T.C. Memo. 1999-5
UNITED STATES TAX COURT
RODNEY W. & LYNNELL R. FRAZIER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12644-97. Filed January 14, 1999.
Rodney W. and Lynnell R. Frazier, pro sese.
Alan Friday, for respondent.
MEMORANDUM OPINION
THORNTON, Judge: By separate notices of deficiency,
respondent determined the following deficiencies and penalties
with respect to petitioner husband’s 1993 Federal income taxes
and petitioners’ joint 1994 and 1995 Federal income taxes:
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Accuracy-related
Years Deficiency Penalty Sec. 6662
1993 $6,412 $1,282
1994 9,140 1,828
1995 4,420 884
All section references are to the Internal Revenue Code in
effect in the years in issue. All Rule references are to the Tax
Court Rules of Practice and Procedure. All dollar amounts are
rounded.
Some of the facts have been stipulated and are so found and
incorporated by this reference.
At the time the petition was filed, petitioners were married
and living in Hueytown, Alabama.
During the years at issue, petitioner husband operated a
business known as Pro TV & VCR Repair. In 1993, petitioner
husband filed a Federal income tax return with a filing status of
single.
In 1994, petitioners were married. During the years at
issue, petitioner wife was employed at the Alabama Power Co. In
1994 and 1995, petitioners filed joint Federal income tax
returns.
Petitioner husband’s tax return for 1993, and petitioners’
joint tax returns for 1994 and 1995, reported income as follows:
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Amount of
Year Source of Income Income Reported
1993 Schedule C income $715
Interest income 20
1994 Wages 29,097
Dividend income 134
Schedule C income 670
1995 Wages 38,433
Interest 29
Dividends 141
Schedule C loss (3,534)
In 1993, petitioner husband purchased a house, which he sold
in 1994, resulting in a capital gain of $2,340.
Respondent determined that for taxable year 1993 petitioner
husband had unreported income in the amount of $28,933, and that
for taxable years 1994 and 1995, petitioners had unreported
income of $31,607, and $17,828, respectively. Respondent also
determined that petitioners had unreported capital gain of $2,340
in taxable year 1994.
In their petition, petitioners alleged that they did not
engage in any taxable activities during the years at issue.
Discussion
Generally, the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving that those
determinations are erroneous. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). In certain circumstances involving
unreported income, respondent must make some minimal evidentiary
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showing linking the taxpayer to an income-producing activity
before the presumption in favor of respondent’s determination
attaches. Blohm v. Commissioner, 994 F.2d 1542, 1548-1549 (11th
Cir. 1993), affg. T.C. Memo. 1991-636. In the case at hand,
ample evidence supports respondent’s determinations.
Respondent used the cash expenditures method to reconstruct
petitioners’ income. This method is based on the assumption
that, absent some explanation by the taxpayer, the excess of a
taxpayer’s expenditures over reported income in a taxable year
constitutes taxable income. Petzoldt v. Commissioner, 92 T.C.
661, 695 (1989).
Petitioners have stipulated copies of bank records
disclosing deposits and disbursements from their bank accounts
and schedules prepared by respondent summarizing all of the
transactions, deposits, and disbursements. For each of the years
in issue, these documents show that petitioners made substantial
expenditures in excess of amounts reported as income on their
Federal income tax returns. Our review of the record indicates
that respondent complied with the requirements set forth in
Holland v. United States, 348 U.S. 121 (1954), by adequately
accounting for opening cash balances and for nontaxable receipts
such as loans, see Petzoldt v. Commissioner, supra at 695, and
that respondent has properly reconstructed petitioners’ income
for the years in issue.
Petitioners bear the burden of showing that respondent’s
application of the cash expenditures method was unfair or
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inaccurate. See Price v. United States, 335 F.2d 671, 677 (5th
Cir. 1964); Goe v. Commissioner, 198 F.2d 851 (3d Cir. 1952);
Tokarski v. Commissioner, 87 T.C. 74, 76-77 (1986); Alvarez v.
Commissioner, T.C. Memo. 1995-414. Petitioners chose to present
no substantive evidence and to call no witnesses. At trial,
petitioner husband sought to read from a prepared statement
contending that the Federal income tax is an indirect tax under
Article 1, Section 8, Clause 1 of the Constitution, and that
petitioners did not engage in any “excise taxable activities”.
Petitioners’ trial memorandum advances similar arguments.
Petitioners’ arguments are without merit and have long been
rejected. In Abrams v. Commissioner, 82 T.C. 403, 406-407
(1984), for instance, this Court stated:
Since the ratification of the Sixteenth Amendment,
it is immaterial with respect to income taxes, whether
the tax is a direct or indirect tax. The whole purpose
of the Sixteenth Amendment was to relieve all income
taxes when imposed from apportionment and from a
consideration of the source whence the income was
derived.
See also Ficalora v. Commissioner, 751 F.2d 85 (2d Cir. 1984);
Sickler v. Commissioner, T.C. Memo. 1994-462; Boyce v.
Commissioner, T.C. Memo. 1990-555. Respondent’s determinations
of unreported income for each of the years in issue are
sustained.
Petitioners have stipulated that the sale in 1994 of
the house that petitioner husband purchased in 1993 resulted in
capital gain of $2,340. We conclude that this capital gain
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constitutes taxable income. Respondent’s determination on this
issue is sustained.
Respondent determined that petitioners are liable for
accuracy-related penalties pursuant to section 6662(a) for
negligence or disregard of rules or regulations.1 In their
petition, petitioners assigned no error to that determination,
nor did they assert either in their trial memorandum or at trial
that the section 6662 penalties are in dispute. Petitioners
failed to offer any evidence that their underpayments were not
due to negligence or that they did not disregard rules or
regulations. Respondent’s determination of penalties under
section 6662(a) is sustained.
The Tax Court is authorized under section 6673(a)(1) to
require the taxpayer to pay to the United States a penalty not in
excess of $25,000 when it appears to the Court that the
taxpayer’s position in the proceeding is frivolous or groundless.
Petitioners’ position, based on stale and meritless contentions,
is manifestly frivolous and groundless, and their action has
resulted in the waste of limited judicial and administrative
resources. Previously, on its own motion, this Court has awarded
damages to the United States under section 6673 where the
taxpayer advanced frivolous and groundless contentions similar to
1
In the notices of deficiency for each of the years at
issue, respondent determined that petitioners were liable for
civil fraud penalties pursuant to sec. 6663, or in the
alternative, accuracy-related penalties pursuant to sec. 6662.
At trial, respondent abandoned the imposition of civil fraud
penalties.
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those advanced by petitioners. See Abrams v. Commissioner, supra
at 408-413. Although we do not now impose a penalty under
section 6673(a)(1), we caution petitioners that if they continue
to advance such arguments to this Court, they will invite such
penalties in the future.
To reflect the foregoing and a concession by the respondent,
Decision will be entered
under Rule 155.