T.C. Memo. 2001-133
UNITED STATES TAX COURT
MATRIXINFOSYS TRUST, ANDY HROMIKO, TRUSTEE, Petitioner
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ANDY HROMIKO, Petitioner v. COMMISSIONER
OF INTERNAL REVENUE, Respondent
Docket Nos. 8897-99, 15974-99. Filed June 7, 2001.
Andy Hromiko (a trustee), for petitioner in docket
No. 8897-99.
Andy Hromiko, pro se in docket No. 15974-99.
Jeremy L. McPherson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: In these consolidated cases, respondent
determined the following deficiencies in, additions to, and
penalties on petitioners’ Federal income taxes:
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Additions to Tax Penalty
Petitioner Year Deficiency Sec. 6651(a)(1) Sec. 6654 Sec. 6662(a)
MatrixInfoSys 1995 $23,789 –- -- $4,758
Trust 1996 23,666 -- -- 4,733
Andy Hromiko 1994 $20,340 $5,085 $1,055 --
1995 20,176 5,044 1,094 –-
1996 19,447 4,862 1,035 –-
1997 18,366 4,592 983 –-
Unless otherwise stated, 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.
We must resolve a basic dispute between the parties:
whether certain payments made to a trust, MatrixInfoSys (the
trust), on account of services performed by Andy Hromiko
(petitioner) should have been returned as income on petitioner’s
individual tax return. Because respondent adopted “whipsaw”
positions in making the determinations against petitioner and the
trust, respondent will concede the tax liabilities determined
against the trust if the Court concludes that the payments made
to the trust are properly taxable to petitioner.
FINDINGS OF FACT
At the time of the filing of the trust’s petition, the
trust’s address was in Roseville, California. Similarly, at the
time petitioner filed his petition, he resided in Roseville,
California. Before setting out our specific factual
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determinations, we describe relevant parts of the procedural
histories of the instant cases.
Procedural Histories
A. The Trust
On May 12, 1999, Andy Hromiko, in his capacity as trustee,
filed a petition for the trust. In the petition, the trustee
alleged that the trust was a business trust entitled to the
business deductions claimed on the filed tax returns.1 The
trustee requested that the matter be transferred to the Internal
Revenue Service (IRS) Appeals Office on the ground that the
notice of deficiency was incomplete and erroneous, that the trust
had been denied its due process under law, and that it had a
substantial claim against the IRS under “the Taxpayer Bill of
Rights”. Further, the trustee listed 10 affirmative defenses on
behalf of the trust:
1. Res judicata
2. Estoppel
3. Waiver
4. Duress
5. Fraud
6. Statute of limitations
7. Invalid notice of deficiency not complying
with the tax code provisions
8. The “clean hands” doctrine (unclean hands
of respondent)
9. Illegality
10. Violation of Taxpayer Bill of Rights
1
With regard to petitioner’s actions as a fiduciary of the
trust, we refer to him as the trustee in this opinion.
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On August 19, 1999, the trust’s case was calendared for the
Court’s trial session beginning January 24, 2000, in San
Francisco, California. On November 5, 1999, respondent filed a
motion for continuance of trial with regard to the trust’s case
on the ground that respondent would seek to have the trust’s case
consolidated with petitioner’s individual case (described below);
we granted respondent’s motion on January 10, 2000. On May 16,
2000, the trust’s case was rescheduled for trial to the San
Francisco, California, trial session beginning October 16, 2000.
B. Petitioner’s Individual Tax Case
On October 12, 1999, petitioner filed a petition for
redetermination with regard to his 1994, 1995, 1996, and 1997 tax
years. Petitioner asserted that he had not received the income
determined by respondent, and therefore he was not liable for the
deficiencies and additions to tax described in the notice of
deficiency.2 Petitioner requested that the matter be transferred
to an IRS Appeals Office because the notice of deficiency was
allegedly incomplete and erroneous. In support of his request,
petitioner alleged that he had been denied “due process of law”
and that he had a claim under the “Taxpayer Bill of Rights”
against the IRS. Finally, petitioner also alleged a laundry list
of defenses:
2
In actuality, respondent determined the deficiencies and
the additions to tax relating to petitioner’s income taxes for
the years in issue in two separate notices.
