T.C. Memo. 2005-144
UNITED STATES TAX COURT
RANDAL W. HOWARD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11442-04. Filed June 20, 2005.
Randal W. Howard, pro se.
Ric D. Hulshoff, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined deficiencies in
petitioner’s Federal income tax of $5,219 for 2000 and $9,164 for
2002, and additions to tax for failure to file under section
6651(a)(1) of $814 for 2000 and $1,746.23 for 2002, for failure
to pay tax under section 6651(a)(2) of $465.66 for 2002, and for
failure to pay estimated tax under section 6654 of $162.28 for
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2000 and $288.17 for 2002. Respondent now contends that, for
2000, petitioner’s income tax deficiency is $5,457 and that he is
liable for additions to tax under section 6651(a)(1) of $874 and
under section 6654 of $175. Respondent concedes that petitioner
is not liable for the addition to tax under section 6651(a)(2)
for 2002 and now contends that he is liable for an increased
addition to tax under section 6651(a)(1) of $1,940.25 for 2002.
The issues for decision are:
1. Whether petitioner had unreported income of $38,858 for
2000 and $55,197 for 2002. We hold that he did.
2. Whether petitioner is liable for the addition to tax for
failure to file under section 6651(a)(1) of $874 for 2000 and
$1,940.25 for 2002. We hold that he is.
3. Whether petitioner is liable for the addition to tax for
failure to pay estimated tax of $175 for 2000 and $288.17 for
2002. We hold that he is.
4. Whether petitioner is liable for a penalty under section
6673 for instituting proceedings primarily for delay and for
maintaining frivolous or groundless positions. We hold that he
is in the amount stated below.
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the taxable years in issue.
Rule references are to the Tax Court Rules of Practice and
Procedure.
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FINDINGS OF FACT
Petitioner resided in Arizona when he filed his petition.
He previously petitioned this Court in cases decided at Howard v.
Commissioner, T.C. Memo. 1998-57 (Howard I); Howard v.
Commissioner, T.C. Memo. 1998-300 (Howard II); Howard v.
Commissioner, T.C. Memo. 2000-222 (Howard III); Howard v.
Commissioner, T.C. Memo. 2002-85 (Howard IV); and Howard v.
Commissioner, T.C. Memo. 2005-100 (Howard V). Petitioner’s
positions in the previous cases were frivolous and groundless.
In Howard III, Howard IV, and Howard V, we awarded penalties to
the United States under section 6673.
Family Life Broadcasting System employed petitioner in 2000
and 2002, paid wages to him by check, and issued to him Forms W-
2, Wage and Tax Statement. He received wage income of $36,899 in
2000 and $39,460 in 2002 and Social Security benefits of $14,840
in 2002. He had $1,357 withheld for Federal income tax in 2000,
and $1,176 withheld in 2002. Petitioner received from his
investments with a fund managed by the Phoenix Investment
Partners, Ltd., dividends in 2000 of $830.31 and in 2002 of
$701.45, of which $210 was withheld for Federal income tax, and
capital gain income in 2000 of $1,054.69, of which $584 was
withheld for Federal income tax. Petitioner also received
interest in 2000 of $74, of which $22 tax was withheld, and in
2002 of $196, of which $17 tax was withheld.
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Petitioner did not file a Federal income tax return for 2000
or 2002. He did not make estimated tax payments for 2000 or
2002.
Respondent issued a notice of deficiency to petitioner.
Respondent determined on the basis of documents provided by
third-party payors that petitioner received taxable income.
However, respondent did not include in the determination for 2000
dividends of $830.31 that petitioner had received in 2000.
Respondent determined that petitioner’s filing status was single
and allowed one exemption to petitioner.
Before trial, petitioner asserted that he had a right not to
testify because to do so would have required him to waive his
Fifth Amendment privilege against self-incrimination. Petitioner
did not identify or exchange any documents, identify witnesses,
or file a pretrial memorandum as required by the standing
pretrial order. Respondent complied with these requirements.
OPINION
A. Burdens of Production and Proof
1. Burden of Production
a. Section 6201(d)
If a taxpayer asserts a reasonable dispute with respect to
any item of income reported on a third-party information return
and the taxpayer has fully cooperated with the Secretary, the
Secretary has the burden of producing reasonable and probative
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information concerning that deficiency in addition to such
information return. Sec. 6201(d).
Petitioner did not introduce any evidence to refute
respondent’s evidence or show that respondent’s determination of
petitioner’s income is in error. We conclude that respondent
does not have the burden of production under section 6201(d)
because petitioner did not assert a reasonable dispute with
respect to any item of income reported on an information return
and petitioner has not fully cooperated with respondent. Even if
respondent had the burden of proceeding under section 6201(d),
respondent met that burden by producing information returns with
certified transcripts from respondent’s administrative files and
from Social Security Administration files and declarations and
supporting records from Douglas Goodall and Donna Bolio. The
declarations were made under penalties of perjury pursuant to and
are in the form required by 28 U.S.C. section 1746 (2000).
