Nunn v. Comm'r

T.C. Memo. 2002-250

UNITED STATES TAX COURT

CEDRIC K. AND MADELYN D. NUNN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16165-99. Filed September 30, 2002.

Cedric K. Nunn, pro se.

Marilyn S. Ames, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOLDBERG, Special Trial Judge: Respondent determined a

deficiency in petitioners’ Federal income tax for the taxable

year 1993 of $10,904, an addition to tax of $2,651.25 pursuant to

section 6651(a)(1), and a penalty of $2,180.80 pursuant to

section 6662(a).1 Unless otherwise indicated, section references

1
Petitioners originally elected to have their case heard
(continued...)
 - 2 -

are to the Internal Revenue Code in effect for the year at issue,

and all Rule references are to the Tax Court Rules of Practice

and Procedure.

Shortly before the scheduled trial date, respondent filed a

motion to dismiss pursuant to Rule 53 alleging that petitioners

failed to properly prosecute their case. The motion was taken

under consideration, and the trial proceeded on the merits.

The issues for decision are: (1) Whether petitioners are

entitled to amounts reported for returns and allowances, costs of

goods sold, and business expense deductions on four separate

Schedules C, Profit or Loss From Business, for the year at issue;

(2) whether petitioners are liable for an addition to tax of

$2,651.25 pursuant to section 6651(a)(1); and (3) whether

petitioners are liable for a penalty of $2,180.80 pursuant to

section 6662(a).

FINDINGS OF FACT

The attached exhibits are incorporated herein by this

reference. At the time the petition was filed, petitioners

resided in Missouri City, Texas.

Petitioners Cedric K. Nunn (Mr. Nunn) and Madelyn D. Nunn

(Mrs. Nunn) are husband and wife. For the year at issue, Mr.

1
(...continued)
as a small tax case. See sec. 7463. On Oct. 22, 2001, pursuant
to petitioners’ oral motion to have the case changed from a small
tax case to regular case status, the “S” designation was removed.
 - 3 -

Nunn was employed by Tech Solutions as a marketing representative

selling color printers and computer products. Mrs. Nunn was

employed as a claims adjuster for State Farm Mutual Insurance Co.

Petitioners reported total wages of $68,129 and $6,625 of Federal

income tax withheld.

Petitioners filed four separate Schedules C for the 1993

taxable year. The Schedules C were filed under the following

business names: (1) Professional Gift Services; (2) C&M

Distribution Co.; (3) the Nunn Mktgn Group; and (4) BCM

Enterprises. All four businesses were operated from petitioners’

residence.

The schedule below shows the gross receipts, returns and

allowances, cost of goods sold, and business expense deductions

reported for each Schedule C activity.

Professional C&M The Nunn
Gift & Distribution Mktgn BCM
Services Co. Group Enterprises

Income
Gross receipts $1,589 $755 $8,878 $2,239
Less: Returns and
allowances -- -- 1,407 338
Cost of goods sold 1,302 -- 6,979 1,232
Gross profit/income 287 755 492 669
Expenses
Advertising 175 928 434 333
Car & truck expense 497 1,088 737 792
Insurance -- 950 450 333
Legal & professional -- -- 225 275
Office expense 370 442 455 1,233
Rent or lease -- 242 -- 231
Repairs & maintenance -- 432 475 545
Supplies 265 393 247 187
Travel -- 879 220 379
Meals & entertainment1 188 910 1,390 702
 - 4 -
Utilities -- 1,200 -- --
Other expenses -- 950 2,292 --
Total expenses 1,495 8,414 6,925 5,010
Net loss (1,208) (7,659) (6,433) (4,341)
1
After 20-percent limitation pursuant to sec. 274(n).

Petitioners did not file their 1993 Federal income tax

return by the April 15, 1994, due date. Additionally,

petitioners did not request an extension of time to file the 1993

tax return. Petitioners filed their 1993 return on March 3,

1997, nearly 3 years past the due date.

In the notice of deficiency, respondent disallowed all

amounts reported for returns and allowances, cost of goods sold,

and business expense deductions shown above because petitioners

failed to establish that the amounts reported were ordinary and

necessary business items. Further, respondent determined an

addition to tax and a penalty pursuant to sections 6651(a)(1) and

6662(a), respectively.

This case was originally set for trial on October 16, 2000.

