LIDDANE v. COMMISSIONER

T.C. Memo. 1998-259

UNITED STATES TAX COURT

STEVEN J. AND JEAN L. LIDDANE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15738-96. Filed July 14, 1998.

Steven J. and Jean L. Liddane, pro sese.

Gerald W. Douglas, for respondent.

MEMORANDUM OPINION

BEGHE, Judge: This case is before the Court on cross-

motions for summary judgment under Rule 1211 and respondent's

motion to impose a penalty under section 6673. Respondent

determined a deficiency of $10,613 in petitioners' 1992 Federal

1
All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the year in issue.
 - 2 -

income tax, an addition to tax of $1,255 under section 6651(a)

for late filing, and an accuracy-related penalty under section

6662 for negligence.

Background

Petitioners resided in Lebanon, New Jersey, when they filed

their petition. Petitioners filed responses to respondent's

request for admissions, and the parties filed a stipulation of

facts.

During 1992, petitioner Steven J. Liddane (petitioner) was

employed by Transaero Corp., from which he received wages of

$65,128 on which Federal income tax of $5,595 was withheld.

Petitioner Jean L. Liddane is a housewife.

Petitioners did not file a timely 1992 Federal income tax

return, and the omission came to respondent's attention. In July

1994, petitioners received respondent's Form CP-516 notice,

stating that, in order to receive a refund of the previous year's

withholding credit, petitioners needed to submit a return.

On December 6, 1994, the Brookhaven Service Center received

a Form 1040, U.S. Individual Income Tax Return, signed by

petitioners, on which they displayed their Social Security

numbers in the appropriate boxes and claimed joint return filing

status. The return showed zeros on lines 7 through 23, line 52,

and line 64, on which items of gross income, adjusted gross

income, and “the AMOUNT YOU OWE”, respectively, are to be
 - 3 -

reported. Petitioners left the return blank in all other

respects; they claimed no refund of tax withheld from the wages

of $65,128 shown on Form W-2 and did not attach Form W-2 to the

return.

On April 24, 1996, respondent mailed a statutory notice of

deficiency to petitioners, determining that petitioners had

income of $65,128 from wages, and $20 from interest that

respondent later conceded, applying the personal exemption and

standard deduction amounts to arrive at taxable income, giving

petitioners credit for the tax withheld from petitioner's wages,

computing their tax liability by affording them joint filing

status, and showing a balance due or underpayment of $5,019 and

the above-described additions.

On July 22, 1996, petitioners timely filed their petition

with this Court, disputing the unpaid portion of the deficiency

and the additions on the ground that “We do not believe we owe

the extra amount due above for this tax year”. On October 23,

1996, petitioner sent an Internal Revenue Service (IRS) Appeals

officer a letter containing three single-spaced pages of text

that petitioner asked to have treated as “an integral part” of

petitioners' return. This letter explains that petitioners filed

the return in order to avoid criminal liability as nonfilers; it

sets forth a series of canned arguments, accompanied by numerous

citations, that petitioners may have regarded as fresh and
 - 4 -

persuasive when they came to petitioners' attention, but which

the Court for the most part regards as timeworn, tired, tax

protester rhetoric. The letter also asserts that the Internal

Revenue Code fails to define the term “income”, that the income

tax is “voluntary” and that petitioners do not choose to

participate, and that the Code does not impose a liability for

income tax on individual human beings, as opposed to “persons”, a

term that primarily connotes, in petitioners' view, artificial

legal entities such as corporations. On August 29, 1996,

respondent timely filed an answer that put the case at issue.

On May 6, 1997, the Court served its notice of trial, with

standing pretrial order attached, calendaring the case for the

Court's October 14, 1997, trial session to be held in New York

City. On July 30, 1997, respondent filed a request for

admissions, and on September 2, 1997, filed a motion to compel

production of documents and a motion for summary judgment, each

of which had been served on petitioners. On September 18, 1997,

the Court received and filed, as petitioners' response to

respondent's motion for summary judgment, petitioner's letter

stating that he had moved with his family to Oregon to take new

employment. The Court thereupon denied respondent's motions

without prejudice, vacated the deemed admissions (petitioners

later responded timely to the requests for admission), changed

petitioners' address on the Court's records, retained
 - 5 -

jurisdiction, and set the case for trial at the Court's March 16,

1998, Portland, Oregon, trial session.

