue, Agent Christenot checked the Ventura County,

California, court records, where petitioner lived, to identify

any real estate or other property owned by petitioner and found

nothing in those court records pertaining to petitioner.

The IRMF report is a report that is compiled by the IRS on

all payment of mortgage interest. It is compiled in Michigan

from Forms 1098, Mortgage Interest Statements, that are forwarded

to IRS from financial institutions throughout the country. The

Forms 1098 list all mortgage payments made throughout the country

and that information is aggregated in one main computer program

maintained by the IRS in the State of Michigan.

Agent Christenot was able to learn through the IRMF that

petitioner had made mortgage interest payments for the years 1989

through 1992 in the amounts of $11,896, $11,288, $6,466, and

$4,005, respectively. Respondent introduced into evidence at

trial documentation showing that petitioner and Charlotte

executed a deed of trust on May 12, 1975, in favor of Valley

Federal Savings and Loan Association in which they pledged their

home at 2600 Valley Meadow Court as security for a $65,000

promissory note.

Respondent then computed petitioner's taxable income on the

basis of the BLS for the years in issue. The BLS represents

estimates of petitioner's annual living expenses. The categories

of family consumption include food, housing, transportation,

clothing, personal care, medical care, and other consumables.
 - 14 -

Agent Christenot substituted for the estimated housing expenses

listed in the BLS the actual mortgage payments made by petitioner

for the years in issue as determined from the above-mentioned

IRMF regarding petitioner. A copy of those statistics was

forwarded to petitioner with the statutory notice of deficiency.

Section 7602(a)(1) authorizes the Secretary to examine any

books, papers, records, or other data which may be relevant for

the purpose of ascertaining the correctness of any return.

Where, as here, the taxpayer refuses to cooperate in the

determination of his income, the Internal Revenue Service has

great latitude in determining a taxpayer's tax liability. Giddio

v. Commissioner, 54 T.C. 1530 (1970). Respondent may use one or

more of several indirect methods to reconstruct a taxpayer's

income. Sec. 446(b). One of the permitted methods, such as was

used in this case, relies on the BLS data. See Giddio v.

Commissioner, supra; Thomas v. Commissioner, T.C. Memo. 1996-492;

Moll v. Commissioner, T.C. Memo. 1987-39; Denson v. Commissioner,

T.C. Memo. 1982-360.

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

appeal in this case would lie, considered issues similar to the

issues under discussion in this case in Edwards v. Commissioner,

680 F.2d 1268 (9th Cir. 1982). In Edwards, the taxpayers were

the former owners of an auto repair business. Prior to 1971,

they had filed Federal income tax returns. For the years 1971

through 1976, William Edwards filed "protest returns". On those
 - 15 -

returns, he entered "Fifth Amendment" on most of the return

entries which required information necessary to determine the

taxpayer's tax liabilities.

On audit, the Commissioner determined that in each of the

years in issue, the taxpayers had received unreported income from

their auto repair business. Because the taxpayers refused to

make available to the Internal Revenue Service auditor any

information that would enable him to determine their income from

that business for the years in issue, the auditor estimated their

tax liabilities by adjusting the pertinent figures reported by

them on their 1970 Federal income tax return in conformance with

the percentage increase in the Consumer Price Index.

The taxpayers filed a petition with this Court. They

refused, however, to produce at trial the books and records of

their auto repair business that would enable the Court to

determine their Federal income tax liabilities for the years in

issue. This Court dismissed the case for failure to properly

prosecute and the taxpayers appealed.

On appeal, the taxpayers argued, inter alia, that the

Commissioner's use of the Consumer Price Index to determine their

tax liabilities was arbitrary and that this Court's dismissal of

their case for failure to properly prosecute violated their Fifth

Amendment privilege against self-incrimination.

In rejecting the taxpayers' argument that the Commissioner's

determination of their tax liabilities was arbitrary, the Court
 - 16 -

of Appeals noted that the Commissioner's determination of

deficiencies is presumptively correct once some substantive

evidence is introduced showing that a taxpayer received

unreported income.