The declarations are admissible under rules 803(6) and
902(11) of the Federal Rules of Evidence. Rule 803(6) of the
Federal Rules of Evidence provides an exception to the hearsay
rule for records that are kept in the course of a regularly
conducted activity and made at or near the time of the event by a
person with knowledge. Rule 902(11) of the Federal Rules of
Evidence states the requirements for self-authentication of a
business record. To qualify under rule 902(11), a domestic
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record of a regularly conducted business activity must be
accompanied by a declaration certifying that the record (1) was
made at or near the time of the occurrence of the matters set
forth by, or from information transmitted by, a person with
knowledge of those matters; (2) was kept in the course of the
regularly conducted activity; and (3) was made by the regularly
conducted activity as a regular practice. All of the underlying
documents were kept in the regular course of business, and the
declarations of the validity of these documents were made by
people familiar with them.
We conclude that section 6201(d) does not apply in this
case.
b. Determination in Unreported Income Cases
The U.S. Court of Appeals for the Ninth Circuit (to which an
appeal of this case would lie) has held that in order for the
presumption of correctness to attach to the notice of deficiency
in unreported income cases, the Commissioner must establish “some
evidentiary foundation” linking the taxpayer to the
income-producing activity, Weimerskirch v. Commissioner, 596 F.2d
358, 361-362 (9th Cir. 1979), revg. 67 T.C. 672 (1977), or some
substantive evidence “demonstrating that the taxpayer received
unreported income”, Edwards v. Commissioner, 680 F.2d 1268, 1270
(9th Cir. 1982); see also Rapp v. Commissioner, 774 F.2d 932, 935
(9th Cir. 1985). Once there is evidence of actual receipt of
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funds by the taxpayer, the taxpayer has the burden of proving
that all or part of those funds is not taxable. Tokarski v.
Commissioner, 87 T.C. 74, 76-77 (1986).
There is ample evidence linking petitioner to
income-producing activities. He received wages from Family Life,
capital gain and dividends from Phoenix Investment Partners,
Social Security benefits, and interest from the Arizona Central
Credit Union during the years in issue. At trial, respondent
submitted Forms W-2, Wage and Tax Statement, Forms 1099-MISC,
Miscellaneous Income, transcripts from the Social Security
Administration, employer records, and declarations under
penalties of perjury of petitioner’s employer and of a
representative for Phoenix Investment Partners as to the validity
of these underlying documents. The transcripts, declarations,
and supporting documents show that petitioner received income
during the years in issue. Thus, petitioner bears the burden of
proving respondent’s determinations are in error. See Edwards v.
Commissioner, supra; Weimerskirch v. Commissioner, supra.
2. Burden of Proof
At trial, respondent moved to amend the pleadings to conform
to the proof, asserting an increased deficiency and additions to
tax for 2000 as a result of respondent’s inadvertent failure to
include in petitioner’s income $830.31 of dividends from Phoenix
Investments in 2000. The parties may amend their pleadings only
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by leave of the Court, and leave shall be given freely when
justice so requires. Rule 41(a). A party may move to amend the
pleadings to conform to the proof presented at trial. Rule
41(b)(2). Prejudice to the other party is a key factor in
deciding whether to allow an amendment to the pleadings. Kroh v.
Commissioner, 98 T.C. 383, 389 (1992).
We granted respondent’s motion because (1) the third-party
Form 1099, Miscellaneous Income, from Phoenix Investment shows
that petitioner received $830.31 in dividends in 2000, (2)
respondent did not include this amount when determining
petitioner’s income for 2000, and (3) there is no prejudice to
petitioner.
Respondent bears the burden of proving the increased
deficiency for 2000 and additions to tax raised in the pleadings.
See Rule 142(a).
Petitioner contends that respondent generally bears the
burden of proof. We disagree. The burden of proof for a factual
issue relating to liability for tax may shift to the Commissioner
under certain circumstances. Sec. 7491(a). Under section
7491(a), the burden of proof with respect to a factual issue
relevant to a taxpayer’s liability for tax shifts from the
taxpayer to the Commissioner if, inter alia, the taxpayer has:
(a) Complied with substantiation requirements under the Internal
Revenue Code, sec. 7491(a)(2)(A); (b) maintained all records
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required by the Internal Revenue Code, sec. 7491(a)(2)(B); and
(c) cooperated with reasonable requests by the Secretary for
information, documents, and meetings, id. A taxpayer bears the
burden of proving that he or she has met the requirements of
section 7491(a). See H. Conf. Rept. 105-599, at 239 (1998),
1998-3 C.B. 747, 993; S. Rept. 105-174, at 45 (1998), 1998-3 C.B.
