McQuatters v. Commissioner

T.C. Memo. 1998-88

UNITED STATES TAX COURT

JOSEPH T. MCQUATTERS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13260-96. Filed March 2, 1998.

Joseph T. McQuatters, pro se.

Edwina L. Charlemagne, for respondent.

MEMORANDUM OPINION

WOLFE, Special Trial Judge: This case was heard pursuant to

the provisions of section 7443A(b)(3) and Rules 180, 181, and

182. All section references are to the Internal Revenue Code in

effect for the tax year in issue, unless otherwise indicated.
 - 2 -

All Rule references are to the Tax Court Rules of Practice and

Procedure.

Respondent determined a deficiency in petitioner's 1988

Federal income tax in the amount of $4,965 and additions to tax

for failure to file timely a Federal income tax return pursuant

to section 6651(a)(1) in the amount of $1,241 and for failure to

pay estimated taxes pursuant to section 6654(a) in the amount of

$318.

We must decide the following issues:

1. Whether petitioner received nonemployee compensation in

the amount of $20,309 from Masterguard Corp. in 1988 as

determined by respondent. We hold he did.

2. Whether petitioner received interest income in the

amount of $128 from Lexington State Bank in 1988 as determined by

respondent. We hold he did.

3. Whether petitioner is liable for self-employment tax in

1988 in the amount of $2,644 as determined by respondent. We

hold he is.

4. Whether petitioner is liable for an addition to tax

under section 6651(a)(1) for failure to file an income tax

return. We hold he is.

5. Whether petitioner is liable for an addition to tax for

the failure to pay estimated tax as determined by respondent

under section 6654(a). We hold he is.
 - 3 -

6. Whether petitioner is liable for a penalty under section

6673(a). We hold he is and require him to pay to the United

States a penalty of $1,000.

Background

The evidence in this case consists of oral testimony by

petitioner and exhibits. At the trial of this case, despite this

Court's pretrial order that all facts be stipulated to the

maximum extent possible, petitioner refused to enter into a

stipulation of facts in this case.1

Petitioner, who resided in Columbia, South Carolina, when

his petition was filed, did not file a Federal income tax return

for the year 1988. On March 22, 1996, respondent issued a

statutory notice of deficiency for petitioner for 1988 based upon

Forms 1099 that respondent had received from Lexington State Bank

and Masterguard Corp. (Masterguard) reporting income paid to

petitioner during 1988. The Form 1099 from Lexington State Bank

reported interest paid to petitioner in the amount of $128 for

1
On May 15, 1997, respondent submitted a supplemental motion
to reopen the record in this case for the limited purpose of
receiving into evidence newly discovered evidence. We deny
respondent's motion because it is the policy of this Court to try
all the issues raised in a case in one proceeding to avoid
piecemeal and protracted litigation. Markwardt v. Commissioner,
64 T.C. 989, 998 (1975); Haft Trust v. Commissioner, 62 T.C. 145,
147 (1974).
At trial, respondent orally moved for dismissal on the
ground that petitioner had failed properly to prosecute this case
by failing to address the merits of the case and by refusing to
stipulate facts as required by the Court's pretrial order. We
decide the case for respondent on the merits, and respondent's
oral motion is denied as moot.
 - 4 -

1988. The Form 1099 from Masterguard reported nonemployee

compensation paid to petitioner in the amount of $20,309 for

1988. Petitioner contends that neither of the above-described

Forms 1099 is valid and that, therefore, the statutory notice of

deficiency itself is invalid. More specifically, petitioner

contends that the Form 1099 issued to him by Masterguard is

invalid because a portion of the amount Masterguard reported as

nonemployee compensation could have been for merchandise refunds.

Petitioner's memorandum and testimony both fail to address the

validity of the Form 1099 issued to him by Lexington State Bank.

In his memorandum and testimony, petitioner argues that no

section of the Internal Revenue Code requires him to pay income

tax. Petitioner states that he is "a Sovereign Citizen of the

South Carolina Republic". Petitioner's written and oral

explanations also include citations of a number of unrelated

sections of the Internal Revenue Code and the Uniform Commercial

Code that he contends provide a basis for his claim that he is

not liable for Federal income tax.

