T.C. Memo. 2002-20
UNITED STATES TAX COURT
SARAH A. BLAND-BARCLAY AND FRANCIS BARCLAY, DECEASED, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1014-00. Filed January 22, 2002.
Sarah A. Bland-Barclay, pro se.
Chang Ted Li, for respondent.
MEMORANDUM OPINION
GOLDBERG, Special Trial Judge: Respondent determined a
deficiency in petitioners’ Federal income tax for the taxable
year 1996 in the amount of $9,356, and an accuracy-related
penalty in the amount of $1,854. Unless otherwise indicated,
section references are to the Internal Revenue Code in effect for
the year in issue.
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After a concession by petitioners,1 the remaining issues in
this case are: (1) Whether wage income received by petitioners
in the amount of $87,118.92 in 1996, except for wages of $432.48
from Defense Finance and Accounting Service, an agency of the
Federal Government, is nontaxable, thereby resulting in an
overpayment of income tax for the taxable year; (2) whether
petitioners are entitled to Schedule A, Itemized Deductions, in
excess of the amounts which respondent allowed; (3) whether
petitioners are entitled to various Schedule C, Profit and Loss
From Business, deductions beyond that which respondent allowed;
and (4) whether petitioners are liable for an accuracy-related
penalty under section 6662(a).
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, Sarah A. Bland-Barclay resided in Baltimore,
1
Petitioners conceded in the Stipulation of Facts that
petitioner Sarah A. Barclay received a Form W-2, Wage and Tax
Statement for 1996, from Olsten Home Healthcare, Inc. (Olsten),
reporting that she received $1,268.81 of wage income. We note
that in the notice of deficiency respondent determined that
petitioners failed to include wage income of $1,267. The record
does not explain the $1.81 discrepancy between the amount on the
Olsten Form W-2 and the notice of deficiency. We accept
respondent’s assertion that the amount in dispute is $1,267 as
stipulated by petitioners and determined in the notice of
deficiency.
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Maryland.2 During the year in issue, Sarah A. Bland-Barclay
(petitioner) and Francis Barclay (Mr. Barclay), were husband and
wife.
During 1996, Mr. Barclay was a welder for the General Motors
Corp. at its Truck & Bus Group assembly plant in Baltimore. Also
in 1996, petitioner began a career as a tax preparer at Jackson
Hewitt Tax Service after completing a 6- to 8-week tax training
program. In further pursuit of her career, petitioner enrolled
in a 2-year associate’s degree program at Essex Community
College, majoring in accounting. Petitioner has not completed
this program due to, in part, Mr. Barclay’s death in 1998.
Petitioner, in addition to her job as a tax preparer, had other
part-time employment.
Petitioner and Mr. Barclay timely filed their joint 1996
Federal income tax return electronically, which was prepared by
Barclay’s Tax Service, a business operated by petitioner. On
June 24, 1998, during their examination of their 1996 income tax
return, they submitted to respondent an amended 1996 Federal
income tax return, Form 1040X, Amended U.S. Individual Tax
Return, which had not been filed.
On their 1996 income tax return, petitioner and Mr. Barclay
reported $86,282 of wages from the following sources:
2
Francis Barclay died intestate in December 1998. Petitioner
Sarah A. Bland-Barclay was issued letters of administration by
the Orphans Court of Baltimore City.
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Employer Employee Amount
GM North American Operations Francis Barclay $80,595.65
Truck & Bus Group
VTR Services, Inc.
T/A Jackson Hewitt Tax Serv. Sarah A. Bland Barclay 3,639.46
Defense Finance and Accounting Sarah A. Bland Barclay 432.48
Service
Manpower International, Inc. Sarah A. Bland Barclay 1,615.00
Total $86,282.59
Attached to their 1996 income tax return were three Schedule
C forms for three businesses petitioner engaged in, in addition
to her part-time employment. These businesses were Barclay’s
Consulting Services, Barclay’s Notary Services, and Barclay’s Tax
Services. All of these businesses were carried on by petitioner
from her residence. Petitioner reported gross receipts from
Barclay’s Consulting Services of $828 and business expenses of
$8,164, resulting in a net loss of $7,336. Petitioner reported
$0 gross receipts from Barclay’s Notary Service and business
expenses of $2,721, resulting in a net loss of $2,721. For
Barclay’s Tax Services, petitioners reported gross receipts of
$7,635 and expenses of $24,568, resulting in a net loss of
$16,933.
In a notice of deficiency, respondent determined that
petitioner received additional wages of $1,267, which she and Mr.
Barclay failed to report on their return. Respondent further
determined that they were not entitled to Schedule A itemized
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deductions consisting of the following amounts, due to lack of
substantiation:
Amount claimed Amount allowed Disallowed
Deduction on return per examination amount
1
Mortgage interest $4,032 $3,709 $323
1
Real estate taxes 1,659 1,526 133
Charitable
contributions 12,500 10,694 1,806
Unreimbursed
employee business
2 2
expense 16,050 1,734 14,316
1
Petitioners were allowed this amount as a deduction on their
Schedule C for office in home. Respondent determined that 8
percent of petitioners’ home residence qualifies as a home office.
2
Before application of the 2-percent limitation.
