FOX v. COMMISSIONER

T.C. Memo. 2001-208

UNITED STATES TAX COURT

VIRGINIA A. FOX, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 5080-99, 5081-99, Filed August 7, 2001.
5082-99.

Roland Fox and Virginia Fox, pro sese.

Sandra Veliz, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Petitioners petitioned the Court to

redetermine respondent’s determinations as to their 1994 and 1995

Federal income taxes. For 1994, respondent determined in a

1
Cases of the following petitioners are consolidated
herewith: Roland R. Fox, docket No. 5081-99; and Roland R. Fox
and Virginia A. Fox, docket No. 5082-99.
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notice of deficiency issued to petitioners that they were liable

for a $66,798 deficiency, a $16,149 late-filing addition to tax

under section 6651, and a $13,360 accuracy-related penalty for

negligence under section 6662.2 For 1995, respondent determined

in a notice of deficiency issued to Roland Fox (Mr. Fox) that he

was liable for a $107,919 deficiency, a $26,408 late-filing

addition to tax under section 6651, and a $5,751 addition to tax

under section 6654 for underpayment of estimated tax. For 1995,

respondent determined in a notice of deficiency issued to

Virginia Fox (Ms. Fox) that she was liable for a $90,261

deficiency, a $21,994 addition to tax under section 6651, and a

$4,788 addition to tax under section 6654 for underpayment of

estimated tax.

Following our consolidation of the three cases for purposes

of trial, briefing, and opinion, we must decide whether

respondent’s determinations are correct. Our decision rests

primarily on whether we should disregard petitioners’ trust,

Prindle International Marketing Trust (Prindle Trust), for

Federal income tax purposes. We hold that we shall disregard the

Prindle Trust and that respondent’s determinations are correct to

the extent stated herein.

2
Section references are to the Internal Revenue Code in
effect for the years in issue. Rule references are to the Tax
Court Rules of Practice and Procedure.
 - 3 -

FINDINGS OF FACT

Some facts have been stipulated and are so found. The

stipulated facts and exhibits submitted therewith are

incorporated herein by this reference. Petitioners are husband

and wife who resided during the relevant years in the State of

Washington without a separate property agreement. They filed a

joint 1994 Federal income tax return on November 19, 1996.

Neither of them filed a 1995 Federal personal income tax return.

Mr. Fox is a college graduate who worked in the U.S.

military for 20 years. He also completed some graduate work in

business administration including a course in taxation. He and

Ms. Fox worked during the subject years as distributors for

Oxyfresh, Inc. (Oxyfresh), a wholesaler of health care products.

In that capacity, they sold Oxyfresh products and recruited and

trained individuals to do the same.

Petitioners created the Prindle Trust in 1991 and have

continued to manage and operate the Prindle Trust in the same

manner throughout its existence. Petitioners were the Prindle

Trust’s managing agents, trustees, and beneficiaries. They also

controlled its bank account. In Prindle Intl. Mktg., UBO v.

Commissioner, T.C. Memo. 1998-164, affd. without published

opinion 229 F.3d 1157 (9th Cir. 2000), we decided (and the Court

of Appeals for the Ninth Circuit agreed) that the Prindle Trust

was without economic substance and was formed for tax avoidance.
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During the subject years, Oxyfresh paid to petitioners

commission income of $191,510 and $225,658, respectively, that

they earned as to their distributorship activity. Oxyfresh

issued to the Prindle Trust 1994 and 1995 Forms 1099-MISC,

Miscellaneous Income, reflecting these amounts. Petitioners did

not report any commission income on their 1994 Federal income tax

return.

Oxyfresh also paid to petitioners during 1994 dividends of

$1,580. Oxyfresh issued a 1994 Form 1099-DIV, Dividends and

Distributions, to the Prindle Trust reflecting this amount.

Petitioners did not report any dividend income on their 1994

Federal income tax return.

During the subject years, Mr. Fox received Social Security

benefits of $4,802 and $8,460, respectively. During 1995,

petitioners received interest income of $138, and Mr. Fox

received $26,638 from his military retirement pension. During

1995, petitioners realized gross rental income on various

properties that they rented.

Respondent determined in the notices of deficiency that

petitioners realized the following taxable income during the

subject years:3

3
Respondent determined in the notices of deficiency for
1995 that community income was taxable to petitioners in a total
amount greater than 100 percent. A Rule 155 computation will be
necessary to tax each spouse on only 50 percent of that income.
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1994 1995

Petitioners Mr. Fox Ms. Fox

Exemption -0- ($2,500) ($2,500)
Commission inc.–-Oxyfresh $191,510 225,658 225,658
Dividend income 1,580 -0- -0-
Interest income -0- 138 -0-
Half of community int. inc. -0- -0- 69
Taxable SSA 4,082 7,191 -0-
Half community taxable SSA -0- -0- 3,596
Pension/annuity -0- 26,638 -0-
Half community pension/annuity -0- -0- 13,319
Net rental inc. -0- 19,262 19,262
Self-employment tax deduction (6,322) (6,816) -0-
Standard deduction -0- (3,275) (3,275)
Deduction for exemptions 1,372 2,500 2,500
Total 192,222 268,796 258,629

OPINION

The parties dispute whether the Prindle Trust is a sham.