On two occasions prior to the original trial date, respondent

requested a meeting with petitioners to discuss the case and

prepare a stipulation of facts. Petitioners did not respond to

either of respondent’s requests.

Immediately prior to calendar call, Mr. Nunn presented

respondent with an unorganized packet of documents. This was the

first meeting between the parties.

At calendar call, Mr. Nunn appeared and orally moved for a
 - 5 -

continuance because he was not ready for trial. Respondent

orally moved to dismiss the case for lack of prosecution because

petitioners had failed to cooperate in the preparation of the

pretrial stipulation of facts. The Court directed Mr. Nunn to

meet with respondent to present and organize his documents or

risk dismissal of the case.

The Court took both motions under advisement and ordered

petitioners to produce to respondent all documents relevant to

the case by November 15, 2000. On or about November 15, 2000,

Mr. Nunn presented respondent with copies of the same unorganized

documents presented at calendar call. The documents were not

separated according to the Schedules C to which they purportedly

related and were not labeled as to specific items reported on the

tax return.

Respondent scheduled further meetings to discuss the

documents with petitioners and their representative on December

13, 2000, and January 4, 2001. Neither petitioners nor their

representative was able to attend either meeting. On January 4,

2001, respondent sent petitioners a letter requesting a third

meeting.

Mr. Nunn and his representative met with respondent on

January 11, 2001. At the meeting, neither Mr. Nunn nor his

representative was prepared to organize the documents according

to the corresponding Schedules C. Additionally, Mr. Nunn claimed
 - 6 -

to have other documents supporting his position, but the

documents were not in his possession at the time of the meeting.

Respondent allowed petitioners until January 25, 2001, to supply

the other documents and organize all the documents according to

the Schedules C to which they related.

Respondent informed the Court of petitioners’ pattern of

delay and requested that the Court continue to hold both motions

under advisement until after January 25, 2001.

In their status report filed January 16, 2001, petitioners

admitted that they received correspondence requesting the

documents be assembled in an organized fashion, but asserted that

the documents were cataloged properly. Further, petitioners

admitted discrepancies existed regarding some invoices but

claimed that the documents presented were sufficient to “warrant

dismissal of all tax liabilities” based on the “Cohan Rule”.2

On January 25, 2001, petitioners failed to submit the other

documents, and for the third time presented respondent with

copies of the same unorganized documents previously presented.

On February 5, 2001, the Court issued an order granting

petitioners’ oral motion for a continuance and denying

respondent’s motion to dismiss the case for failure to prosecute.

The Court ordered petitioners to organize the documents to be

2
The “Cohan Rule” allows for the estimation of certain
expenses in limited situations. See Cohan v. Commissioner, 39
F.2d 540 (2d Cir. 1930); infra pp. 17 and 18.
 - 7 -

used at trial “in a fashion that will allow the Court to relate

each record to an expense deduction” on the various Schedules C.

The Court ordered petitioners to supply the organized documents

to respondent not later than 60 days prior to the next scheduled

trial date. Further, the Court held that failure to comply with

the order would constitute grounds for respondent to renew the

motion to dismiss for failure to prosecute.

On June 12, 2001, respondent sent petitioners a letter

requesting that the organized documents be submitted to

respondent in accordance with the February 5, 2001, order.

Respondent warned petitioners that failure to submit the

organized documents in accordance with the Court’s order would

result in respondent’s renewing the motion to dismiss for failure

to prosecute. This letter was sent to petitioners by certified

mail and was signed for by Mr. Nunn.

On August 1, 2001, the case was again scheduled for trial at

the Houston trial session beginning on October 22, 2001. The

notice setting the case for trial explained that before trial the

parties must cooperate fully and “must agree in writing to all

facts and all documents about which there should be no

disagreement.” Petitioners refused to stipulate any facts in

this case.

On August 8, 2001, respondent sent another letter to

petitioners requesting the documents in an organized manner.
 - 8 -

Respondent notified petitioners that the documents would have to

be submitted to respondent by August 23, 2001, to be in

compliance with the February 5, 2001, order. In addition,

respondent notified petitioners that failure to submit the

documents would result in a renewed motion to dismiss for failure

to properly prosecute. This letter was sent to petitioners by

certified mail and was signed for by Mr. Nunn.

