T.C. Memo. 1998-316
UNITED STATES TAX COURT
DENNIS R. ANDREWS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18990-96. Filed September 2, 1998.
Thomas S. Botkin and Ralph A. Caruso II,1 for petitioner.
Brian M. Harrington, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined deficiencies in and
additions to petitioner's Federal income taxes as follows:
1
After the trial of this case, Ralph A. Caruso II filed a
Motion to Withdraw which was granted by the Court.
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Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6654
1991 $13,997 $3,499.25 $811.54
1992 10,926 2,731.50 476.54
1993 9,575 2,393.75 401.18
1994 9,406 2,351.50 488.12
Unless otherwise indicated, 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.
After concessions, the issues for decision are: (1) Whether
the notice of deficiency is arbitrary and excessive and therefore
lacks presumptive correctness; (2) whether petitioner is liable
for the deficiencies in taxes as determined by respondent; and
(3) whether petitioner is liable for the additions to tax as
determined by respondent.
FINDINGS OF FACT
The parties submitted the instant case fully stipulated.
The stipulated facts are incorporated herein by reference and are
found as facts in the instant case. Petitioner resided in
Warsaw, Indiana, at the time he filed his petition.
In a letter to respondent dated July 18, 1994, petitioner
stated that he is not a resident or citizen of the United States,
but that he is a "Natural human being of the Indiana Republic",
questioned respondent's delegation of authority to operate in a
foreign capacity in the "united American Republic (Indiana)", and
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stated that he had no income from a source within the United
States or effectively connected to a trade or business within the
United States. On July 19, 1994, petitioner executed a document
entitled "AFFIDAVIT OF REVOCATION & RESCISSION OF SIGNATURE AND
POWER OF ATTORNEY" in which document he stated that he revoked
all signatures on any and all instruments related to his Social
Security number and his Federal income tax returns. On April 18,
1995, respondent received from petitioner a document entitled
"NOTICE: A SPECIAL LEGAL ADMINISTRATIVE EVIDENTIARY INSTRUMENT"
in which document petitioner asserted that he does not reside and
never resided "in this state", "in the state" or "any federal
area", that he is not a "U.S. Citizen", "U.S. Person", or "U.S.
Individual", and that he "is a sovereign Indiana citizen, living
and working in the Indiana Republic, which is distinct and
separate from any Federal area."
Petitioner did not file Federal income tax returns for the
years in issue. On January 5, 1996, respondent sent a letter to
petitioner concerning his failure to file returns for the years
in issue and requesting that he either file returns or assist the
tax auditor in preparing returns for him. Respondent's letter
also indicated that if petitioner failed to cooperate, returns
would be prepared based upon information received by the Internal
Revenue Service (IRS). On January 26, 1996, respondent mailed to
petitioner a report proposing adjustments for the years in issue.
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In response to respondent's January 26, 1996, letter,
petitioner, in a discursive letter to respondent dated February
22, 1996, claimed "Nontaxpayer" status, maintained that "Title 26
is NOT positive law", refused to "volunteer to be a taxpayer",
asserted that he was outside the jurisdiction of the IRS and the
Courts, and claimed that respondent's attempt to collect money
from him is "straight fraud".
Respondent's Information Return Master File (IRMF) indicates
that several payors issued information returns to petitioner as
follows:
Type of
Tax Year Payor Form Income Amount
1991 The Jada Co. Inc. W-2 Wages $2,990
1991 The Jada Co. Inc. 1099-MISC Rents 10,200
1991 Starkey Lab., Inc. 1099-MISC Nonemployee Comp. 2,400
1991 Starkey Lab., Inc. 1099-MISC Nonemployee Comp. 200
1992 Starkey Lab., Inc. 1099-MISC Nonemployee Comp. 3,900
1992 Matol Botanical Inter. 1099-MISC Nonemployee Comp. 63
Respondent's IRMF also indicates that one payee, Inland Mortgage
Corporation, reported, on Form 1098, that petitioner paid
mortgage interest during the years in issue as follows:
Tax
Year Amount
1991 $6,521
1992 6,000
1993 6,973
1994 6,380
On June 4, 1996, respondent issued to petitioner the
statutory notice of deficiency for the years in issue.
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In determining petitioner's tax deficiencies, respondent utilized
the information as set forth above relating to the Forms W-2,
1099, and 1098, and certain Consumer Expenditure Surveys released
by the U.S. Department of Labor, Bureau of Labor Statistics.
OPINION
1. Burden of Proof
The threshold issue for decision concerns the placement of
the burden of proof. Petitioner argues that although
respondent's determinations contained in a notice of deficiency
are generally presumed to be correct, when respondent's
determinations are based upon an alleged underreporting of income
the presumption of correctness "evaporates", citing Zuhone v.