On March 2, 1998, respondent's and petitioners' trial

memoranda were received by the Court. In due course, they were

filed as part of the record in this case. Petitioners' trial

memorandum contains an index of citations of more than 60

authorities that includes, in addition to the Internal Revenue

Code, IRS Publication 17, the 1992 instructions for Form 1040,

Bouvier's Law Dictionary, 48 American Jurisprudence, 5 State

court opinions, 30 opinions of the U.S. Supreme Court, and 21

opinions of lower Federal courts. Petitioners' trial memorandum

charges respondent's notice of deficiency with failure to cite

legal authority in support of its determinations, including the

failure to explain, in support of their objection to the

additions, why filing income tax returns is “mandatory”.

At the hearing of this case, the Court provided respondent's

counsel and petitioners with copies of the Court's opinion in

Cocozza v. Commissioner, T.C. Memo. 1997-305, with citations

of other such cases decided by the Court, including Talmage v.

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

opinion 101 F.3d 695 (4th Cir. 1996). Respondent's counsel

informed the Court that he had already provided petitioners with

a copy of the Court's opinion in Talmage, as well as copies of

the Court's opinions in Greenberg v. Commissioner, 73 T.C. 806
 - 6 -

(1980), and Steele v. Commissioner, T.C. Memo. 1997-307, as

evidenced by his letter to petitioners of February 26, 1998,

annexed as an exhibit to respondent's trial memorandum. In each

of those cases, the Court imposed a penalty against the taxpayer

under section 6673 because of the frivolousness of the taxpayer's

arguments. That letter also notified petitioners that respondent

intended to file a motion for a penalty under section 6673 “in an

amount of at least $5,000.00, if you continue to assert your

previously stated objections to paying taxes” because “As you can

see by reading these cases, your objections to paying taxes are

clearly frivolous and, even more to the point, have been

repeatedly rejected by the Courts.”

At the hearing, the Court explained to petitioners that

their position has no merit. The Court told petitioners that

petitioner's letter of October 23, 1996, would not be treated as

part of their return, but would be deemed a protest filed with

the Appeals officer. Although the facts of the case had been

fully stipulated, petitioners had a prepared statement that they

wished to read into the record. The Court suggested that it

would be more efficient to file the statement as a brief. The

parties thereupon each moved for summary judgment, and respondent

filed a written motion for a penalty under section 6673 “in an

amount not less than $10,000”.
 - 7 -

The Court ordered a seriatim briefing schedule, with

petitioners to lead off, as they requested. After an extension

of time, petitioners filed a 52-page brief, with more than 130

citations of statutes, regulations, cases, and other materials,

partially typed but largely handwritten, with three exhibits

attached, consisting of the IRS Mission Statement, the White

House press release accompanying the President's signature of

H.R. 1226, the Taxpayer Browsing Protection Act, and an excerpt

from 1953 hearings before the Ways and Means Committee,

consisting of a portion of the testimony of Dwight E. Avis, Head,

Alcohol and Tobacco Tax Division, Bureau of Internal Revenue, in

which he stated, among other things: “Your income tax is 100

percent voluntary tax and your liquor tax is 100 percent enforced

tax”. Upon receipt of petitioners' brief, the Court issued an

order informing the parties that they need not file additional

briefs and that the case would be deemed fully submitted.

Discussion

Petitioners' brief, although much longer, by reason of the

inclusion of copious quotations and additional citations, than

the letter to the Appeals officer, adds nothing of substance to

what was said in the letter. In these circumstances, our recent

comments in VonDyl v. Commissioner, T.C. Memo. 1998-120, are

exactly to the point:

Petitioner, by selectively analyzing statutes,
regulations, and case precedent out of context, has
 - 8 -

reached the conclusion that amounts he received from
any and all sources do not constitute income.
Petitioner, following in the footsteps of numerous
others who have unsuccessfully attempted to rationalize
a way to avoid paying Federal income tax, must also
fail. We find petitioner's arguments to be either
wholly without merit and not worthy of further analysis
and/or previously addressed by this and other courts.
See, for example, opinions addressing the question of
whether compensation for labor is not subject to tax,
such as Funk v. Commissioner, 687 F.2d 264 (8th Cir.
1982), affg. T.C. Memo. 1981-506; Broughton v. United
States, 632 F.2d 706, 707 (8th Cir. 1980); Hayward v.
Day, 619 F.2d 716, 717 (8th Cir. 1980); Rowlee v.
Commissioner, 80 T.C. 1111, 1120 (1983). Further, we
are not obligated to exhaustively review and/or rebut
petitioner's misguided contentions. Crain v.
Commissioner, 737 F.2d 1417 (5th Cir. 1984).