In preparation of their case for trial, petitioners did not

submit the documents to respondent in an organized manner as

required by the February 5, 2001, order and the notice setting

the case for trial for October 22, 2001.

On October 11, 2001, petitioners filed a motion for a second

continuance stating that the documents were “re-catalogued” and

submitted to respondent. In the motion, petitioners alleged

respondent was “skirting the law” by not accepting the documents

presented as sufficient support for the deductions reported.

Petitioners also claimed respondent was blatantly lying about

petitioners’ willingness to cooperate. Additionally, petitioners

asserted that they had never received any written notices from

respondent requesting documentation. The Court denied

petitioners’ motion on October 11, 2001.

At calendar call on October 22, 2001, respondent filed a

motion to dismiss for failure to properly prosecute. The Court

took respondent’s motion under advisement and allowed Mr. Nunn to
 - 9 -

read a prepared statement into the record. The statement was

filed with the Court as petitioners’ trial memorandum.

In the prepared statement, petitioners claimed that the

Federal income tax is unconstitutional. Petitioners asserted

that their constitutional rights have been violated and they are

the victims of an elaborate fraud perpetrated by respondent.

Petitioners stated that respondent does not have jurisdiction

over them or their documents. Petitioners claimed that the

filing of a tax return is voluntary and that respondent

fraudulently coerced them into believing that filing tax returns

was mandatory.

After petitioners’ statement was read into the record, the

Court informed petitioners that the Supreme Court has held that

the imposition of a Federal income tax is constitutional and that

the arguments petitioners set forth have been rejected by every

court presented with these claims. The Court warned petitioners

that proceeding with their argument could subject them to a

penalty up to $25,000.

The Court encouraged petitioners to conduct further research

and carefully read the caselaw before proceeding with their

misconceived arguments at trial. The Court repeatedly admonished

petitioners that their arguments have been consistently rejected

by all courts presented with the issue and that a penalty of up
 - 10 -

to $25,000 could be imposed for proceeding with tax-protester

rhetoric. A trial was then set for October 25, 2001.

At trial, respondent requested that the Court hold the

motion to dismiss for failure to prosecute in abeyance until

after petitioners presented their case. During opening

statements, Mr. Nunn claimed that respondent has no jurisdiction

over him or his documents and that the Federal income tax is

unconstitutional. Again, the Court explained to Mr. Nunn that

not one court in the country has found the Federal income tax to

be unconstitutional; and if his argument presented were found to

be without merit, a penalty up to $25,000 could be imposed.

At trial, petitioners’ unorganized packet of documents was

received into evidence. Mr. Nunn testified to the nature of the

various Schedule C businesses but did not relate a single

receipt, report, or invoice from the documents presented to a

corresponding deduction reported on the return. Mrs. Nunn did

not appear at calendar call or at trial.

The Court asked Mr. Nunn if he was going to proceed with

petitioners’ primary argument that the Federal income tax was

unconstitutional or if he was going to organize the documents and

try to substantiate the disallowed items set forth in the notice

of deficiency. Mr. Nunn decided to stay with petitioners’

primary argument and rested the case.

On cross-examination by respondent, Mr. Nunn testified that
 - 11 -

the weekly expense reports, documents included in the unorganized

packet, related directly to his Schedule C businesses, although

he could not recall to which business the expenses related.

Further, Mr. Nunn testified that although he was reimbursed for

mileage by Tech Solutions, the weekly expense reports submitted

were related to the various Schedules C and not his employment.

The weekly expense reports include a column containing the

mileage driven each day multiplied by 24 cents a mile.3 The

daily amounts were totaled, and the total weekly amount was

entered on a line titled “Total Due Employee”. On each form, Mr.

Nunn checked the box labeled “Mail Check To:” and listed his

mailing address directly under the checked box. Additionally,

Mr. Nunn signed each form. The Court could not understand why

Mr. Nunn would complete each weekly expense report with details

that were inconsistent with his Schedule C record keeping.4 The

Court found Mr. Nunn’s testimony that the weekly expense reports

related to Schedule C businesses and not his employment to be

untruthful.