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1. Res judicata
2. Estoppel
3. Waiver
4. Duress
5. Fraud
6. Statute of limitations
7. Invalid notice of deficiency not complying
with the tax code provisions
8. Failure of respondent to exhaust administrative
remedies
9. Laches
10. The “clean hands” doctrine (unclean hands
of respondent)
11. Illegality
12. Failure of jurisdiction over petitioner
13. Violation of Taxpayer Bill of Rights
Lastly, petitioner submitted documents in which it appears
that he “revokes” and “rescinds” any agreement with the
Government of the United States regarding the Social Security
system. On May 16, 2000, the Court calendared for trial
petitioner’s individual case; the case was placed on the Court’s
trial session beginning October 16, 2000, in San Francisco,
California.
C. Pretrial Discovery and Proceedings
On July 19, 2000, respondent served petitioner with a formal
set of interrogatories. Additionally, on July 19, 2000,
respondent served petitioner with a request for admissions of
fact (with attached exhibits) and filed a copy with the Court on
July 20, 2000. On July 31, 2000, petitioner served respondent
with his own request for admissions of fact. On August 29, 2000,
petitioner moved this Court to issue a protective order so that
he would not have to answer respondent’s interrogatories and
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requests for admissions of fact. Petitioner alleged that
respondent had failed to show that petitioner had received
taxable income. He contended that there was no evidence to
support the determination; therefore, the determination was
arbitrary and erroneous, and the burden of proof shifted to
respondent. On August 30, 2000, we summarily dismissed
petitioner’s claims. On August 31, 2000, respondent filed his
response to petitioner’s request for admissions of fact. On
September 5, 2000, because petitioner had failed to respond to
respondent’s discovery requests, respondent filed a motion to
compel responses to respondent’s interrogatories. On
September 6, 2000, we granted respondent’s motion and ordered
petitioner to make full, complete, and responsive answers on or
before September 18, 2000. We warned petitioner that failure to
comply with the Court’s order could lead to sanctions under Rule
104, including dismissal of the case and entry of a decision
against him. On September 19, 2000, respondent received
petitioner’s responses, but they were evasive and incomplete.
D. Motion To Dismiss and October 16, 2000, Trial
On October 2, 2000, respondent filed a motion to dismiss for
failure properly to prosecute and for a penalty under section
6673 with regard to petitioner’s case. On October 16, 2000,
petitioner filed an opposition to respondent’s motion, a response
to respondent’s request for admissions, and a motion to withdraw
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“deemed admitted admissions” and accept petitioner’s answers to
respondent’s admissions. On October 16, 2000, considering
petitioner’s presence at trial, the Court denied respondent’s
motion to dismiss and for the imposition of a section 6673
penalty. Although the case was allowed to continue, the Court
denied petitioner’s motion to withdraw the deemed admissions. At
trial on October 16, 2000, the Court consolidated petitioner’s
case with the trust’s case. After a considerable exchange
regarding his oath, petitioner testified (in general) that “I
think I filed everything I needed to, that I was required to.”
Petitioner's Income-Producing Activity
During 1994, 1995, 1996, and 1997, petitioner performed
computer analysis and programming services for Duraflame, Inc.,
and California Cedar Products, Inc. These companies paid for
petitioner’s services at an hourly rate and made payments
directly to the trust.
Petitioner did not file individual Federal income tax
returns for 1994 through 1997. Forms 1041, U.S. Income Tax
Return for Estates and Trusts, were filed on behalf of the trust
for 1994, 1995, 1996, and 1997. Respondent made the following
alternative determinations with regard to the trust: (1) The
trust is not entitled to various deductions and exemptions; (2)
it is a sham; and (3) it is a grantor trust subject to sections
671 through 679. Respondent also determined that the money paid
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to the trust is taxable income to petitioner. At trial,
respondent orally renewed his motion that the Court impose a
section 6673 penalty on petitioner.
