T.C. Memo. 1998-224
UNITED STATES TAX COURT
RAYMOND O. WRIGHT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 273-96. Filed June 24, 1998.
Raymond O. Wright, pro se.
Kevin M. Curran, for respondent.
MEMORANDUM OPINION
GALE, Judge: Respondent determined deficiencies in
petitioner's 1987 and 1989 Federal income taxes in the amounts of
$3,777 and $6,500, respectively, and additions to tax under
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section 6651(a)(1)1 for 1987 and 1989 in the amounts of $358 and
$1,556, respectively.
After concessions, the issues for decision are as follows:
(1) Whether petitioner has been denied due process by
respondent's actions such that petitioner is entitled to a
decision in his favor on all contested issues. We hold that
petitioner has not been denied due process. (2) Whether
petitioner is liable for self-employment taxes on income received
in 1987 and 1989.2 We hold that he is. (3) Whether petitioner
is liable for additions to tax for 1987 and 1989 under section
6651(a)(1). We hold that he is. (4) Whether petitioner is
liable for a penalty under section 6673. We hold that he is not.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference.
1
All section references are to the Internal Revenue Code
in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
2
Although petitioner failed to assign error to
respondent's determinations of liability for self-employment tax,
petitioner did raise this issue in his trial memorandum and at
trial. Respondent has objected to our consideration of this
issue on the grounds that it was untimely raised and
consideration of it would prejudice respondent. Respondent
received notice that petitioner intended to dispute his liability
for self-employment tax at least as early as the service of
petitioner's trial memorandum, which respondent received 16 days
before the first day of trial and 23 days prior to the second day
of trial held 1 week later. We shall accordingly consider this
issue as if properly raised by petitioner.
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At the time the petition was filed, petitioner resided in
New York, New York. Petitioner's taxable year was the calendar
year. Petitioner did not file returns for 1987 and 1989. On
September 27, 1995, respondent issued a notice of deficiency to
petitioner in which it was determined that petitioner had (i)
taxable income of $22,535 in 1987, of which $7,900 was determined
to be self-employment income, and (ii) taxable income of $31,270
in 1989, of which $12,150 was determined to be self-employment
income. The notice also determined that petitioner was liable
for additions to tax under section 6651(a)(1) for failure to file
for both years.
Petitioner admits that he received taxable income in the
amounts determined, but disputes that any portion of such income
in either year was self-employment income. Petitioner also
disputes his liability for the additions to tax determined by
respondent. Petitioner further contends that, in addition to
relief from the additions to tax, he should be relieved of
liability for some or all interest and should have all issues in
the case resolved in his favor because of errors, omissions, and
delays by respondent that have deprived him of due process.
Denial of Due Process
Petitioner's due process complaint concerns his inability to
obtain redress in these proceedings for what he contends are
various errors, omissions, and delays on the part of respondent,
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primarily during the administrative stage of this case but also
to some extent after the filing of the petition. Specifically,
petitioner faults respondent's failure at any time to explain to
petitioner's satisfaction the grounds for the denial of
petitioner's claims of reasonable cause for his failure to file
in 1987 and 1989; he further cites errors and delays in
respondent's handling of his case from the time he contacted
respondent in 1991 to ascertain what he owed until the issuance
of a notice of deficiency in 1995; he contends that respondent
withheld evidence; and finally petitioner alleges that
respondent's "decision-making process" with respect to him "was
(racially) biased and arbitrary".
As to respondent's actions prior to the issuance of the
notice of deficiency, it is well settled that this Court
generally will not look behind the notice of deficiency to
examine the evidence or the propriety of the motives,
administrative policies, or procedures utilized by respondent in
making a determination. Proesel v. Commissioner, 73 T.C. 600,
605 (1979); Greenberg's Express, Inc. v. Commissioner, 62 T.C.
324, 327 (1974); Human Engg. Inst. v. Commissioner, 61 T.C. 61,
66 (1973). The rationale for this stance is that a trial before
this Court is a proceeding de novo, and our determination must be
based upon the merits of the case as presented here and not upon
a record developed at the administrative level. Greenberg's
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Express, Inc. v. Commissioner, supra at 328. However, one
recognized exception to this general rule occurs when there is
substantial evidence of unconstitutional conduct by respondent in
determining the deficiency. Church of Scientology v.