Petitioners submitted three invoices for computer equipment

3
The standard mileage rate for 1993 was 28 cents per
mile. Rev. Proc. 92-104, 1992-2 C.B. 583.
4
For example, Mr. Nunn could not adequately explain why
he would intentionally check a box and write his mailing address
on each weekly expense form to have a check mailed to himself
that he would have drafted to himself for mileage reimbursement
relating to Schedule C businesses that were operated from his
home address.
 - 12 -

allegedly purchased from Agama Systems (Agama). When asked if

the invoices were valid receipts, Mr. Nunn testified that he

reconstructed the invoices. Mr. Nunn further testified that he

reconstructed the invoices because he paid cash and did not

receive a receipt for the equipment purchased from Agama.

Katherine Lam (Ms. Lam), an employee of Agama, testified on

behalf of respondent. Ms. Lam testified that the invoices

petitioners submitted were not legitimate Agama invoices and

contained multiple inconsistencies with actual Agama invoices

issued in 1993. Ms. Lam and three of her associates reviewed all

of Agama’s invoices from 1993 and were unable to find any record

of equipment sold to Mr. Nunn. On cross-examination, Ms. Lam

testified that there is no way to purchase equipment from Agama

without generating an invoice.

Petitioners submitted three invoices for car repairs

allegedly for services rendered by Fondren Toyota Service. The

receipts contained discrepancies in the odometer readings when

compared to other receipts for the same vehicle. The three

receipts resemble each other but appear to be different from

another receipt provided by petitioners from the same company.

Mr. Nunn testified that he may also have reconstructed the three

receipts.

The Court found that Mr. Nunn attempted to deceive

respondent and the Court with false documents. Overall, the
 - 13 -

Court found Mr. Nunn’s testimony to be lacking in credibility and

not forthright.

OPINION

1. Respondent’s Motion To Dismiss

At trial, respondent requested that the Court grant the

motion to dismiss for failure to properly prosecute on the basis

of the following: (1) Petitioners did not cooperate during

informal pretrial discovery; (2) petitioners refused to sign a

stipulation of facts; (3) petitioners did not submit organized

documents despite repeated requests to do so by respondent; (4)

petitioners violated the Court’s order dated February 5, 2001,

requiring petitioners’ documents to be submitted to respondent in

an organized fashion; (5) petitioners presented a baseless

argument that the Federal income tax is unconstitutional; and (6)

petitioners failed to present a case on the merits.

The Court may dismiss a case at any time and enter a

decision against the petitioner for failure to (1) properly

prosecute the case, (2) comply with the Rules, (3) comply with an

order of the Court, or (4) for other cause which the Court deems

sufficient. Rule 123(b). Dismissal may properly be granted

where the party’s failure to comply is due to willfulness, bad

faith, or fault. Dusha v. Commissioner, 82 T.C. 592, 599 (1984).

We find that petitioners failed to cooperate with

respondent, failed to comply with the Rules, and failed to comply
 - 14 -

with an order of the Court. We find that these failures were due

to petitioners’ willfulness, bad faith, or fault. Further,

petitioners failed to provide the Court with any excuse or

explanation for their behavior.

We very easily could find that petitioners failed to

properly prosecute their case and grant respondent’s motion to

dismiss this action. However, we choose instead to decide the

case on the merits in the hope that this opinion will guide

petitioners’ future decisions regarding their tax obligations.

See Calcutt v. Commissioner, 84 T.C. 716, 721-722 (1985); Pace v.

Commissioner, T.C. Memo. 2000-300; Bissell v. Commissioner, T.C.

Memo. 1991-163. Respondent’s motion to dismiss for failure to

properly prosecute will be denied.

2. Petitioners’ Challenges to the Federal Income Tax

The crux of petitioners’ arguments can be found in their

trial memorandum. Petitioners assert that the Federal income tax

is a voluntary system that is unconstitutional. Petitioners

arrive at this conclusion by combining case quotations taken out

of context and erroneous statements of law with misguided and

illogical beliefs.

Petitioners’ arguments are basic tax-protester rhetoric

which has long been dismissed as frivolous and without merit.

Lonsdale v. Commissioner, 661 F.2d 71, 72 (5th Cir. 1981), affg.

per curiam T.C. Memo. 1981-122. These arguments are nothing more
 - 15 -

than a “hodgepodge of unsupported assertions, irrelevant

platitudes, and legalistic gibberish.” Crain v. Commissioner,

737 F.2d 1417, 1418 (5th Cir. 1984).

Petitioners’ arguments are completely baseless and have

repeatedly been rejected by this Court as well as the Court of

Appeals for the Fifth Circuit, the court to which an appeal in

this case would lie. See, e.g., id.; Parker v. Commissioner, 724

F.2d 469, 472 (5th Cir. 1984), affg. T.C. Memo. 1983-75; United

States v. McCarty, 665 F.2d 596, 597 (5th Cir. 1982); Lonsdale v.

