T.C. Memo. 2003-144
UNITED STATES TAX COURT
ROBERT D. HILL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6814-02. Filed May 20, 2003.
Robert D. Hill, pro se.
Erin K. Huss, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioner petitioned the Court to redetermine
the following determinations as to his 1999 taxable year:
Addition to Tax Accuracy-Related Penalty
Deficiency Sec. 6651(a)(1) Sec. 6662(a)
$35,568 $7,113.60 $7,113.60
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We decide as to that year:
1. Whether petitioner failed to include in his gross income
self-employment income of $106,077 and a tax refund of $266. We
hold he did.
2. Whether petitioner is liable for self-employment tax on
his self-employment income. We hold he is.
3. Whether petitioner is liable for the addition to tax and
the accuracy-related penalty. We hold he is.
4. Whether we shall impose a penalty on petitioner under
section 6673 for advancing frivolous and/or groundless claims.
We shall impose a penalty of $15,000.
Section references are to the applicable versions of the
Internal Revenue Code. Rule references are to the Tax Court
Rules of Practice and Procedure.
FINDINGS OF FACT
Some facts were stipulated. The stipulated facts and the
exhibits submitted therewith are incorporated herein by this
reference. We find the stipulated facts accordingly. Petitioner
resided in Sedona, Arizona, when he petitioned the Court.
During 1999, petitioner was a self-employed salesperson for
London Bridge Resort LLC (LLC). In that capacity, he solicited
individuals and entities to purchase timeshare interests in the
London Bridge Resort Time Share Condominium. LLC generally
compensated petitioner for his services by paying to him
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commissions on the interests that he sold. Petitioner’s written
contract as to those services provided that petitioner would not
be considered by the parties thereto to be an employee but an
independent contractor. The contract also provided that
petitioner was fully responsible for the Federal, State, and
local taxes and Social Security contributions payable with
respect to those services. During 1999, petitioner received
$106,077 from LLC. Petitioner also received a tax refund of $266
from the State of California during that year.
Petitioner filed his 1999 Federal income tax return on
December 14, 2000, and reported therein that he had “zero” income
and “zero” tax. He attached a letter to his return indicating,
among other things, that he was unaware of any section of the
Internal Revenue Code which established an income tax liability.
This letter was similar to tax protester letters we have seen in
other cases, e.g., Copeland v. Commissioner, T.C. Memo. 2003-46,
and Smith v. Commissioner, T.C. Memo. 2003-45.
On March 21, 2001, respondent sent to petitioner a letter
advising him that his tax-reporting position was frivolous and
giving him the opportunity to correct his position in order to
avoid imposition of frivolous return penalties under section
6702. On April 1, 2001, petitioner responded to respondent’s
letter. Petitioner stated in part:
The only Code sections identified in the 1040's
Privacy Act Notice as allegedly applying to income
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taxes are Code Sections 6001, 6011, and 6012 and none
of them identifies any statute which makes me “liable”
for income taxes, requires me “to pay” such a tax; or
requires me to accurately “self-assess” myself with any
such tax.
* * * * * * *
Code Section 6011 states, “When required by regulation
... any person made liable for any tax...” shall do
certain things. However, like Code Section 6001,
Section 6011 does not even mention income taxes, let
alone identify any regulation that “requires” me to do
anything with respect to income taxes.
* * * * * * *
And Code Section 6012 does not even contain the
word “liability”, “liable”, or “self-assessment”;
therefore, this section can have nothing to do with
making me “liable” for income taxes or putting me on
notice that I required [sic] to “self-assess” myself.
* * * * * * *
In addition your letter claiming that I had filed
a “frivolous” income tax return made no mention at all
of my claims (let alone refute them) that:
1. No Section of the Internal Revenue Code makes
me “liable” for income taxes.
2. “Income” is not defined in the Code.
3. The Supreme Court defined “income” as being a
corporate profit. And
4. Since I know the constitutional definition of
“income”, if I were to swear under penalty of perjury
to receiving anything other than “zero” income, I would
be swearing falsely, and thus I would be committing
perjury under at least two statutes.