Commissioner, 883 F.2d 1317 (7th Cir. 1989), affg. T.C. Memo.
1988-142. Accordingly, petitioner contends, the burden of proof
in the instant case has shifted to respondent. Respondent
counters that the burden of proof remains with petitioner because
evidence linking petitioner to an income-producing activity has
been provided, and, in any event, that petitioner does not deny
receiving unreported income.
In general, the Commissioner's determinations contained in a
notice of deficiency are entitled to a presumption of
correctness, and the taxpayer has the burden of proving them
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incorrect.2 Rule 142(a); United States v. Janis, 428 U.S. 433,
441-442 (1976); Welch v. Helvering, 290 U.S. 111, 115 (1933);
Gold Emporium, Inc. v. Commissioner, 910 F.2d 1374, 1378 (7th
Cir. 1990), affg. Malicki v. Commissioner, T.C. Memo. 1988-559.
If, however, the taxpayer demonstrates that the Commissioner's
determinations are arbitrary and excessive or without rational
foundation, then the presumption no longer applies.3 Pittman v.
2
The Internal Revenue Service Restructuring & Reform Act of
1998 (RRA 1998), Pub. L. 105-206, sec. 3001, 112 Stat. 685, 726-
727, added sec. 7491, which shifts the burden of proof to the
Secretary in certain circumstances.
However, sec. 7491 is applicable to "court proceedings
arising in connection with examinations commencing after the date
of the enactment of this Act." RRA 1998, sec. 3001(c). The
Internal Revenue Service Restructuring & Reform Act of 1998 was
enacted on July 22, 1998, and, accordingly, neither party argues
that sec. 7491 is applicable to the instant case.
3
On brief, petitioner cites Anastasato v. Commissioner, 794
F.2d 884 (3d Cir. 1986), vacating and remanding T.C. Memo. 1985-
101, for the proposition that respondent bears the burden of
proving that the deficiency notice is not arbitrary or erroneous
where it is based upon alleged unreported income. Petitioner,
however, misconstrues Anastasato. Respondent does not have the
burden to prove that the deficiency notice is not arbitrary;
rather, petitioner has the burden to prove that the deficiency
notice is arbitrary. See Anastasato v. Commissioner, 794 F.2d
884, 887 (3d Cir. 1986) ("If the taxpayer rebuts the presumption
by showing that it is arbitrary and erroneous * * * the
presumption disappears."); see also Pittman v. Commissioner, 100
F.3d 1308, 1313 (7th Cir. 1996) ("Thus, to rebut the presumption
of correctness and shift the burden to the Commissioner, the
taxpayer must demonstrate that the Commissioner's deficiency
assessment lacks a rational foundation or is arbitrary and
excessive." (Citations omitted.)), affg. T.C. Memo. 1995-243;
Gold Emporium, Inc. v. Commissioner, 910 F.2d 1374, 1378 (7th
Cir. 1990) ("If the taxpayer demonstrates that the assessment is
arbitrary and excessive or without factual foundation, then the
presumption no longer applies." (Citation omitted.)), affg.
(continued...)
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Commissioner, 100 F.3d 1308, 1317 (7th Cir. 1996), affg. T.C.
Memo. 1995-243; Gold Emporium, Inc. v. Commissioner, supra at
1378; Zuhone v. Commissioner, supra at 1325-1326; Ruth v. United
States, 823 F.2d 1091, 1094 (7th Cir. 1987).
In asking this Court to hold that the notice of deficiency
is arbitrary, petitioner is asking us to explore the
underpinnings of that notice. As a general rule, we will not
look behind the statutory notice to examine the evidence used in
making the determination. Petzoldt v. Commissioner, 92 T.C. 661,
688 (1989); Llorente v. Commissioner, 74 T.C. 260, 264 (1980),
affd. in part, revd. in part and remanded 649 F.2d 152 (2d Cir.
1981); Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324,
327 (1974). Courts have identified an exception to the general
rule where the Commissioner, in a case involving unreported
income, introduces no direct evidence but rests on the
presumption of correctness and the taxpayer challenges the
3
(...continued)
Malicki v. Commissioner, T.C. Memo. 1988-559; Zuhone v.