Commissioner, supra.

We need not refute petitioners’ arguments with “somber

reasoning and copious citation of precedent”, as “to do so might

suggest that these arguments have some colorable merit.” Crain

v. Commissioner, supra at 1417. “The constitutionality of our

income tax system–-including the role played within that system

by the Internal Revenue Service and the Tax Court–-has long been

established.” Id. at 1417-1418.

3. Schedule C–-Adjustments to Income

The determinations of the Commissioner in a notice of

deficiency are presumed correct, and the burden is on the

taxpayer to show that the determinations are incorrect. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).5

5
Sec. 7491 does not apply in this case to place the
burden of proof on respondent because, among other reasons, the
(continued...)
 - 16 -

The computation of income of a Schedule C business takes

into account returns and allowances, cost of goods sold, and

various business expenses. An adjustment to gross receipts for

returns and allowances is made before an adjustment for cost of

goods sold and is essentially the same as where goods are sold at

a trade discount. Pittsburgh Milk Co. v. Commissioner, 26 T.C.

707, 716 (1956). Cost of goods sold is an offset subtracted from

gross receipts in determining gross income. Sec. 1.61-3(a),

Income Tax Regs. Accordingly, returns and allowances and cost of

goods sold are not treated as deductions and are not subject to

the limitations on deductions contained in sections 162 and 274.

Metra Chem Corp. v. Commissioner, 88 T.C. 654, 661 (1987).

However, any amount claimed as returns and allowances or cost of

goods sold must be substantiated, and taxpayers are required to

maintain records sufficient for this purpose. Sec. 6001; Wright

v. Commissioner, T.C. Memo. 1993-27; sec. 1.6001-1(a), Income Tax

Regs.

Deductions are a matter of legislative grace, and the

taxpayer bears 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). A taxpayer is required to maintain records sufficient to

5
(...continued)
examination was commenced prior to July 22, 1998.
 - 17 -

establish the amount of his or her income and deductions. Sec.

6001; sec. 1.6001-1(a), (e), Income Tax Regs.

Section 162(a) allows a taxpayer to deduct ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on any trade or business. To be “ordinary” the

transaction which gives rise to the expense must be of a common

or frequent occurrence in the type of business involved. Deputy

v. Du Pont, 308 U.S. 488, 495 (1940). To be “necessary” an

expense must be “appropriate and helpful” to the taxpayer’s

business. Welch v. Helvering, supra at 113. Additionally, the

expenditure must be “directly connected with or pertaining to the

taxpayer’s trade or business”. Sec. 1.162-1(a), Income Tax Regs.

Generally, if a claimed business expense is deductible, but

the taxpayer is unable to fully substantiate it, the Court is

permitted to make as close an approximation as it can, bearing

heavily against the taxpayer whose inexactitude is of his or her

own making. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930). The estimate must have a reasonable evidentiary basis.

Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). However,

section 274 supersedes the Cohan doctrine, see sec. 1.274-5T(a),

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985),

and requires strict substantiation of expenses for travel, meals

and entertainment, and gifts, and with respect to any listed

property as defined in section 280F(d)(4), sec. 274(d). Listed
 - 18 -

property includes any passenger automobile. Sec.

280F(d)(4)(A)(i).

A taxpayer is required by section 274(d) to substantiate a

claimed expense by adequate records or by sufficient evidence

corroborating the taxpayer’s own statement establishing the

amount, time, place, and business purpose of the expense. Sec.

274(d). Even if such an expense would otherwise be deductible,

the deduction may still be denied if there is insufficient

substantiation to support it. Sec. 1.274-5T(a), Temporary Income

Tax Regs., supra.

At trial, petitioners failed to substantiate any of the

amounts claimed on the Schedules C that were disallowed in the

notice of deficiency. The Court provided petitioners ample time

to present evidence establishing the correctness of amounts

claimed on the Schedules C. However, petitioners presented

absolutely no evidence to establish that any of their documents

corresponded directly to amounts claimed on the Schedules C. In

addition, Mr. Nunn presented false invoices and testimony lacking

credibility and truthfulness. Therefore, the Court was unable to

apply the Cohan doctrine to the applicable items because there

was no reasonable evidentiary basis to form an estimate of

whether any of those items were allowable.