Commissioner, 83 T.C. 381, 447-48 (1984), affd. 823 F.2d 1310
(9th Cir. 1987); Riland v. Commissioner, 79 T.C. 185, 207 (1982);
Greenberg's Express, Inc. v. Commissioner, supra at 328.
Petitioner contends that respondent's decisions with respect to
him were racially motivated. While decisions by a government
official based on impermissible considerations such as race may
constitute a violation of equal protection, see, e.g., Oyler v.
Boles, 368 U.S. 448 (1962), petitioner has presented no evidence
to substantiate his claim, and our review of the entire record in
this case gives us no reason to suspect it may be true.
Essentially, respondent's decisions in this case were to audit
petitioner, to reject his claim of reasonable cause for failure
to file, and to oppose his claim that he was not liable for self-
employment tax.3 A decision to audit a nonfiler seems to us
unexceptional, and since we sustain the other positions taken by
respondent, we fail to discern bias in respondent's reaching
them. Thus, we decline to further examine respondent's actions
preceding the notice of deficiency on this basis.
3
It should be noted that respondent disputes whether
petitioner in fact contested his self-employment tax liability
prior to submitting his trial memorandum in this case.
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We note, however, that petitioner also makes a claim for
relief from penalties and interest on the grounds of "errors and
delays" by respondent during the period between petitioner's
contact with respondent to ascertain his liabilities in 1991 and
the issuance of the statutory notice in 1995. Petitioner's
liability for the additions to tax for failure to file are
unaffected by any actions taken by respondent in 1991 or
thereafter because, as discussed more fully below, petitioner had
accrued more than 5 months of unexcused delay in filing his 1987
and 1989 returns by the time of any contact with respondent in
1991, thus subjecting him to the maximum 25-percent addition to
tax for failure to file in each year. With respect to interest,
petitioner cites the same errors and delays by respondent between
1991 and 1995 as grounds for an abatement of interest.
Consideration of petitioner's request for abatement of interest
is premature, as there has been neither an assessment of such
interest or a final determination by respondent not to abate
interest. See sec. 6404(e), (g), as currently in effect.
Finally, with respect to postpetition proceedings,
petitioner alleges that respondent withheld evidence. Petitioner
is referring to respondent's refusal to produce certain documents
from petitioner's administrative file on the grounds of executive
or deliberative process privilege. In connection with the trial
of this case, the Court conducted an in camera inspection of the
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documents withheld on privilege grounds and concluded that the
documents contained both mental impressions, legal analysis, and
recommendations protected by the deliberative process privilege
as well as factual statements not so protected. We ordered
respondent to produce the nonprivileged portions of these
documents to petitioner.4 Petitioner now contends that his
failure to obtain the privileged portions of the documents is a
denial of due process. We reject that claim.
Self-Employment Income
Section 1401 imposes a tax on "self-employment income",
which is generally defined as the gross income, less allowable
deductions, derived by an individual from any trade or business
carried on by him during the taxable year. Sec. 1402(a) and (b).
The term "trade or business" for these purposes, however, does
not include the performance of services by an individual as an
employee. Sec. 1402(c)(3). "Employee" for this purpose is
defined in section 3121(d)(2) as, inter alia,
(2) any individual who, under the usual common
law rules applicable in determining the employer-
employee relationship, has the status of an employee;
* * *
4
Although the previously withheld information was, at
best, of marginal significance to petitioner's case, to avoid any
prejudice to petitioner the Court ordered a 1-week recess in the
trial proceedings to afford petitioner additional time to prepare
with respect to the newly disclosed information.
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The regulations promulgated under section 3121(d) provide that an
employer-employee relationship exists--
when the person for whom services are performed has
the right to control and direct the individual who
performs the services, not only as to the result to
be accomplished by the work but also as to the details
and means by which that result is accomplished. That
is, an employee is subject to the will and control of
the employer not only as to what shall be done but how
it shall be done. * * * [Sec. 31.3121(d)-1(c)(2),
Employment Tax Regs.]