Masterguard is a wholesaler of early warning fire protection

equipment, which includes single station battery-operated smoke

detectors, single station mechanical heat detectors, and portable

fire extinguishers. Petitioner conceded at trial that he

purchased merchandise from Masterguard in 1988. According to

petitioner, he paid for any merchandise he received from

Masterguard upon receipt. However, petitioner also testified
 - 5 -

that he was unable to recall whether he resold the aforementioned

merchandise or gave it away; but he acknowledged that he might

have resold the merchandise to others. Respondent contends that

the types of transactions for which Masterguard might issue a

Form 1099 to an individual who purchases its merchandise include:

(1) Override payments made to an independent authorized dealer on

purchases made by other independent authorized dealers; and (2)

refunds for products purchased directly by the independent

authorized dealer. During cross-examination, petitioner

acknowledged that according to Masterguard, the company makes

override payments and also issues rebates to individuals who

purchase merchandise from Masterguard.

Petitioner claims that he is unable to recall from what

sources he received income in 1988 due to subsequent problems he

had with his health. Petitioner's only recollection of how he

earned a living in 1988 is that he's "been self-supporting since

I was about 14." Petitioner also claims to have no records

relating to any income he received in 1988. During cross-

examination petitioner asserted his Fifth Amendment rights and

refused to answer questions posed to him by respondent's counsel

concerning petitioner's marital status or whether petitioner has

any children.

Respondent determined that because of petitioner's receipt

of nonemployee compensation in the amount of $20,309 from

Masterguard in 1988, petitioner is subject to self-employment tax
 - 6 -

under section 1401. Petitioner asserts that he was not self-

employed in 1988 and therefore is not liable for the self-

employment tax.

Discussion

Petitioner invoked the jurisdiction of this Court by a

petition alleging that respondent had erred in determining income

tax deficiencies for petitioner for 1988. Petitioner, having

failed to file an income tax return for 1988, claimed he had no

records from 1988 to show to respondent, and he also refused

respondent's request to stipulate facts.

Respondent determined that petitioner received unreported

income in the amounts of $20,309 in nonemployee compensation from

Masterguard and $128 in interest income from Lexington State

Bank. Petitioner claims he is unable to remember how he

supported himself in 1988 but offered nothing into evidence that

would rebut respondent's determination that he received

nonemployee compensation from Masterguard and interest income

from Lexington State Bank.

A statutory notice of deficiency ordinarily carries with it

a presumption of correctness. Rule 142(a); Welch v. Helvering,

290 U.S. 111 (1933). Because of this presumption, taxpayers

generally, at least initially, have the burden of proof and the

burden of going forward with the evidence. Cebollero v.

Commissioner, 967 F.2d 986, 991 (4th Cir. 1992), affg. T.C. Memo.

1990-618.
 - 7 -

Petitioner asserts that respondent has not carried the

burden of proving the accuracy of the disputed Forms 1099.

Although petitioner argues that neither of the Forms 1099 is

valid, at trial, petitioner addressed only the validity of the

Form 1099 issued to him by Masterguard. For support, petitioner

cites section 6201(d) and claims that he has fully cooperated

with respondent by granting access to all records and information

for 1988 in his possession.

Section 6201(d), amended by section 602, Taxpayer Bill of

Rights 2, Pub. L. 104-168, 110 Stat. 1452, 1463 (1996), is

effective as of July 30, 1996. The petition was filed on June

24, 1996, and the trial in this case was held on February 5,

1997. We will assume arguendo that section 6201(d), as amended,

is applicable in this case. Section 6201(d) provides that if the

taxpayer, in a court proceeding, asserts a reasonable dispute

with respect to the income reported on an information return, and

fully cooperates with the Commissioner, then the Commissioner

shall have the burden of producing reasonable and probative

information in addition to the information return.2 See Dennis

2
Sec. 6201(d) provides:

SEC. 6201(d). Required Reasonable Verification of
Information Returns.--In any court proceeding, if a
taxpayer asserts a reasonable dispute with respect to
any item of income reported on an information return
filed with the Secretary * * * by a third party and the
taxpayer has fully cooperated with the Secretary
(including providing, within a reasonable period of
(continued...)
 - 8 -

v. Commissioner, T.C. Memo. 1997-275; Hardy v. Commissioner, T.C.

Memo. 1997-97. The legislative history of section 6201(d)

specifically refers to a situation where there is a dispute over

income and further states:

Fully cooperating with the IRS includes (but is not
limited to) the following: bringing the reasonable
dispute over the item of income to the attention of the
IRS within a reasonable period of time, and providing
(within a reasonable period of time) access to and
inspection of all witnesses, information and documents
within the control of the taxpayer (as reasonably
requested by the Secretary). [H. Rept. 104-506, at 36
(1996), 1996-3 C.B. 49, 84; emphasis added.]