Instead of providing evidence in an attempt to substantiate

the amounts reported, petitioners chose to rely primarily on
 - 19 -

frivolous tax-protester arguments. Petitioners are not entitled

to deductions for business expenses that are completely

unsubstantiated. Ronnen v. Commissioner, 90 T.C. 74, 102 (1988).

Petitioners have failed to meet their burden of proof with

respect to the amounts reported on the Schedules C that were

disallowed in the notice of deficiency. Thus, petitioners are

not entitled to any amounts claimed for returns and allowances,

cost of goods sold, or business expense deductions reported on

the Schedules C for the year at issue. Respondent is sustained

on this issue.

4. Section 6651(a)(1) Addition to Tax

Respondent determined an addition to tax as a result of

petitioners’ failure to timely file their Federal income tax

return for the year at issue. Section 6651(a)(1) imposes an

addition to tax for failure to file a timely tax return. The

addition to tax is equal to 5 percent of the amount of the tax

required to be shown on the return if the failure to file is not

for more than 1 month. Sec. 6651(a)(1). An additional 5 percent

is imposed for each month or fraction thereof in which the

failure to file continues, to a maximum of 25 percent of the tax.

Id. The addition to tax is imposed on the net amount due. Sec.

6651(b).

The addition to tax is applicable unless a taxpayer

establishes that the failure to file was due to reasonable cause
 - 20 -

and not willful neglect. Sec. 6651(a). If a taxpayer exercised

ordinary business care and prudence and was nonetheless unable to

file the return within the date prescribed by law, then

reasonable cause exists. Sec. 301.6651-1(c)(1), Proced. & Admin.

Regs. “Willful neglect” means a “conscious, intentional failure

or reckless indifference.” United States v. Boyle, 469 U.S. 241,

245 (1985).

At trial, Mr. Nunn testified that petitioners’ 1993 Federal

income tax return was not filed timely because he “procrastinated

* * * and never got to it.” Additionally, Mr. Nunn claimed that

he misunderstood the tax laws to allow for a late filing if the

taxpayer was to receive a refund.

Petitioners’ procrastination in filing a timely tax return

is certainly not reasonable cause. Petitioners failed to

exercise ordinary care and willfully neglected to file their 1993

Federal tax return timely.

“As a general rule, taxpayers are charged with knowledge of

the law.” Niedringhaus v. Commissioner, 99 T.C. 202, 222 (1992).

A taxpayer need not be an expert in tax law to know that tax

returns have fixed filing dates. United States v. Boyle, supra

at 251. Petitioners’ mistaken belief that they could file their

tax return late because they were due a refund is not reasonable

cause for failure to timely file a return. See Linseman v.
 - 21 -

Commissioner, 82 T.C. 514, 523 (1984); Bradley v. Commissioner,

T.C. Memo. 1998-170.

Petitioners’ 1993 Federal income tax return was due on April

15, 1994. Petitioners filed their return just under 3 years

later and offered no rational explanation for their failure to

file the return timely. Petitioners failed to show that they

exercised ordinary care and prudence in this case. Accordingly,

petitioners are liable for the addition to tax under section

6651(a)(1). Respondent is sustained on this issue.

5. Section 6662 Penalty

Section 6662 provides that if any portion of any

underpayment is due to negligence, then a taxpayer will be liable

for a penalty equal to 20 percent of the underpayment of tax

required to be shown on the return that is attributable to the

taxpayer’s negligence or disregard of rules or regulations. See

sec. 6662(a) and (b)(1). Negligence is defined as the “lack of

due care or failure to do what a reasonable and ordinarily

prudent person would do under the circumstances.” Korshin v.

Commissioner, 91 F.3d 670, 672 (4th Cir. 1996), affg. T.C. Memo.

1995-46. As pertinent here, “negligence” includes the failure to

make a reasonable attempt to comply with the provisions of the

Internal Revenue Code and also includes any failure to keep

adequate books and records or to substantiate items properly.

See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.
 - 22 -

“Disregard” has been categorized as any careless, reckless, or

intentional disregard. Sec. 6662(c).