Petitioner argues that he performed services only in the
capacity of an employee during the years in issue and therefore
is not liable for any self-employment tax. The $7,900 determined
by respondent to be self-employment income in 1987 was
remuneration for petitioner's services paid by American Aerospace
Industries, Inc. (Aerospace). Petitioner testified that his
services for Aerospace were related to telephone marketing and
consisted in reviewing past promotional materials and suggesting
changes, editing telephone solicitation scripts and followup
brochures, supervising telephone staff to insure that
solicitations were being made correctly, and drafting press
releases. Petitioner further emphasized that all of his work had
to be performed on Aerospace's premises, that he was required to
work specific hours, including a designated lunch hour, that he
could not delegate any of his responsibilities or choose
personnel, and that he had no discretion as to goals or
timetables. The foregoing testimony was uncorroborated.
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Aerospace paid petitioner by means of checks at 2-week intervals
in the amount of $2,000,5 which carried the notation "consulting
fees".
The $12,150 in self-employment income determined by
respondent for 1989 consists of $6,150 in remuneration for
petitioner's services paid by Charles River Computers (Charles
River) and $6,000 from Solutions Plus, Inc.6 A Confidentiality
Agreement entered into by petitioner and Charles River provided
that petitioner would receive $750 per week for "½ time" and
makes reference to petitioner's performance of "consulting and
other services". A provision in the agreement prohibiting
petitioner from engaging in any other business during the term of
the agreement was lined through. Petitioner did not provide
specific descriptions of his work in 1989 except to claim that,
as in 1987, such work was always performed on the purported
employer's premises, was subject to established working hours,
and was nondelegable.
5
One such check was for $1,900 instead of $2,000, which
petitioner testified was due to the fact that he was "docked"
one-half day's pay ($100) when he was absent from work one
morning.
6
The only identification of the source of the 1989 amounts
determined to be self-employment income was in petitioner's trial
memorandum, where he appears to acknowledge that $6,150 of such
amounts was from "Charles River Computers" and $6,000 was from
"Solutions Plus". Petitioner does not, in any event, dispute
that taxable income in these amounts was received.
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Petitioner claims that he was classified as an employee for
unemployment insurance purposes by the New York State Department
of Labor with respect to all work that he performed in 1987 and
1989 and also points to the fact that respondent determined that
he received taxable unemployment compensation in 1989. The
documentary evidence submitted by petitioner to corroborate his
claim regarding the New York State Department of Labor falls far
short of doing so. Nothing in these materials indicates what
determination, if any, was made by the Department with respect to
any given employer. Since the parties have agreed that
petitioner worked in part as an employee in 1987 and 1989, and
that petitioner had income in 1988, the fact that petitioner
received unemployment compensation in 1989 is not probative with
respect to whether he rendered some services as an independent
contractor in 1987 and 1989.
With respect to 1987, even if we accept petitioner's
uncorroborated testimony concerning his responsibilities at
Aerospace, we do not believe that he has shown that Aerospace had
control over the "details and means by which * * * [the] result
is [to be] accomplished", sec. 31.3121(d)-1(c)(2), Employment Tax
Regs., such that petitioner was an employee under common-law
principles, particularly given the temporary nature of the
assignment and Aerospace's characterization of the arrangement as
"consulting". With respect to 1989, petitioner's testimony is
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vague and conclusory and does not even address the specifics of
his duties in that year. We conclude that he has failed to
demonstrate error in respondent's determinations of liability for
self-employment tax in 1987 and 1989 and accordingly sustain
them.
Additions to Tax Under Section 6651(a)(1)
Respondent determined additions to tax for failure to timely
file returns under section 6651(a)(1) with respect to both years
in issue. Petitioner claims that his failure to file for these
years was due to reasonable cause.
Section 6651(a)(1) imposes 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. The amount
of the addition to tax is determined on a graduated basis,
beginning at the rate of 5 percent of the amount required to be
shown on the return if the failure is not more than 1 month, with
an additional 5 percent for each additional month or fraction
thereof that such failure continues, not exceeding 25 percent in
the aggregate. Sec. 6651(a)(1).