On October 15, 2001, respondent sent to petitioner a letter
informing him about changes which respondent proposed to make to
petitioner’s 1999 return. These changes included the unreported
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income of $106,077 and of $266. The letter also reflected an
addition to tax of $7,113.60 under section 6651(a)(1) for failure
to file timely his 1999 return and an accuracy-related penalty of
$7,113.60 under section 6662(a) and (b)(1) for negligence. On
October 24, 2001, petitioner acknowledged the receipt of
respondent’s letter. In an attachment to his response,
petitioner stated in part:
This is in reply to your letter of Oct. 15th 2001
in which you notified me that “We have changed/adjusted
your return.”
* * * * * * *
You have no legal authority to “change/adjust” my
return, nor to assess any amount other than what is
shown on my return, and if any IRS employee attempts to
do otherwise, they will do so at their own criminal
and/or civil peril.
Petitioner’s statements in the attachment are similar to the
tax protester statements contained in a letter sent by the
taxpayer in Kaye v. Commissioner, T.C. Memo. 2003-74. The other
correspondence in the record between petitioner and respondent
also includes tax protester statements advanced by petitioner.
OPINION
A. Burden of Proof
Respondent’s determinations of deficiencies in the notice of
deficiency are presumed correct, and petitioner bears the burden
of proving those determinations wrong. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Section 7491 shifts to the
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Commissioner the burden of proof as to determined deficiencies
when the taxpayer establishes that he or she met certain
requirements. Petitioner has not established that he has met
those requirements.
Section 7491(c) requires that the Commissioner bear the
burden of production as to the additions to tax and penalties.
In order to meet this burden, the Commissioner must present
evidence indicating that it is appropriate to impose an addition
to tax or a penalty. See Higbee v. Commissioner, 116 T.C. 438,
446 (2001). Once the Commissioner meets his burden of
production, the taxpayer must come forward with evidence
sufficient to persuade a Court that the Commissioner’s
determination is incorrect. Id.
B. Whether Petitioner Had Unreported Income
In his petition, petitioner asserted that respondent erred
in attributing income to petitioner which he did not receive “for
any taxable source within or without the United States”. We
disagree that respondent erred as asserted. First, petitioner
received $106,077 from LLC during 1999. Under section 61(a),
this amount, which is an accession to petitioner’s wealth, is
includable in his gross income absent a determination that it
falls within a statutory exclusion. Sec. 61(a); United States v.
Burke, 504 U.S. 229, 233 (1992); Commissioner v. Glenshaw Glass
Co., 348 U.S. 426, 431 (1955). Petitioner has failed to present
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any evidence or credible argument that this income was not
taxable to him for the subject year. Respondent, on the other
hand, clearly established that petitioner was self-employed
during 1999 and that he received the above-referenced amount in
connection with his self-employment business. That evidence
includes: (1) A copy of petitioner’s realtor’s license; (2) a
copy of an independent contractor’s contract between petitioner
and Queen’s Bay, the owner and developer of the London Bridge
Resort Time Share Condominium; and (3) a payroll check register
of LLC indicating that LLC paid petitioner during the relevant
year for his services. The record also includes the testimony of
the custodian of records of LLC to the effect that petitioner
provided services for and received income from LLC.
Second, petitioner received a tax refund of $266 from the
State of California. Under the tax benefit rule, State income
tax refunds are taxable if the amount of the tax refund was
deducted in a prior year and the deduction resulted in a
reduction of tax for that year. Sec. 111; Kadunc v.
Commissioner, T.C. Memo. 1997-92; sec. 1.111-1(a), Income Tax
Regs. The amount of the refund is taxable to petitioner absent
his proving to the contrary. Petitioner has failed to present
any evidence or testimony to the effect that the amount of this
tax refund was not taxable to him for the subject year.
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We sustain respondent’s determination as to both items of
unreported income. In so doing, we note without further comment
that we consider it proper for respondent to have determined this
unreported income from the information received from the third
parties. E.g., Parker v. Commissioner, 117 F.3d 785 (5th Cir.
1997); see also Hardy v. Commissioner, 181 F.3d 1002, 1005 (9th
Cir. 1999), affg. T.C. Memo. 1997-97.
C. Whether Petitioner Is Liable for Self-Employment Tax
Section 1401 imposes a tax on the self-employment income of
every individual for old age, survivors, disability insurance,
and hospital insurance. Sec. 1401(a) and (b); Schelble v.
