T.C. Memo. 2002-112
UNITED STATES TAX COURT
NEIL T. NORDBROCK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
EVELYN R. NORDBROCK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 12755-00, 12756-00. Filed May 3, 2002.
Neil T. Nordbrock and Evelyn R. Nordbrock, pro sese.
Vicki L. Miller, and Robert M. Fowler, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies and
additions to tax as follows:
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Docket No. 12755-00--Neil T. Nordbrock
Additions to Tax/Penalties, I.R.C.
Year Deficiency Sec. 6651(a)(1) Sec. 6654
1995 $8,497 $1,903 $453
1996 8,727 2,182 465
1997 1,581 395 85
Docket No. 12756-00--Evelyn R. Nordbrock
Additions to Tax/Penalties, I.R.C.
Year Deficiency Sec. 6651(a)(1) Sec. 6654
1995 $7,860 $1,744 $418
1996 8,569 2,142 456
1997 1,691 423 90
The issues for decision are whether petitioners failed to
report taxable income, whether they are entitled to joint filing
status, and whether they are entitled to deduct business expenses
in excess of those conceded by respondent. 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.
FINDINGS OF FACT
Some of the facts have been deemed stipulated pursuant to
Rule 91(f). Petitioners resided in Arizona during the years in
issue and at the time that they filed their petitions in these
cases. Petitioners were married to each other during the years
in issue.
During 1995 and for part of 1996, Evelyn R. Nordbrock
(Ms. Nordbrock) was employed by Alpha Tax Service as a tax return
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preparer. In 1996, she started a tax preparation business in
which she prepared tax returns for third parties during 1996 and
1997. During the years in issue, Neil T. Nordbrock
(Mr. Nordbrock) was a self-employed accountant.
During the years in issue, petitioners received the
following items of income:
Source 1995 1996 1997
Wages
(Alpha Tax Service) $12,694.41 $ 778.89 --
Interest income 1,313.00 5,638.00 $5,554.00
Dividend income 15,013.00 – 59.00
Capital gain 10,758.00 – --
Rental income 6,063.00 370.00 --
Cancellation of -- 1,748.00 --
indebtedness
Pension distribution -- -- 12,376.00
Nonemployee compensation 864.00 908.00 1,583.00
E. Nordbrock tax 17,911.00 27,728.00 --
preparation
N. Nordbrock accounting 21,179.00 14,236.00 9,917.00
Swan business receipts 10,835.28 -- --
Danmarkin Investments/ -- 6,824.00 --
Charles Schwab dividend income
Olde Discount–dividend -- 3,398.00 --
income
Under Arizona community property laws, one-half of each of the
foregoing items is allocable to each petitioner.
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Beginning long before the years in issue, petitioners were
involved in continuing disputes with the Internal Revenue Service
(IRS). Petitioners were associated with an organization known as
the American Law Association, which conducted seminars promoting
the creation of foreign trusts for the purpose of decreasing or
avoiding taxes. In 1978, petitioners established three foreign
business trusts in the Turks and Caicos Islands. Mr. Nordbrock
was convicted of violating section 7206(1) for filing false
income tax returns for 1981 and 1982. Mr. and Ms. Nordbrock were
convicted of violating section 7206(1) for filing a false amended
income tax return for 1981. These convictions were affirmed on
appeal by the Court of Appeals for the Ninth Circuit in United
States v. Nordbrock, 952 F.2d 408 (9th Cir. 1992) (unpublished
opinion). In 1992, the District Court for the District of
Arizona imposed a lifetime injunction prohibiting Mr. Nordbrock
from preparing tax returns for others. The lifetime injunction
was affirmed on appeal by the Court of Appeals for the Ninth
Circuit in United States v. Nordbrock, 38 F.3d 440 (9th Cir.
1994).
In October 1992, respondent seized property located on Swan
Road in Tucson, Arizona. The IRS sent a notice of seizure to
Swan Business Organization as nominee of Mr. Nordbrock on
October 9, 1992.
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In 1994, Mr. Nordbrock commenced a proceeding in bankruptcy.
In that proceeding, his attorney was John J. Standifer, Jr.
(Standifer). During 1995, checks totaling $3,060.48 were written
to Standifer. Other checks were written to Standifer and to the
bankruptcy trustee in multiples of $36.50 per month as “payments
to be applied to Mr. Nordbrock’s Chapter 13 Plan”.
On April 25, 1996, the IRS sold the Swan property in order
to enforce a judgment against Mr. Nordbrock for preparer
penalties. Petitioners commenced litigation challenging the sale
and seeking to set it aside. That litigation was still pending
at the time of trial in these cases.