Commissioner, 883 F.2d 1317, 1325, 1326 (7th Cir. 1989) ("If the
taxpayer establishes that the Commissioner's determination is
arbitrary, courts generally shift the burden of production to the
Commissioner." (Citation omitted.) "If the taxpayer is
successful in showing that the assessment is arbitrary and
excessive or without factual foundation, the presumption drops
from the case."), affg. T.C. Memo. 1988-142; Ruth v. United
States, 823 F.2d 1091, 1094 (7th Cir. 1987) ("when the assessment
is shown to be 'without rational foundation' or 'arbitrary and
erroneous,' the presumption should not be recognized." (Citations
omitted.)).
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deficiency on the grounds that it is arbitrary.4 Portillo v.
Commissioner, 932 F.2d 1128, 1133 (5th Cir. 1991), affg. in part,
revg. in part and remanding T.C. Memo. 1990-68; Schad v.
Commissioner, 87 T.C. 609, 618 (1986), affd. without published
opinion 827 F.2d 774 (11th Cir. 1987); Llorente v. Commissioner,
supra at 264; see also Senter v. Commissioner, T.C. Memo. 1995-
311.
Petitioner relies on Portillo as support for his position
that the notice of deficiency in the instant case is arbitrary
and therefore not entitled to the normal presumption of
correctness. The Court of Appeals for the Fifth Circuit,
however, has recently distinguished Portillo in Parker v.
Commissioner, 117 F.3d 785 (5th Cir. 1997). As in the instant
case, the taxpayers in Parker failed to file income tax returns
for the years in issue, yet relied upon Portillo for the
proposition that the usual presumption of correctness should not
apply because the Commissioner's determinations of unreported
income were based upon Forms 1099 and W-2. The Court of Appeals
for the Fifth Circuit stated:
In Portillo, the IRS issued a notice of deficiency when
it discovered that the taxpayer had reported
substantially less income from a particular payor than
4
"[T]he reason behind the burden-shifting principle in an
unreported income case is that the taxpayer bears the difficult
burden of proving the non-receipt of income." Sealy Power, Ltd.
v. Commissioner, 46 F.3d 382, 386 (5th Cir. 1995), affg. T.C.
Memo. 1992-168.
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that payor had reported in its Form 1099. We found
that the Commissioner "arbitrarily decided to attribute
veracity to [the third-party payor] and assume that
[the taxpayer's] Form 1040 was false." [Portillo v.
Commissioner, 932 F.2d at 1134.] In Portillo, the
Commissioner's determination was arbitrary because the
Commissioner offered no factual basis for accepting one
sworn statement, the Form 1099, while rejecting another
sworn statement, the taxpayer's Form 1040.
Portillo did not hold that the IRS must conduct an
independent investigation in all tax deficiency cases.
In this case, the Commissioner has not arbitrarily
found the third-party forms credible: the Parkers
never filed a Form 1040 or any other document in which
they swore that they did not receive the payments in
question. The Commissioner has no duty to investigate
a third-party payment report that is not disputed by
the taxpayer.
Parker v. Commissioner, supra at 786-787.5
Like the taxpayers in Parker, petitioner in the instant case
never filed a Form 1040 or any other document in which he swore
that he did not receive unreported income. We find it
significant that nowhere in petitioner's petition, trial
5
Petitioner does not cite Parker v. Commissioner, 117 F.3d
785 (5th Cir. 1997), in his trial memorandum, brief, or reply
brief. On brief, petitioner cites Portillo v. Commissioner, 932
F.3d 1128 (5th Cir. 1991), affg. in part, revg. in part and
remanding T.C. Memo. 1990-68, for the proposition that
"Respondent is not allowed to blindly accept the veracity of tax
forms submitted by third parties when rendering proposed
deficiencies", but "is required to investigate the books,
receipts and other records of the third parties submitting these
forms to determine whether the forms are correct." Petitioner's
failure to mention the holding in Parker, that no such
investigation is required where, as in the instant case, the
taxpayer does not file a Form 1040 or other sworn document
denying receipt of unreported income, does little to instill
faith in petitioner's candor toward the Court. We generally
expect more from counsel representing parties appearing before
this Court.
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memorandum, brief, or reply brief does he state any facts tending
to indicate that he did not receive unreported income.6
Petitioner's sole strategy in the instant case has been to
obfuscate rather than enlighten.
Moreover, respondent has at least established in the instant
case a minimal predicate for the determination. The evidence
stipulated by the parties indicates that petitioner received
wages, rents, and nonemployee compensation from several payors
and that he made interest payments on a home mortgage.
Additionally, the use of data compiled by the Bureau of Labor
Statistics is an acceptable and reasonable method of income
reconstruction. Pollard v. Commissioner, 786 F.2d 1063, 1066
(11th Cir. 1986), affg. T.C. Memo. 1984-536; Burgo v.