The Court of Appeals also rejected the taxpayers' argument

that this Court's dismissal of their case for failure to properly

prosecute violated their Fifth Amendment privilege against self-

incrimination. The Court noted in Edwards v. Commissioner, supra

at 1270:

To invoke the fifth amendment privilege, the taxpayer
must be faced with substantial hazards of self-
incrimination that are real and appreciable, and must
have reasonable cause to apprehend such danger. United
States v. Neff, 615 F.2d 1235, 1239 (9th Cir.), cert.
denied, 447 U.S. 925, 100 S.Ct. 3018, 65 L.Ed.2d 1117
(1980). Appellants steadfastly assert that they have
engaged in no criminal activity relating to their auto
repair business, nor is any criminal investigation
pending. Their fifth amendment claim merely rests on a
generalized fear that if forced to turn over their
business records, they somehow would be more likely to
have criminal charges brought against them for tax
evasion. Because there is no indication that
production of their records would reveal criminal
activity in their auto repair business and because the
fifth amendment privilege may not itself be used as a
method of evading payment of lawful taxes, United
States v. Carlson, 617 F.2d 518, 523 (9th Cir.) cert.
denied, 449 U.S. 1010, 101 S.Ct. 564, 66 L.Ed.2d 468
(1980), we reject appellants' fifth amendment claim as
frivolous.

In this case, as in Edwards, the use of one or more of

several indirect methods to reconstruct a taxpayer's income is

permissible. Sec. 446(b). In particular, the use of BLS data

has been approved by this Court. See Giddio v. Commissioner,
 - 17 -

supra.

Furthermore, in this case, as in Edwards, respondent did

not, in any manner, at the administrative or litigation phases of

this case, suggest any criminal investigative activities

pertaining to petitioner for the years in issue. We, therefore,

hold that petitioner's Fifth Amendment claim may not be used as a

method of avoiding income taxes due and owing for the years in

issue. As Justice Holmes stated in United States v. Sullivan,

274 U.S. 259 (1927), in referring to the defendant in error at

264: "He could not draw a conjurer's circle around the whole

matter by his own declaration that to write any word upon the

government blank would bring him into danger of the law."

Respondent has demonstrated, through the testimony of Ms. Stello,

that taxable moneys were forwarded to petitioner through Services

during the years in issue. Although respondent has proven the

fact that petitioner received income during the years in issue,

she was unable to prove the amount of such income. Respondent's

inability to prove the amount of taxable income received by

petitioner during the years in issue is directly attributable to

petitioner's adamant refusal to communicate with respondent in

her attempt to determine petitioner's income tax liabilities for

the years in issue. We hold that respondent's determination of

petitioner's Federal income tax liabilities for the years in

issue must be sustained.
 - 18 -

Respondent determined that petitioner's income for each of

the years in issue is subject to self-employment tax under

section 1401, and petitioner has not disputed this determination.

We hold for respondent on this issue.

Respondent also determined that petitioner is liable for

additions to tax for the years in issue under sections 6651(a)

and 6654(a).

Section 6651(a)(1) imposes an addition to tax for failure to

timely file a return, unless the taxpayer establishes: (1) The

failure did not result from "willful neglect"; and (2) the

failure was "due to reasonable cause". "Willful neglect" has

been interpreted to mean a conscious, intentional failure, or

reckless indifference. United States v. Boyle, 469 U.S. 241,

245-246 (1985). "Reasonable cause" requires the taxpayer to

demonstrate that he exercised ordinary business care and prudence

and was nonetheless unable to file a return within the prescribed

time. Id. at 246; sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

The addition to tax equals 5 percent of the tax required to be

shown on the return for the first month, with an additional 5

percent for each additional month or fraction of a month during

which the failure to file continues, not to exceed a maximum of

25 percent. Sec. 6651(a)(1).

Petitioner did not testify as to his failure to file Federal

income tax returns for the years in issue. Based on the record

we find petitioner intentionally failed to file his Federal
 - 19 -

income tax returns for the years in issue and is liable for the

addition to tax pursuant to section 6651(a)(1).

We next address the issue of the addition to tax for failure

to pay estimated income tax under section 6654(a) for the years

in issue. This Court stated in Estate of Ruben v. Commissioner,

33 T.C. 1071, 1072 (1960): "This section has no provision

relating to reasonable cause and lack of willful neglect. It is

mandatory and extenuating circumstances are irrelevant."

Petitioner has failed to show that he did not underpay his

estimated tax for the years in issue. Accordingly respondent's

determination is sustained.

Having fully reviewed the record in this case, we hold that

respondent's determinations as set forth in the notice of

deficiency must be sustained, except for the concessions by

respondent, as previously noted.

To reflect the foregoing,

Decision will be entered

under Rule 155.