For each of the years in issue, petitioners submitted to the
IRS a joint Form 1040, U.S. Individual Income Tax Return. Next
to their signatures on the form, however, was a reference to
“Note 1”. Note 1 to each return was a statement as follows:
NOTE 1
This return is not voluntarily submitted, nor is it
signed under penalties of perjury.
It is signed and submitted under duress, coercion, and
the threat of criminal prosecution.
See 319 US 624-1943 WEST VIRGINIA STATE BOARD OF
EDUCATION et al. v. BARNETTE et al.
In the notices of deficiency, respondent determined that
petitioners were taxable on the items of income set forth above,
less certain of the deductions claimed on the Forms 1040
submitted by them. Respondent disallowed deductions for legal
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expenses, travel expenses, education expenses, meals and
entertainment, and similar unsubstantiated items. Respondent
also determined that petitioners had other items of income that
respondent has since conceded. Respondent determined that
petitioners’ Forms 1040 were not valid income tax returns. Thus
respondent determined the additions to tax in issue and
calculated the deficiencies using rates for married persons
filing separate returns.
In each of the petitions in these cases, filed December 12,
2000, petitioners attached approximately 150 pages of exhibits
purportedly supporting their claims that the notices of
deficiency were a continuation of “harassment, lies, and criminal
fraud” committed by various Federal employees. Summarizing their
allegations, they claim “in excess of 500 criminal violations
perpetrated against * * * [them] by more than 150 different
federal co-conspirators during the past 17 1/2 years.”
OPINION
Respondent moved to strike from the petition and to dismiss
for lack of jurisdiction the allegations constituting accusations
of criminal conduct. A hearing on respondent’s motion was held
in Phoenix, Arizona, on March 19, 2001. Respondent’s motion was
granted. At that time, Mr. Nordbrock requested that any trial be
postponed for “at least 90 days”. Petitioners were advised that
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the hearing was only for the purposes of the motion and the trial
had not been set.
By notice served August 24, 2001, the case was set for trial
in Phoenix on January 28, 2002. Attached to the Notice Setting
Case for Trial was a Standing Pre-Trial Order including, among
other things, the following paragraphs:
Continuances will be granted only in exceptional
circumstances. See Rule 133 (formerly Rule 134), Tax
Court Rules of Practice and Procedure. Even joint
motions for continuance will not routinely be granted.
* * * * * * *
ORDERED that all facts shall be stipulated to the
maximum extent possible. All documentary and written
evidence shall be marked and stipulated in accordance
with Rule 91(b), unless the evidence is to be used to
impeach the credibility of a witness. Objections may
be preserved in the stipulation. If a complete
stipulation of facts is not ready for submission at
trial, and if the Court determines that this is the
result of either party’s failure to fully cooperate in
the preparation thereof, the Court may order sanctions
against the uncooperative party. Any documents or
materials which a party expects to utilize in the event
of trial (except for impeachment), but which are not
stipulated, shall be identified in writing and
exchanged by the parties at least 15 days before the
first day of the trial session. The Court may refuse
to receive in evidence any document or material not so
stipulated or exchanged, unless otherwise agreed by the
parties or allowed by the Court for good cause shown.
* * *
On December 14, 2001, respondent filed a Motion to Show
Cause Why Proposed Facts in Evidence Should Not Be Accepted as
Established, recounting petitioners’ failure to address
respondent’s proposed stipulation or to respond to respondent’s
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informal and formal discovery. The motion to show cause also
referred to petitioners’ attempt to secure by formal discovery
the “oaths of office” of respondent’s counsel and of the Chief
Judge and of the judicial officers to whom these cases had been
assigned for hearing on respondent’s motion to dismiss and for
the trial scheduled for January 28, 2002. On December 17, 2001,
respondent’s Motion to Compel Responses to Respondent’s
Interrogatories and Motion to Compel Production of Documents were
filed. On December 17, 2001, an Order to Show Cause was issued.
On December 18, 2001, respondent’s discovery motions were
granted.
On December 31, 2001, Respondent’s Status Report was filed.
Respondent’s status report attached a copy of a request for a
90-day continuance served by petitioners but not as of then
received by the Court. Respondent objected to continuance,
recounting the history of the cases and pointing out that
petitioners’ grounds for continuance were not well taken.
Respondent also referred to petitioners’ continuing failure to
respond to the outstanding discovery.