Accordingly, we sustain respondent's determination
* * *

In an effort to help petitioners understand why and how their

selective reading of dicta in old cases is at odds with more

recent Supreme Court opinions that set forth the current correct

approach to interpreting and applying the Internal Revenue Code

that is followed by the Federal courts, we make the following

additional observations.

Justice Holmes not only said, in Compania General de Tabacos

de Filipinas v. Collector, 275 U.S. 87, 100 (1927), that “Taxes

are what we pay for civilized society”, but in his article, “The

Path of the Law”, 10 Harv. L. Rev. 457, 461 (1897), that “The

prophecies of what the courts will do in fact, and nothing more

pretentious, are what I mean by the law”, and “a legal duty so

called is nothing but a prediction that if a man does or omits
 - 9 -

certain things he will be made to suffer in this or that way by

judgment of the court”. Id. at 458. Although these formulations

may be somewhat simplistic, they have “a valid core”, Reich v.

Continental Cas. Co., 33 F.3d 754, 757 (7th Cir. 1994). Our

opinion in Talmage v. Commissioner, supra, cites numerous other

cases, in addition to those cited in VonDyl v. Commissioner,

supra, in which this Court and the Courts of Appeals have

invariably rejected arguments that wages are not income for the

purposes of the income tax law. The information given to

petitioners before and at the hearing should have made clear to

petitioners that their case is a sure loser.

The fact that “income” is not a defined term in the Internal

Revenue Code is of no moment. The lack of a definition does not

make the 16th Amendment or the Internal Revenue Code inoperative.

As Judge Learned Hand stated in United States v. Oregon-

Washington R.R. & Nav. Co., 251 F. 211, 212 (2d Cir. 1918), the

meaning of the word “income” is “not to be found in its bare

etymological derivation. Its meaning is rather to be gathered

from the implicit assumptions of its use in common speech”. The

term "income" as used in the 16th Amendment and in the Internal

Revenue Code "carries the meaning which an intelligent layman,

not an economist or a lawyer, would ascribe to it”. Magill,

Taxable Income 19 (1945 rev.). Although there was a time in the

early days of the Federal tax laws when the Supreme Court
 - 10 -

regarded the problem as one that could be solved by arriving at

an approved definition, which, incidentally, early on included

income derived from labor, including salaries, wages, or

compensation,2 the current view, as expressed on behalf of the

Supreme Court by Justice Holmes in United States v. Kirby Lumber

Co., 284 U.S. 1, 3 (1931), is: “We see nothing to be gained by

the discussion of judicial definitions. The defendant in error

[the taxpayer] has realized within the year an accession to

income, if we take words in their plain popular meaning”. See

also Reading v. Commissioner, 70 T.C. 730, 733 (1978), affd. per

curiam 614 F.2d 159 (8th Cir. 1980).

What petitioners and others who make the misguided arguments

that the Court has waded through in this case have failed or

refused to recognize, and must realize and understand, is that

the courts no longer pay any attention to the metaphysical logic

chopping and nit-picking of dicta from old cases about what is

“income”. The correct view, which all Federal courts currently

follow and apply, was made clear by Chief Justice Warren in the

more recent opinions of the Supreme Court in Commissioner v.

Glenshaw Glass Co., 348 U.S. 426 (1955), and General Am.

Investors Co. v. Commissioner, 348 U.S. 434 (1955), that the

2
The classic definition was worked out in a series of cases
commencing with Stratton's Independence, Ltd. v. Howbert, 231
U.S. 399, 415 (1913), through Doyle v. Mitchell Bros. Co., 247
U.S. 179, 185 (1918), and culminating in Eisner v. Macomber, 252
U.S. 189, 207 (1920).
 - 11 -

receipts in question in those cases were included in taxable

income under both the 1939 and 1954 Internal Revenue Codes. For

example, in Commissioner v. Glenshaw Glass Co., supra at 432-433:

“We would do violence to the plain meaning of the statute and

restrict a clear legislative attempt to * * * bear upon all

receipts constitutionally taxable were we to say that the

payments in question here are not gross income.” And again, in

General Am. Investors Co. v. Commissioner, supra at 436: “In

accordance with the legislative design to reach all gain

constitutionally taxable unless specifically excluded, we

conclude that the petitioner is liable for the tax and the

judgment is affirmed.”