Petitioner contends that the Form 1099 issued to him by

Masterguard is invalid because respondent is unable to determine

what portion of the amount reported as nonemployee compensation

was for override payments made to an independent authorized

dealer on purchases made by other independent authorized dealers,

and what portion was for merchandise refunds. Petitioner offered

no evidence or testimony regarding his argument that the Form

1099 issued to him by Lexington State Bank is invalid.

At trial, respondent introduced no evidence in response to

petitioner's contention that the Form 1099 from Masterguard was

2
(...continued)
time, access to and inspection of all witnesses,
information, and documents within the control of the
taxpayer as reasonably requested by the Secretary),
the Secretary shall have the burden of producing
reasonable and probative information concerning such
deficiency in addition to such information return.
 - 9 -

not accurate. However, the limited amount of petitioner's

testimony that did not consist of shopworn tax protester

arguments supports respondent's determination that petitioner did

in fact receive nonemployee income from Masterguard in 1988. In

his testimony, petitioner admitted that he purchased merchandise

from Masterguard in 1988 and that he might have resold this

merchandise to others. Petitioner acknowledged at trial that

Masterguard may pay rebates and overrides to individuals who

purchase merchandise from it. Petitioner admitted that he is not

an employee of Masterguard, so it would have been appropriate for

Masterguard to characterize the payments it made to petitioner as

nonemployee compensation.

Even if this Court were to find petitioner's dispute

reasonable, section 6201(d) clearly requires that in addition to

asserting a reasonable dispute with respect to any item of income

reported on an information return, the taxpayer must have fully

cooperated with the Commissioner before the burden of production

will shift to the Commissioner. The evidence in this case is

unequivocal that petitioner did not fully cooperate with

respondent as required by section 6201(d). First, we note that

petitioner failed to file an income tax return for 1988. As a

nonfiler, petitioner plainly did not bring his dispute over any

item of income to the attention of the IRS within a reasonable

period of time as contemplated by the terms and legislative

history of section 6201(d). Additionally, petitioner's behavior
 - 10 -

prior to and during the trial cannot be characterized as the

behavior of a taxpayer fully cooperating with the IRS. Prior to

the trial, in response to a letter from respondent's agent

requesting an appointment with petitioner to discuss petitioner's

1988 income tax liability, petitioner sent a document, dated

June 1, 1995, captioned "Certified Demand for Proof of

Jurisdiction" in which he challenged the jurisdiction of the

Internal Revenue Service over him and alleged that he is "a

Sovereign Citizen of the South Carolina Republic," but not "a

citizen of the United States subject to its jurisdiction." Then,

after receipt of respondent's report of Income Tax Examination

Changes, Form 4549, petitioner returned the Form 4549 to the IRS

district director in Doraville, Georgia, and declared in the

accompanying letter dated December 8, 1995, that he was a

"Nonimmigrant/Nonresident Alien Nontaxpayer". Petitioner's

December 8, 1995, letter to the district director included

numerous citations of the Uniform Commercial Code that have no

relevance to this case.

On the basis of the evidence before us, we conclude that

petitioner has not asserted a "reasonable dispute with respect to

any item of income" that was reported to respondent as having

been paid to and/or earned by petitioner and has not shown that

he "fully cooperated" with respondent. See Dennis v.

Commissioner, supra; Hardy v. Commissioner, supra. Therefore,

the burden of going forward and producing "reasonable and
 - 11 -

probative information" concerning the deficiency beyond the

information return has not shifted to respondent. Petitioner is

a nonfiler and a typical tax protester. When petitioner's

nonfiling status was brought to the attention of respondent

through information returns filed by unrelated third parties,

petitioner responded with classic tax protester arguments, and to

the extent possible, stonewalled respondent by refusing to

provide any information or records concerning his income in 1988.

Section 6201(d) does not provide a means for a taxpayer to avoid

his Federal income tax liabilities by failing to file a tax

return, refusing to provide any information to the Commissioner

or the Court, and refusing to provide any records concerning his

income. Respondent's determinations concerning petitioner's 1988

income from self-employment and interest are sustained.