A taxpayer may avoid the accuracy-related penalty by showing

that (1) there was reasonable cause for the underpayment, and (2)

the taxpayer acted in good faith with respect to such

underpayment. See sec. 6664(c). Whether the taxpayer acted with

reasonable cause and in good faith is determined by the relevant

facts and circumstances, and, most importantly, the extent to

which he attempted to assess his proper tax liability. See Neely

v. Commissioner, 85 T.C. 934 (1985); Stubblefield v.

Commissioner, T.C. Memo. 1996-537; sec. 1.6664-4(b)(1), Income

Tax Regs.

It is petitioners’ responsibility to establish that they are

not liable for the accuracy-related negligence penalty imposed by

section 6662(a). See Rule 142(a); Tweeddale v. Commissioner, 92

T.C. 501, 505 (1989).

At trial, petitioners made no argument and offered

absolutely no evidence to refute imposition of the section 6662

penalty. Further, petitioners failed to establish that they

acted with reasonable care and in good faith with respect to the

1993 underpayment.

Petitioners claimed various Schedule C deductions which they

were unable to substantiate and disregarded the requirements of

sections 162 and 274. Additionally, petitioners failed to keep
 - 23 -

adequate books and records, created false invoices, and presented

documents not believed by the Court to be related to legitimate

business expense deductions. At a minimum, petitioners displayed

a lack of due care and failed to act as reasonable, prudent

persons would under the circumstances.

On the basis of the entire record, we find that petitioners

were negligent and hold that petitioners are liable for an

accuracy-related penalty under section 6662(a) for the 1993 tax

year. Respondent is sustained on this issue.

6. Section 6673 Penalty

As relevant herein, section 6673(a)(1) authorizes the Tax

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 such proceeding is

frivolous or groundless.

The record in this case is replete with numerous examples of

instances where petitioners have delayed these proceedings,

advanced frivolous and groundless arguments, and presented false

documents to respondent and the Court. See supra pp. 4-13.

For example, petitioners failed to (1) meet with respondent

on several occasions, (2) enter into a stipulation of facts, (3)

present organized documents, and (4) comply with a court order.

Petitioners also presented tax-protester rhetoric at trial
 - 24 -

despite several warnings from the Court that the arguments were

frivolous and groundless and could subject petitioners to a

penalty. In addition, the Court found that petitioners attempted

to deceive respondent and the Court by creating false documents

and that Mr. Nunn’s overall testimony lacked credibility and

truthfulness.

The record in this case provides ample support to convince

us that petitioners were not interested in disputing the merits

of the substantive issues in the case. We are convinced that

petitioners instituted the present proceeding primarily for

delay. In this regard, it is clear that petitioners considered

this proceeding as nothing but a vehicle to protest the tax laws

of this country and to espouse their own misguided views, which

are frivolous and groundless. In short, having to deal with this

matter wasted the Court's time, as well as respondent’s, and

taxpayers with genuine controversies may have been delayed.

Although the Court can demand a higher degree of

responsibility from a member of the bar, litigants cannot be

treated as free to advance frivolous claims merely because they

appear without counsel. Where pro se litigants are warned that

their claims are frivolous, as petitioners were several times,

and where they are aware of the ample legal authority holding

squarely against them, a penalty is appropriate. See Lonsdale v.
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Commissioner, 661 F.2d at 72; Coulter v. Commissioner, 82 T.C.

580, 584-586 (1984).

Petitioners cited the Internal Revenue Code, the

Constitution, and various cases. We have no doubt that

petitioners were thoroughly familiar with the precedent which

uniformly denied validity to their position. The Court informed

petitioners several times of the frivolous and groundless nature

of their claims. In addition, the Court warned petitioners four

times that their stale and baseless arguments could subject them

to a penalty up to $25,000. Nevertheless, petitioners chose to

ignore well-established precedent of this and other Federal

courts and pursue instead their tax-protester rhetoric.

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

those advanced by petitioners. See Abrams v. Commissioner, 82

T.C. 403, 408-413 (1984); Coulter v. Commissioner, supra.

In view of petitioners’ egregious conduct in this case, we

will exercise our discretion under section 6673(a)(1) and require
 - 26 -

petitioners to pay a penalty to the United States in the amount

of $7,500.

To reflect the foregoing,

An appropriate order denying

respondent’s motion will be issued,

and decision will be entered

for respondent.