Commissioner, 69 T.C. 729, 749 (1978); Cupp v. Commissioner, 65
T.C. 68 (1975), affd. without published opinion 559 F.2d 1207 (3d
Cir. 1977); Giddio v. Commissioner, 54 T.C. 1530, 1532 (1970).
It was not arbitrary for respondent to determine that petitioner
had income in an amount at least equal to the normal cost of
6
See White v. Commissioner, T.C. Memo. 1997-459 ("We observe
that upon receipt of a notice of deficiency determining
unreported income, a taxpayer can reasonably be expected to
support an allegation that the Commissioner erred in determining
a deficiency in tax by stating facts tending to show that the
taxpayer was unemployed, earned a lower amount of income, or
otherwise did not receive the payments reported to respondent by
third-party payors.").
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supporting his family.7 "All that is required to support the
presumption is that the Commissioner's determination have some
minimal factual predicate." Pittman v. Commissioner, 100 F.3d at
1317.
The evidence of unreported income offered by respondent is
uncontroverted by petitioner. Consistent with Parker v.
Commissioner, supra, we hold that the presumption of correctness
properly attached to respondent's determinations, and petitioner
bears the burden of demonstrating that they are erroneous. See
White v. Commissioner, T.C. Memo. 1997-459 ("In short,
petitioner's assertion that respondent erred in relying on
reports from third-party payors in determining the deficiencies
in dispute, standing alone, carries no weight.").8
7
The parties stipulated that during the years in issue
petitioner "was married and was legally responsible for one
dependant [sic] child."
8
Sec. 6201(d),amended by the Taxpayer Bill of Rights 2, Pub.
L. 104-168, sec. 602, 110 Stat. 1452, 1463 (1996), is effective
as of July 30, 1996. Sec. 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. See McQuatters v.
Commissioner, T.C. Memo. 1998-88; Dennis v. Commissioner, T.C.
Memo. 1997-275; Hardy v. Commissioner, T.C. Memo. 1997-97.
Neither party addressed the applicability vel non of sec.
6201(d) to the instant case. Sec. 6201(d) does not apply to
petitioner's 1993 and 1994 taxable years because there was no
income reported on an information return for those years. As for
petitioner's 1991 and 1992 taxable years, we conclude that
petitioner has not asserted a reasonable dispute with respect to
(continued...)
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2. Whether Petitioner Is Liable for the Deficiencies
Petitioner presented no affirmative evidence that
respondent's determinations are erroneous. On this record, we
sustain respondent's determinations.
3. Section 6651(a)(1) Failure To File Timely
For each year in issue respondent determined that petitioner
is liable for the addition to tax under section 6651(a)(1) for
his failure to file a Federal income tax return. Section
6651(a)(1) provides for an addition to tax of 5 percent of the
tax required to be shown on the return for each month or fraction
thereof for which there is a failure to file, not to exceed 25
percent. The addition to tax for failure to file a return timely
will be imposed if a return is not timely filed unless the
taxpayer shows that the delay was due to reasonable cause and not
willful neglect. Sec. 6651(a)(1).
There is no evidence in the record that suggests that
petitioner's failure to file a Federal income tax return for any
year in issue was due to reasonable cause and not due to willful
8
(...continued)
any item of income reported on an information return.
Petitioner: (1) Never filed a Form 1040 or any other document in
which he swore that he did not receive unreported income; (2)
failed to state any facts tending to indicate that he did not
receive unreported income; and (3) failed to deny that he
received any item of income reported on an information return.
Furthermore, petitioner offered no evidence that he fully
cooperated with respondent, and the limited evidence in the
record suggests otherwise.
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neglect. To the contrary, his asserted reasons for refusing to
file returns are patently frivolous. Consequently, we sustain
respondent's determination that petitioner is liable for the
additions to tax under section 6651(a)(1) for the years 1991
through 1994.
4. Section 6654 Failure To Pay Estimated Tax
For each year in issue respondent determined that petitioner
is liable for the additions to tax under section 6654 for his
failure to make estimated tax payments. Where payments of tax,
either through withholding or by making estimated quarterly tax
payments during the course of the year, do not equal the amount
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. Niedringhaus v.
Commissioner, 99 T.C. 202, 222 (1992); Grosshandler v.
Commissioner, 75 T.C. 1, 20-21 (1980). Petitioner bears the
burden to show qualification for such exception. Habersham-Bey
v. Commissioner, 78 T.C. 304, 319-320 (1982). The record does
not show that he qualifies for any exception; therefore, we hold
that he is liable for the additions to tax under section 6654 for
the 1991 through 1994 taxable years.
To reflect the foregoing,
Decision will be entered
under Rule 155.