On January 9, 2002, the Court instituted a conference
telephone call among the parties and the Court to advise
petitioners that their request for a continuance would not be
granted. The parties also discussed the outstanding discovery
Orders and response to the Order to Show Cause. The Court
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advised petitioners of the necessity of presenting documentation
that would substantiate the deductions to which they might be
entitled for the 3 years in issue. Thereafter, the Court
received from petitioners documents demanding production of
copies of subscribed oaths of office; their demands were
untimely, were not relevant to the subject matter involved in the
pending cases, and were not likely to lead to the discovery of
admissible evidence. On January 14, 2002, petitioners filed a
Motion to Dismiss claiming that neither respondent nor the Court
had “proven jurisdiction” in these cases. That motion was
denied. The Court has jurisdiction in these cases as a result of
timely filed petitions from valid notices of deficiency. Secs.
6212, 6213, and 6214. After invoking our jurisdiction in a
deficiency case, petitioners may not just change their minds and
decide they do not want to be here. Stevens v. Commissioner, 709
F.2d 12 (5th Cir. 1983), affg. T.C. Memo. 1982-352; Dorl v.
Commissioner, 57 T.C. 720 (1972), affd. per curium 507 F.2d 406
(2d Cir. 1974); see also sec. 7459(d); Estate of Ming v.
Commissioner, 62 T.C. 519 (1974) (a deficiency case commenced by
a taxpayer cannot be voluntarily dismissed without entry of a
decision on the merits).
On January 16, 2002, Respondent’s Motion in Limine to
Exclude Untimely Identified Witnesses and Untimely Exchanged
Documents was filed. That motion recounted petitioners’
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continuing failure to provide documents concerning their claimed
deductions other than a few documents that related to expenses
for 1995. The motion also pointed out petitioners’ failure to
submit a trial memorandum identifying witnesses as required by
the Court’s Standing Pre-Trial Order. Respondent’s motion was
set for hearing on January 28, 2002. When the cases were called
for trial on January 28, petitioners filed a Renewal of Motion to
Dismiss, repeating and expanding on scurrilous accusations
against respondent’s counsel and the Court and claiming that the
Court lacked jurisdiction because neither respondent’s counsel
nor the Court would provide copies of their oaths of office to
petitioners. Petitioners’ motion was denied. Respondent’s
motion in limine was granted.
The cases proceeded to trial on January 28. Petitioners
presented neither evidence nor argument that respondent’s
determination of specific items of income was erroneous. The
facts that were deemed stipulated connected petitioners to items
of income either by specific receipts or by bank deposits into
accounts under the control of petitioners. See Delaney v.
Commissioner, 743 F.2d 670 (9th Cir. 1984), affg. T.C. Memo.
1982-666; Tokarski v. Commissioner, 87 T.C. 74 (1986). The
testimony of Mr. Nordbrock and the documents presented for 1995
related to legal and other expenses of filing his personal
bankruptcy, repairs or improvements to petitioners’ home, travel
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expenses, and expenses of attending seminars. Petitioners bear
the burden of proving that they are entitled to deductions. See,
e.g., Rockwell v. Commissioner, 512 F.2d 882 (9th Cir. 1975),
affg. T.C. Memo. 1972-133.
It is apparent from the record in this case that petitioners
are not entitled to the benefits of the burden of proof
provisions of section 7491(a). They have failed to respond to
reasonable requests for information, documents, meetings, and
interviews, and they have failed to comply with Court orders that
they produce documents and answer questions. They have not
presented any substantiation with respect to deductions for 1996
and 1997. They have not produced credible evidence on disputed
issues of fact. In view of their history as tax return
preparers, they should have been familiar with the types of
records required and the legal requirements for deductions.
Instead of substantiating their deductions, they have made
unwarranted accusations against those charged with determining
their tax liability.
Mr. Nordbrock testified only after the Court told him that
he would have to explain the documents that had been produced for
1995 before any deductions could be allowed. His testimony was
vague and conclusory and marked by failure to remember specific
details on cross-examination. Ms. Nordbrock declined to testify.
Petitioners contend that the bankruptcy proceedings were
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commenced in an attempt by petitioners to save business property
from seizure by the IRS. Mr. Nordbrock testified that the only
creditor in the bankruptcy was the IRS, and the debt to the IRS
resulted from $75,000 in preparer penalties. See United States
v. Nordbrock, 38 F.3d 440 (9th Cir. 1994). Respondent argues
that these expenses are personal expenses and not deductible
business expenses. Petitioners have not persuaded us that the
bankruptcy-related expenses were ordinary and necessary business
expenses and have not provided us with a basis for allocating the
fees between personal services and business services.