These words are also “dicta”, as are the words of the old

Supreme Court opinions and other opinions and sources that

petitioners selectively quote out of context. Dicta is a word

that lawyers and judges use to refer to explanations or comments

in a judicial opinion that are not necessary to the holding or

result that is the court's actual decision. But, as explained in

Reich v. Continental Cas. Co., supra at 757, in which the Court

of Appeals applied and followed the dicta in a recent Supreme

Court opinion on another subject:

federal law is for all practical purposes what the
Supreme Court says it is. When the Court's view is
embodied in a holding, the Court's reluctance to
overrule its precedents enables a confident prediction
that that holding is “the law.” When the view is
embodied in a dictum, prediction cannot be made with
 - 12 -

the same confidence. But where it is a recent dictum
that considers all the relevant considerations and
adumbrates an unmistakable conclusion, it would be
reckless to think the Court likely to adopt a contrary
view in the near future. In such a case the dictum
provides the best, though not an infallible guide to
what the law is, and it will ordinarily be the duty of
a lower court to be guided by it.

So much more so in the case at hand, as in the countless other

cases in which misguided taxpayers such as petitioners have

repeated the fruitless arguments that the income tax laws are

ineffective or inapplicable in accomplishing their intended

objective of raising governmental revenue from individuals

who receive wage, salary, or other compensation income. The

invariable practice of this Court and the Courts of Appeals in

rejecting those arguments confirms that petitioners' arguments

are frivolous. By enacting and amending the Internal Revenue

Code, Congress, the people's elected representatives, has

accomplished the purpose of providing the primary means of

financing the costs of the Federal Government. This is the

system under which both individuals and corporations will be

required to pay their shares of the burden, at least until such

time as Congress decides to repeal the income tax and try another

way to raise the necessary revenue.

Petitioners' descriptions of the Federal income tax as a

voluntary system that they and others who don't like to pay taxes

can elect to participate in or not as they choose are based on a

gross misunderstanding that can only be attributed to willful
 - 13 -

"obtuseness". See Coleman v. Commissioner, 791 F.2d 68, 72 (7th

Cir. 1986) (quoted in Talmage v. Commissioner, T.C. Memo. 1996-

114). That misunderstanding arises from a false distinction

between the way in which some taxes are determined and collected

without the filing of a return, as by stamp or at the point of

sale, and our self-assessment system of filing income tax returns

in which taxpayers are required in the first instance to compute

and report to the Government the amount of their taxable income

and the resulting tax liability. But, as Judge Learned Hand

pointed out in his famous aphorism about income tax avoidance in

Commissioner v. Newman, 159 F.2d 848, 850-851 (2d Cir. 1947):

Over and over again courts have said that there is
nothing sinister in so arranging one's affairs as to
keep taxes as low as possible. Everybody does so, rich
or poor; and all do right, for nobody owes any public
duty to pay more than the law demands: taxes are
enforced exactions, not voluntary contributions. To
demand more in the name of morals is mere cant.
[Emphasis supplied.]

Again, the notion that the tax on the income from employment

or labor of a human being is an unconstitutional tax on his

existence, and that only artificial entities such as

corporations, formed and continued by State action, can be

subjected to income tax, is, in this day and age, even when

alternative approaches to raising revenue are receiving

legislative consideration, too quaint to require extended

discussion. In this connection, petitioners' notion that common

speech restricts the term “person” to artificial persons is just
 - 14 -

wrong. “Person” is the generic term; it usually refers to human

beings; when it is extended to include other entities, such as

corporations, they are included in the definition of person and,

to provide clarity and contrast, the term “individual” is applied

to human beings.

Petitioners are “individuals” within the meaning of the

Internal Revenue Code. The fact that the term “individual” is

not defined in the Internal Revenue Code is also of no moment.

As previously stated, words in the Internal Revenue Code have

their commonly accepted meanings as used in common speech.

Petitioners display similar obtuseness in asserting that the

words of the Internal Revenue Code do not actually impose income

tax liability on them. Petitioners have been led astray by

whoever has sold them the bill of goods that they have so

laboriously written out and filed as their brief. All that is

required is actually to read the Internal Revenue Code. Section

1, entitled “Tax Imposed”, provides in subsection (a):

There is hereby imposed on the taxable income of--

(1) every married individual * * * who makes
a single return jointly with his spouse under
section 6013 * * *

* * * * * * *

a tax determined in accordance with the following table:

* * * * * * *

If taxable income is: The tax is:
 - 15 -

* * * * * * *

Over $32,450 but not
over $78,400 . . . . . . . . $4,867.50, plus 28%
of the excess over
$32,450.