The following combined Schedule C expense deductions of $25,269
were also disallowed:
Amount claimed Amount
Expense on return disallowed
Advertising $1,500 $1,114
Car and truck 2,790 1,519
Insurance 402 402
Office 9,700 9,090
Business use of home -0- (455)
Supplies 9,527 4,470
Utilities 9,894 8,624
Other 505 505
Total $34,318 $25,269
Respondent disallowed the above deductions because petitioners
failed to show that each claimed deduction was an ordinary and
necessary business expense, or because petitioners failed to
substantiate payment of each claimed deduction. Respondent also
determined that petitioners were liable for an accuracy-related
penalty under section 6662.
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On November 9, 2000, petitioners filed a motion to dismiss
on the ground that the period of limitations for assessment under
section 6501 and section 301.6501(a)-1, Proced. & Admin. Regs.,
had expired. At the call of the trial calendar in Baltimore on
November 27, 2001, the Court heard arguments on the motion to
dismiss, and, after due consideration, denied petitioners’
motion. The case was then set for trial on November 30, 2001.
At trial, and subsequently in brief, petitioner continued to
argue that this case should be dismissed for lack of jurisdiction
because as citizens of the Maryland Republic petitioners are
exempt from the Federal income tax law, that the United States
Constitution forbids taxation of compensation received for
personal service, and that the Commissioner is without authority
to act absent self-assessment and voluntary compliance.
Specifically, petitioner argues that all income reported on the
Forms W-2, with the exception of income received from Defense
Finance and Accounting Service, an agency of the Federal
government, does not constitute gross income subject to Federal
income tax, and, therefore, petitioners are entitled to a refund.
This Court and Federal courts across the nation have
repeatedly rejected the argument that wages do not constitute
income and that reporting and paying income taxes is strictly
voluntary. Woods v. Commissioner, 91 T.C. 88, 90 (1988). We
find petitioners’ arguments baseless and wholly without merit.
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As petitioners’ arguments have been addressed by this and other
courts, we need not exhaustively review and respond to them.
Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984).
Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving the entitlement to any deduction
claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).3
Section 162(a) allows a deduction for a taxpayer’s “ordinary and
necessary” business expenses paid or incurred during the taxable
year. However, a taxpayer is required to maintain records
sufficient to establish the amount of his or her income and
deductions. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
At trial, petitioner failed to offer any evidence with
regard to the disallowed Schedules A and C deductions. Her
testimony consisted chiefly of describing the nature of her
business activities during the year. Petitioners failed to
substantiate any of the disallowed Schedules A and C deductions.
Based on the record, we find no credible basis for allowing any
deduction in excess of amounts previously allowed by respondent.
The last issue for decision is whether petitioners are
liable for an accuracy-related penalty pursuant to section
6662(a) for the year in issue. Section 6662(a) imposes a penalty
3
Respondent does not bear any burden of proof or production
under sec. 7491 because the examination commenced prior to July
22, 1998.
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of 20 percent of the portion of the underpayment which is
attributable to negligence or disregard of rules or regulations.
Sec. 6662(b)(1). Negligence is the “‘lack of due care or failure
to do what a reasonable and ordinarily prudent person would do
under the circumstances.’” Neely v. Commissioner, 85 T.C. 934,
947 (1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506
(5th Cir. 1967), affg. in part and remanding in part 43 T.C. 168
(1964) and T.C. Memo. 1964-299). It includes any failure by the
taxpayer to keep adequate books and records or to substantiate
items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. The term
“disregard” includes any careless, reckless, or intentional
disregard. Sec. 6662(c). No penalty shall be imposed if it is
shown that there was reasonable cause for the underpayment and
the taxpayer acted in good faith with respect to the
underpayment. Sec. 6664(c).
As noted above, we found that petitioners did not
substantiate, during the examination or at trial, any of the
amounts of disallowed Schedule A itemized deductions and Schedule
C business expense deductions. Petitioner was an income tax
return preparer during the year in issue. As an income tax
return preparer, petitioner should have been aware of and
understood the substantiation requirements for deductions claimed
on the Schedules A and C.
Because petitioners failed to offer any credible explanation
for their lack of due care in preparing and filing their 1996
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return, they are liable for the negligence penalty under section
6662(a)(1).
At the hearing of petitioners’ motion to dismiss and before
the trial, the Court admonished petitioner against arguing that
wage income was not includable in gross income and therefore not
subject to income tax. Petitioner ignored our warning. Section
6673(a)(1) allows this Court to award a penalty not in excess of
$25,000 when proceedings have been instituted or maintained
primarily for delay, or where the taxpayer’s position is
frivolous or groundless; i.e., it is contrary to established law
and unsupported by a reasoned, colorable argument for a change in
the law. Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir.
1986), affg. in part an unreported order of this Court. We
believe that a penalty in this case is appropriate. The
positions argued by petitioner are frivolous and wholly without
merit. Moreover, we rejected petitioner’s frivolous arguments
when she raised them in her motion to dismiss. Accordingly, we
will require petitioners to pay a penalty to the United States in
the amount of $1,500 under section 6673(a)(1).
To reflect the foregoing,
An appropriate order
imposing the penalty under
section 6673(a), and decision
will be entered for respondent.