Commissioner, 130 F.3d 1388, 1391 (10th Cir. 1997), affg. T.C.
Memo. 1996-269; sec. 1.1401-1(a), Income Tax Regs.
Self-employment income includes the net earnings from
self-employment derived by an individual during the taxable year.
Sec. 1402(b). For purposes of the self-employment tax, the term
"net earnings from self-employment" is the gross income derived
by an individual from any trade or business carried on by such
individual, reduced by, inter alia, the deductions attributable
to the trade or business. Sec. 1402(a); sec. 1.1402(a)-1, Income
Tax Regs. Petitioner has failed to disprove that his earnings
were “net earnings from self-employment” within the meaning of
section 1402(a). Accordingly, we sustain respondent’s
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determination that petitioner is liable for self-employment tax.
See Rule 142(a).
D. Addition to Tax and Accuracy-Related Penalty
1. Addition to Tax
Section 6651(a)(1) imposes an addition to tax for failing to
file timely a required Federal income tax return, unless it is
shown that the failure was due to reasonable cause and not to
willful neglect. Petitioner was required to file a Federal
income tax return for the subject year. Secs. 6012, 6072.
Respondent met his burden of production as to this addition
to tax in that respondent introduced (and the Court admitted)
into evidence documentation establishing that petitioner filed
his 1999 income tax return untimely. Petitioner, in turn, has
failed to meet his burden of proof. Petitioner has neither
asserted nor introduced any evidence indicating that he filed his
return untimely for cause that is reasonable. We hold that
petitioner is liable for the addition to tax under section
6651(a)(1). See United States v. Boyle, 469 U.S. 241, 245
(1985); Cluck v. Commissioner, 105 T.C. 324, 338-339 (1995).
2. Accuracy-Related Penalty
Section 6662(a) and (b)(1) imposes a penalty equal to 20
percent of the amount of an underpayment attributable to
negligence or disregard of rules or regulations. In this
context, negligence includes any failure to make a reasonable
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attempt to comply with the provisions of the Internal Revenue
Code and any failure to exercise ordinary and reasonable care in
the preparation of a tax return. Sec. 6662(c); ASAT, Inc. v.
Commissioner, 108 T.C. 147, 175 (1997); sec. 1.6662-3(b)(1),
Income Tax Regs. An accuracy-related penalty under section
6662(a) does not apply to any part of an underpayment if the
taxpayer shows that there was reasonable cause for that part and
that the taxpayer acted in good faith. Sec. 6664(c)(1).
Petitioner’s failure to report any income and reliance on
frivolous arguments are not what a reasonable and prudent person
would do under the circumstances. We sustain respondent’s
determination as to this issue.
E. Penalty Under Section 6673(a)
Respondent moved the Court to impose a penalty under section
6673(a). Respondent asserts that petitioner’s position in this
case is frivolous and groundless. Respondent also asserts that
petitioner instituted this proceeding primarily for the purpose
of delay.
Section 6673(a)(1) authorizes the Court to require a
taxpayer to pay to the United States a penalty of up to $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.
Petitioner did not offer any evidence at trial, nor did he
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otherwise make any legitimate attempt to prove respondent’s
determinations wrong. Petitioner was warned by respondent before
trial, and he was warned by the Court during trial, that his
position (or lack thereof) was without merit and could subject
him to a penalty of up to $25,000 under section 6673(a).
Notwithstanding the fact that we previously sanctioned petitioner
in Hill v. Commissioner, T.C. Memo. 2002-272, for $3,500,
petitioner continues to pursue his frivolous and/or groundless
arguments. Petitioner has disregarded these warnings and has
consumed wastefully the time, resources, and effort of the Court.
We conclude from the record that petitioner’s positions in this
proceeding are frivolous and without merit. We also conclude
from the record that petitioner has instituted and maintained
this proceeding primarily for delay. Pursuant to section
6673(a), we require petitioner to pay to the United States a
penalty of $15,000.1
1
We note that petitioner has two more cases before the
Court (docket Nos. 8690-02 and 14771-02).
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We have considered all arguments made by the parties and
have found those arguments not discussed herein to be irrelevant
and/or without merit. To reflect the foregoing,
An appropriate order and
decision will be entered for
respondent.