Married individuals who file separate returns or no return suffer

tax liability at the higher rate of 31 percent on much the same

amount of taxable income under section 1(d).

Section 61(a) defines “gross income” as “all income from

whatever source derived”, the formulation that Chief Justice

Warren said, on behalf of the Supreme Court, in Commissioner v.

Glenshaw Glass Co., 348 U.S. 426 (1955), and General Am.

Investors Co. v. Commissioner, 348 U.S. 434 (1955), was all

encompassing, and which specifically includes, in paragraph (1),

“Compensation for services”. Section 62 defines the intermediate

term “adjusted gross income” minus certain defined deductions.

Section 63(b) defines “taxable income” for individuals who do not

itemize their deductions, as petitioners failed to do on their

return document (and rejected the opportunity that we afforded

them to rectify their omission), as meaning “adjusted gross

income, minus-- (1) the standard deduction, and (2) the deduction

for personal exemptions provided in section 151.” The standard

deduction for 1992 is defined by section 63(c) as $5,000 in the

case of a joint return, and the personal exemption amount for

1992 is $4,600 for two individuals.
 - 16 -

Finally, civil tax liabilities are not criminal punishment.

The requirement that the Government prove liability beyond a

reasonable doubt, the standard applied in criminal cases, does

not apply to civil tax liabilities. In any event, the burden of

proof plays no role in this case. No facts are in dispute.

Petitioners' stipulation that petitioner received wages of

$65,128 is all that is needed to decide this case in respondent's

favor.

Respondent's determination is sustained with respect to

petitioner's wage income from Transaero Corp. We will deny

petitioners’ motion for summary judgment and grant respondent's

motion. To give effect to respondent's concession on the $20 of

interest, a computation under Rule 155 will be required.

Because petitioners' brief does not address the late-filing

addition and the negligence penalty, we might have deemed

petitioners to have conceded them, once we rejected petitioners'

frivolous arguments on the merits of the tax liability. However,

petitioner's trial memorandum, which was filed as part of the

record in this case, takes the position that the section 6651(a)

late filing addition and the section 6662 negligence penalty

cannot be imposed because of respondent's failure to persuade

petitioners, by reason of their “voluntary” argument, that there

is a mandatory filing requirement. Inasmuch as we have rejected

petitioners' argument on that score, their arguments against
 - 17 -

the imposition of the addition and penalty cannot stand.

Respondent's determinations are clearly correct and must be

sustained. Petitioners filed their return more than a year and

a half late. Their return position was inexcusably groundless,

and their arguments have been clearly frivolous. As such, they

evidence petitioners' continuing failure to make any reasonable

attempt to comply with the applicable provisions of the Internal

Revenue Code. The addition and penalty clearly apply to the

underpayment to be determined in the Rule 155 computation.

We now turn to respondent's motion to impose a penalty under

section 6673. Petitioners received a warning that respondent

would move for a penalty under section 6673 because their

position was groundless and their arguments frivolous.

Respondent furnished petitioners with copies of similar cases, in

which, after upholding the Commissioner's determinations, the

Court imposed such a penalty on the taxpayers and in which the

Court's decision to impose a penalty was upheld by the Courts of

Appeals. Petitioners were given ample opportunity to recede in

the face of the evidence provided by the Court and respondent of

the overwhelming likelihood, amounting to certainty, that they

would lose their case and that a penalty would be imposed if they

persisted in their misguided time- and resource-consuming course

of action. Petitioners' position in this case has been

groundless and their arguments frivolous from the time they first
 - 18 -

decided not to file a return, then filed a return taking a

clearly groundless position, through the times of filing of their

petition and the protest letter with its frivolous arguments that

they sought to incorporate into their return, through the filing

of their trial memorandum and their actions at the hearing, and

concluding with their brief, all, as the Court of Appeals said in

Coleman v. Commissioner, 791 F.2d at 71, “contrary to established

law and unsupported by a reasoned, colorable argument for change

in the law.”

In these circumstances, we will exercise our discretion

under section 6673(a)(1) and require petitioners, in addition to

the underpayment of tax, the late filing addition, and the

negligence penalty, to pay a penalty to the United States in the

amount of $2,500.

In view of the foregoing,

An appropriate order will

be issued, and decision will be

entered under Rule 155.