OPINION
A fundamental principle of tax law is that income is taxed
to the person who earns it. See Commissioner v. Culbertson, 337
U.S. 733, 739-740 (1949); Lucas v. Earl, 281 U.S. 111, 114-115
(1930); Johnston v. Commissioner, T.C. Memo. 2000-315. An
assignment of income to a trust is ineffective to shift the tax
burden from the taxpayer to a trust when the taxpayer controls
the earning of the income. See Vnuk v. Commissioner, 621 F.2d
1318, 1320 (8th Cir. 1980), affg. T.C. Memo. 1979-164.
The Commissioner is not required to apply the tax laws in
accordance with the form a taxpayer employs where that form is a
sham or inconsistent with economic reality. See Diedrich v.
Commissioner, 457 U.S. 191, 195 (1982); Higgins v. Smith, 308
U.S. 473, 477 (1940). Where an entity is created that has no
real economic effect and which affects no cognizable economic
relationships, the substance of a transaction involving this
entity will control over the form. See Zmuda v. Commissioner,
731 F.2d 1417, 1420-1421 (9th Cir. 1984), affg. 79 T.C. 714, 719
(1982); Markosian v. Commissioner, 73 T.C. 1235, 1241 (1980).
These principles apply even though an entity may have been
properly formed and have a separate existence under applicable
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local law. See Zmuda v. Commissioner, 79 T.C. at 720; Vercio v.
Commissioner, 73 T.C. 1246, 1253 (1980).
Petitioner does not dispute that the amounts paid to the
trust were on account of his personal services. Petitioner
simply argues that the trust earned the payments related to his
services and that the trust is bona fide. On the basis of the
record before us, we conclude that petitioner was the true earner
of the amounts paid and that petitioner established the trust as
a mechanism to avoid tax. Consequently, we hold that the trust
should not be respected for Federal income tax purposes and that
the money paid to the trust is taxable income to petitioner.3
Respondent determined that petitioner is liable for
additions to tax under section 6651(a)(1). Section 6651(a)(1)
imposes an addition to tax for failure to file a return on the
date prescribed (determined with regard to any extension of time
for filing), unless the taxpayer can establish that such failure
is due to reasonable cause and not due to willful neglect.
Petitioner did not file any returns for the years in issue or
present evidence indicating that his failure to file was due to
reasonable cause and not due to willful neglect. See Rule
3
Because we rule against petitioner with regard to
respondent’s determinations against him, we accept respondent’s
concession related to the determinations against the trust.
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142(a). Accordingly, we sustain respondent’s determination
regarding this matter.
Respondent also determined that petitioner is liable for
additions to tax under section 6654 for failure to make estimated
tax payments. Petitioner did not offer any evidence relating to
this issue. See Rule 142(a). We therefore sustain respondent’s
determination as to the additions to tax under section 6654.
Finally, we reconsider whether petitioner has engaged in
behavior that warrants the imposition of a penalty pursuant to
section 6673. Section 6673(a) authorizes this Court to penalize
a taxpayer who (1) institutes or maintains a proceeding primarily
for delay, (2) pursues a position in this Court which is
frivolous or groundless, or (3) unreasonably fails to pursue
available administrative remedies. Petitioner’s conduct
throughout this proceeding has convinced us that he instituted
and maintained this proceeding primarily for delay and pursued a
position that was frivolous and groundless.
From the filing of his petition to the submission of his
brief, petitioner has devoted much of his time to shopworn
arguments characteristic of the tax-protester rhetoric that has
been universally rejected by this and other courts. We refuse to
painstakingly address petitioner’s assertions “with somber
reasoning and copious citation of precedent” because “to do so
might suggest that these arguments have some colorable merit.”
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Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984); see
Wilcox v. Commissioner, 848 F.2d 1007, 1008 (9th Cir. 1988),
affg. T.C. Memo. 1987-225; Williams v. Commissioner, 114 T.C.
136, 139 (2000). Petitioner has wasted the time and resources of
this Court. Accordingly, we shall impose a penalty of $12,500 on
petitioner pursuant to section 6673.
To reflect the foregoing,
An appropriate order and
decision will be entered for
respondent in docket No. 15974-99,
and an order and decision will be
entered for petitioner in
docket No. 8897-99.