Petitioners presented copies of checks that were payable to the
attorney who filed the bankruptcy proceeding. They did not,
however, present any invoices that explained the services
provided by the attorney. See In re Collins, 26 F.3d 116 (11th
Cir. 1994); Dowd v. Commissioner, 68 T.C. 294, 303-304 (1977).
Some of the payments claimed as deductible were made to the
trustee in bankruptcy. Those payments relate to the preparer
penalties, inasmuch as petitioner testified that the only
creditor in the bankruptcy was the IRS and that the seizure of
property that he was trying to defeat was for $75,000 in unpaid
preparer penalties that were assessed against him. The nature of
the payments is not clear. If the payments were for monthly
fees, as petitioner testified, they suffer from the same
infirmity as the legal fees. If they were payments on account of
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the penalties and any interest related thereto, they are not
deductible. See Tippin v. Commissioner, 104 T.C. 518, 528-529
(1995). In any event, petitioners have failed to prove that the
payments are deductible.
Mr. Nordbrock testified that some of the seminar expenses
and travel expenses were for an investment seminar related to
Ms. Nordbrock’s investments. Respondent’s theory is that the
seminars attended by petitioners, including travel to those
seminars, related to petitioners’ tax protest activities. Some
of the exhibits support respondent’s argument. A payment of $480
claimed as legal and professional fees was, according to
Mr. Nordbrock’s testimony, for authoring a letter to the IRS that
challenged the “true identity and legal affiliation of the entity
known as the Internal Revenue Service”. In any event,
Mr. Nordbrock was enjoined during the years in issue from
preparing tax returns on behalf of clients. Ms. Nordbrock did
not testify, although most of the checks received in evidence
were signed by her. We are not persuaded that the checks
represent payments for deductible business expenses. Those
expenses relating to investments, to personal taxes, or to
Ms. Nordbrock’s expenses as an employee of Alpha Tax Services
would be deductible, if at all, under section 212 and only to the
extent that the total exceeded 2 percent of petitioners’ adjusted
gross income. See sec. 67(a). The amounts identified by
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petitioners for seminars totaled less than $500 and do not meet
that threshold. The travel expenses claimed by petitioners were
not substantiated as required by section 274(d). No
contemporaneous documents or other reliable evidence corroborated
the alleged business purpose of the travel.
Petitioners contend that the repairs and maintenance expense
related to an office in their home. The only evidence on this
issue is Mr. Nordbrock’s uncorroborated and conclusory testimony.
The documentation that was presented consisted of checks without
invoices and credit card charges, and the documentation showed no
allocation between an alleged office in the home and the personal
residential quarters of petitioners. Petitioners failed to
present reliable or persuasive evidence that would satisfy the
conditions of section 280A(c).
After examination of the documents submitted by petitioners
and petitioners’ testimony, we conclude that any additional
expenses beyond those conceded by respondent are not adequately
substantiated.
There is no excuse for petitioners’ failure to present
substantiating materials during the administrative stages and for
more than a year while these cases were pending. They
disregarded the Court’s order that they produce documents for
1996 and 1997. They are familiar with the consequences of
failing to produce documents when required by law or Court order
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to do so. See United States v. Nordbrock, supra. They refused
to answer interrogatories asking for identification of items of
disputed income and claimed deductions, notwithstanding a Court
order that they answer the interrogatories. When their efforts
to delay trial failed, they sought dismissal of the cases. On
the entire record in these cases, we infer that evidence that
petitioners refused to produce would have been unfavorable to
their claims of error in respondent’s determinations. See
Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165
(1946), affd. 162 F.2d 513 (10th Cir. 1947).
The Forms 1040 submitted by petitioners for the years in
issue were not valid tax returns. See Williams v. Commissioner,
114 T.C. 136 (2000). As a result, petitioners are not entitled
to joint return rates. See sec. 6013(b); Thompson v.
Commissioner, 78 T.C. 558, 561-562 (1982). Based on the
Forms 1040 they submitted, the additions under section 6651(a)(1)
are appropriate. Williams v. Commissioner, supra. The section
6654 addition to tax applies absent exceptions not shown to exist
in these cases. Grosshandler v. Commissioner, 75 T.C. 1, 20-21
(1980). The tax returns and the transcripts of petitioners’
accounts received in evidence satisfy respondent’s burden of
production with respect to the additions to tax.
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To take account of respondent’s concessions,
Decisions will be entered
under Rule 155.