To prove reasonable cause, a taxpayer must show that he
exercised ordinary business care and prudence but nevertheless
was unable to file the return when it was due. Crocker v.
Commissioner, 92 T.C. 899, 913 (1989); sec. 301.6651-1(c)(1),
Proced. & Admin. Regs. Petitioner argues that he had reasonable
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cause for his failure to file his 1987 return because he was
preoccupied, beginning sometime in March 1988 and continuing
through August 1988, with the disappearance of his mother while
in the custody of a New York City homeless shelter or hospital,
his subsequent search for her with inadequate assistance from the
authorities or other family members, and his ultimate discovery
in August 1988 that she had died and been buried unclaimed.
Further, arrangements were protracted for her exhumation,
funeral, and reburial, which did not occur until October 1988 due
to demands of other family members. Even if we accept
petitioner's chronology, the foregoing events do not constitute
reasonable cause for his failure to file, because the failure
continued well after the traumatic events which he cites. The
incapacity of a taxpayer due to his illness or the illness of an
immediate family member may constitute reasonable cause for a
delay in filing a return. Williams v. Commissioner, 16 T.C. 893,
906 (1951); Tabbi v. Commissioner, T.C. Memo. 1995-463; Hayes v.
Commissioner, T.C. Memo. 1967-80. However, the duration of the
incapacity must approximate that of the failure to file. See,
e.g., Tabbi v. Commissioner, supra (reasonable cause where late
return not filed until 2 months after taxpayers' child's death);
Hayes v. Commissioner, supra (taxpayers' and their children's
illnesses during first half of year was reasonable cause for late
return not filed until August of that year); see also Barber v.
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Commissioner, T.C. Memo. 1997-206. In the instant case, any
incapacity petitioner experienced as a result of the traumatic
events surrounding his mother's disappearance and death had
ceased by sometime in 1989; in that year he obtained a filing
extension with respect to his 1988 return and timely filed it in
August. Thus, there has been an unexcused delay of more than 5
months with respect to petitioner's 1987 return, which has never
been filed, and we accordingly sustain respondent's determination
of the addition to tax for 1987.
With respect to his failure to file for 1989, petitioner
claims reasonable cause because at the time the return was due in
April 1990, the statutory period of limitations was about to
expire on any claim he might file against the City of New York
with respect to the events surrounding the disappearance and
death of his mother. According to petitioner, he was preoccupied
at this time with investigating his mother's treatment at the
homeless shelter and with potential legal recourse against the
City. In light of petitioner's admitted capacity to attend to
other matters, we conclude that he has failed to show reasonable
cause for his failure to file for 1989. Reasonable cause
requires a showing of incapacity; "selective inability" to file
tax returns while attending to other responsibilities does not
demonstrate reasonable cause. Tabbi v. Commissioner, supra;
Kemmerer v. Commissioner, T.C. Memo. 1993-394; Bear v.
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Commissioner, T.C. Memo. 1992-690, affd. without published
opinion 19 F.3d 26 (9th Cir. 1994); Fambrough v. Commissioner,
T.C. Memo. 1990-104. Accordingly, we sustain respondent's
determination of the addition to tax for 1989.
Section 6673 Penalty
At trial, respondent filed a motion for a penalty under
section 6673 on the grounds that (i) petitioner's position in
these proceedings is frivolous or groundless; or (ii) petitioner
instituted or maintained the proceedings primarily for delay.
Though ultimately unavailing, we do not believe that petitioner's
position regarding his liability for self-employment taxes was
frivolous. Some of the delay in these proceedings was due to
respondent's attempt to withhold documents from petitioner, a pro
se litigant, on privilege grounds where the Court's in camera
inspection revealed that the documents clearly contained
nonprivileged matter. This necessitated a delay in the
proceedings to protect petitioner's rights. Accordingly,
respondent's motion is denied.
To reflect the foregoing and concessions,
An appropriate order will
be issued denying respondent's
motion for a penalty, and decision
will be entered for respondent.
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