Respondent argues it is. Petitioners argue it is not. We agree

with respondent.

Petitioners concede that the Prindle Trust is the same trust

that was at issue in Prindle Intl. Mktg., UBO v. Commissioner,

supra, but assert baldly that the Prindle Intl. Mktg., UBO case

was wrongly decided by both this Court and the Court of Appeals

for the Ninth Circuit. In that case, we held in relevant part

that: (1) The Prindle Trust was a sham not to be recognized for

Federal income tax purposes for 1992 or 1993, (2) petitioners

were liable for self-employment tax on the payments which they

received from Oxyfresh during 1992 and 1993, (3) petitioners were

liable for a failure-to-file addition to their 1993 tax under

section 6651, and (4) petitioners were liable for the
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accuracy-related penalty for negligence under section 6662(a) for

1992 and 1993. The Court of Appeals for the Ninth Circuit

affirmed each of these holdings. The rationale that we set forth

in the Prindle Intl. Mktg., UBO case to support our holdings

applies equally to this case. Because petitioners have presented

no persuasive reason as to why we should not apply that rationale

here, we do so to sustain respondent’s determination as to the

commission income from Oxyfresh. We also sustain each of

respondent’s determinations as to the other income items. We

have found as a fact that one or both of petitioners received

each of those items of income, and petitioners have failed to

prove that any of the related determinations are incorrect.4

As to respondent’s determinations under section 6651,

petitioners are liable for those additions to tax unless they

prove that their failure to file Federal income tax returns

timely was: (1) Due to reasonable cause and (2) not due to

willful neglect. Sec. 6651(a)(1); Rule 142(a); United States v.

Boyle, 469 U.S. 241, 245 (1985). A failure to file timely a

Federal income tax return is due to reasonable cause if the

taxpayer exercised ordinary business care and prudence, and,

nevertheless, was unable to file his or her return within the

prescribed time. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

4
We note, however, that the record reveals that the Rule
155 computation must reflect the fact that the interest income of
$138 was received by petitioners jointly.
 - 7 -
Willful neglect means a conscious, intentional failure or

reckless indifference. United States v. Boyle, supra at 245.

Petitioners have presented no persuasive evidence on this issue,

and the record does not otherwise establish that their failure to

file timely returns was due to reasonable cause and not due to

willful neglect. We sustain respondent’s determinations under

section 6651(a).

As to respondent’s determinations under section 6654,

section 6654(a) provides for an addition to tax "in the case of

any underpayment of estimated tax by an individual". Generally,

this addition to tax is mandatory, and there is no exception for

reasonable cause. Recklitis v. Commissioner, 91 T.C. 874, 913

(1988); Grosshandler v. Commissioner, 75 T.C. 1, 20-21 (1980).

However, no addition to tax is imposed if one of the exceptions

contained in section 6654 is met. Recklitis v. Commissioner,

supra at 913. Petitioners have offered no evidence to show that

any of the statutory exceptions apply. We sustain respondent’s

determinations under section 6654(a).

As to respondent’s determination under section 6662(a),

section 6662(a) and (b)(1) imposes a 20-percent accuracy-related

penalty on the portion of an underpayment that is due to

negligence or intentional disregard of rules or regulations.

Negligence includes a failure to attempt reasonably to comply

with the Code. See sec. 6662(c). Disregard includes a careless,
 - 8 -
reckless, or intentional disregard. Id. An underpayment is not

attributable to negligence or disregard to the extent that the

taxpayer shows that the underpayment is due to the taxpayer’s

reasonable cause and good faith. Secs. 1.6662-3(a), 1.6664-4(a),

Income Tax Regs. Reasonable cause requires that the taxpayer

have exercised ordinary business care and prudence as to the

disputed item. See United States v. Boyle, supra. Petitioners

have presented no persuasive evidence on this issue, and the

record does not otherwise establish that their failure to report

their income accurately was due to reasonable cause or good

faith. We sustain respondent’s determinations under section

6662(a).

In conclusion, we note that section 6673(a)(1) authorizes

this Court to require a taxpayer to pay to the United States a

penalty not in excess of $25,000 whenever it appears that

proceedings have been instituted or maintained by the taxpayer

primarily for delay or that the taxpayer’s position in the

proceeding is frivolous or groundless. Although the

circumstances of this case suggest that petitioners may have

instituted this proceeding primarily for delay, with a position

that is frivolous or groundless, we shall not now impose a

penalty under section 6673(a)(1). We take this opportunity,

however, to admonish petitioners that we shall strongly consider
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imposing such a penalty if they return to this Court and advance

similar arguments in the future.

To reflect the foregoing,

Decisions will be entered

under Rule 155.