In the statutory notice of deficiency, respondent determined

that in 1988 petitioner received unreported nonemployee

compensation from Masterguard in the amount of $20,309, which was

subject to self-employment tax. Section 1401 imposes a tax on

the "self-employment income" of every individual. "Self-

employment income" is defined generally in section 1402(b) as

"the net earnings from self-employment derived by an individual *

* * during any taxable year". Section 1402(a) defines the term

"net earnings from self-employment" as the "gross income derived

by an individual from any trade or business carried on by such

individual, less the deductions allowed by this subtitle which
 - 12 -

are attributable to such trade or business". Section 1.1402(a)-

2(b), Income Tax Regs., provides that "The trade or business must

be carried on by the individual, either personally, or through

agents or employees." See also S. Rept. 1669, 81st Cong., 2d

Sess. (1950), 1950-2 C.B. 302, 354. These provisions are to be

broadly construed to favor treatment of income as earnings from

self-employment. Hornaday v. Commissioner, 81 T.C. 830, 834

(1983). Respondent's determination that petitioner is liable for

self-employment tax is presumed to be correct, and petitioner

bears the burden of proving it is erroneous. Rule 142(a); Kasey

v. Commissioner, 33 T.C. 656, 660 (1960); Ahmad v. Commissioner,

T.C. Memo. 1997-85.

At trial, petitioner testified that he was "self-supporting"

and that he was not an employee of Masterguard. Petitioner

offered no other evidence as to how he supported himself during

1988, the year in issue. Therefore, we hold that petitioner has

not met his burden of proving that respondent's determination is

incorrect and hold petitioner liable for self-employment tax on

the unreported income as determined by respondent for 1988.

Section 6651(a) imposes an addition to tax for a taxpayer's

failure to file a required return on or before the specified

filing date, including extensions. The addition to tax is

inapplicable, however, if the taxpayer shows that the failure to

file the return was due to reasonable cause and not willful

neglect. Sec. 6651(a)(1).
 - 13 -

Petitioner did not file an income tax return for 1988. The

reasons given by petitioner for his failure to file are wholly

frivolous and are similar to the rejected arguments of other

taxpayers who have previously petitioned this Court in protest of

their liability for Federal income tax. Petitioner's assertions

in this case are characteristic of the tax-protester rhetoric

that has been universally rejected. See, e.g., Rowlee v.

Commissioner, 80 T.C. 1111, 1120 (1983); Frami v. Commissioner,

T.C. Memo. 1997-509. Petitioner attempted to support these

arguments by reference to statutes, regulations, and cases that

are related to each other only in the sense that they all involve

issues of taxation. Petitioner's arguments are without merit and

lack factual and legal foundation. We are not obligated to

review exhaustively and rebut petitioner's misguided contentions.

Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984) ("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."); accord Kish v.

Commissioner, T.C. Memo. 1998-16. Petitioner's arguments are not

adequate to show reasonable cause. Accordingly, we sustain the

additions to tax for delinquent filing as determined by

respondent.

Respondent also determined that petitioner was liable for

additions to tax under section 6654(a) for failure to pay

estimated tax for 1988. Where payments of tax, either through
 - 14 -

withholding or by making estimated quarterly tax payments during

the course of the year do not equal the percentage of total

liability required under the statute, imposition of the addition

to tax under section 6654 is automatic, unless the taxpayer shows

that one of the statutory exceptions applies. Sec. 6654(a);

Niedringhaus v. Commissioner, 99 T.C. 202, 222 (1992);

Grosshandler v. Commissioner, 75 T.C. 1, 20-21 (1980).

Petitioner bears the burden of showing qualification for such an

exception. Habersham-Bey v. Commissioner, 78 T.C. 304, 319-320

(1982). Petitioner offered no testimony or other evidence that

an exception applies, and petitioner did not make any estimated

tax payments for 1988. Accordingly, we hold that petitioner is

liable for the addition to tax under section 6654(a) for 1988.

As to respondent's motion for imposition of a penalty under

section 6673, section 6673(a)(1) allows this Court to award a

penalty not in excess of $25,000 when proceedings have been

instituted or maintained primarily for delay, or where the

taxpayer's position is frivolous or groundless if it is contrary

to established law and unsupported by a reasoned, colorable

argument for a change in the law. Coleman v. Commissioner, 791

F.2d 68, 71 (7th Cir. 1986); Kish v. Commissioner, supra; Talmage

v. Commissioner, T.C. Memo. 1996-114, affd. without published

opinion 101 F.3d 695 (4th Cir. 1996). In our opinion, such is

the case here, and we believe that a penalty is appropriate. We
 - 15 -

will require petitioner to pay a $1,000 penalty under section

6673(a).

To reflect the foregoing,

An appropriate order and

decision will be entered.