537, 581. Petitioner does not contend that he meets the
requirements of section 7491(a), and the record shows that he did
not meet those requirements because he did not cooperate with
respondent. Thus, petitioner bears the burden of proof except as
to the increased deficiency and increased additions to tax. See
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
3. Whether Petitioner’s Fifth Amendment Claims Affect the
Burden of Proof
Before trial, petitioner asserted Fifth Amendment rights
against self-incrimination. However, even if petitioner’s claim
was bona fide (which we need not decide), it would have no effect
on petitioner’s burden of proof. See United States v. Rylander,
460 U.S. 752, 758 (1983); Petzoldt v. Commissioner, 92 T.C. 661,
684-685 (1989); Traficant v. Commissioner, 89 T.C. 501, 504
(1987), affd. 884 F.2d 258 (6th Cir. 1989).
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B. Petitioner’s Income in 2000 and 2002
1. Respondent’s Determination
Petitioner has not shown that respondent’s determination
relating to the amount of his income for 2000 and 2002 is
incorrect. We conclude that petitioner received taxable income
in 2000 and 2002 as determined by respondent.
2. Increased Deficiency for 2000
As discussed above, the Commissioner has the burden of
proving increased deficiencies and additions to tax asserted in
the pleadings. Rule 142(a). Petitioner received dividends of
$830.31 in 2000 that respondent did not determine to be included
in petitioner’s income for 2000. Thus, respondent has proven the
increased deficiency for 2000. We conclude that petitioner
received income as described above in the findings of fact.
C. Petitioner’s Deductions
A taxpayer must keep records that are sufficient to enable
the Commissioner to determine his or her tax liability. Sec.
6001; sec. 1.6001-1(a), Income Tax Regs. Deductions are a matter
of legislative grace. INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 84 (1992). A taxpayer must substantiate the payments which
give rise to claimed deductions. Hradesky v. Commissioner, 65
T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.
1976); see sec. 6001.
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Petitioner alleged in the petition that he is entitled to
claim deductions. However, petitioner has not identified the
items that he contends are deductible or offered any evidence
supporting his claim. Thus, he may not deduct any amount for
2000 or 2002.
We conclude that petitioner’s deficiencies in income tax
were $5,457 for 2000 and $9,164 for 2002.
D. Additions to Tax
Section 7491(c) places on the Commissioner the burden of
producing evidence that it is appropriate to impose additions to
tax. To meet the burden of production under section 7491(c), the
Commissioner must produce evidence showing that it is appropriate
to impose the particular addition to tax but need not produce
evidence relating to defenses such as reasonable cause or
substantial authority. Higbee v. Commissioner, 116 T.C. 438, 446
(2001); H. Conf. Rept. 105-599, supra at 241, 1998-3 C.B. at 995.
Respondent has met the burden of production under section
7491(c) with respect to the addition to tax for failure (a) to
file under section 6651(a)(1) because the record shows that
petitioner is required to but has not filed a return for 2000 and
2002; and (b) to make estimated tax payments under section
6654(a) because the record shows that petitioner did not make
estimated tax payments, except for nominal amounts withheld from
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his wages and investments, with respect to his tax liability for
2000 or 2002.
The addition to tax under section 6651(a)(1) for failure to
file is based on the amount of tax due. Thus, respondent met the
burden of proving that petitioner is liable for the increased
addition to tax under section 6651(a)(1) by showing that
petitioner had an increased deficiency for 2000 as described
above.
Respondent conceded that petitioner is not liable for the
addition to tax under section 6651(a)(2) for 2002. Thus, section
6651(c)(1) (reducing the amount imposed by section 6651(a)(1) to
4.5 percent for any month in which both section 6651(a)(1) and
(2) are imposed) does not apply and the 5-percent rate does.
Respondent has established that petitioner is liable for the
addition to tax under section 6651(a)(1) for 2002 in an amount
greater than respondent determined in the notice of deficiency.
We conclude that petitioner is liable for additions to tax
for failure to file under section 6651(a)(1) of $874 for 2000 and
$1,940.25 for 2002, and failure to pay estimated tax under
section 6654 of $175 for 2000 and $288.17 for 2002.
E. Penalty for Frivolous Positions or Instituting Proceedings
Primarily for Delay Under Section 6673
Respondent moved at trial to impose a penalty under section
6673. The Court may impose a penalty of up to $25,000 if the
position or positions asserted by the taxpayer in the case are
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frivolous or groundless or the proceedings were instituted
primarily for delay. Sec. 6673(a)(1)(B). A position maintained
by the taxpayer is frivolous if it is “contrary to established
law and unsupported by a reasoned, colorable argument for change
in the law.” Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir.
1986); Gilligan v. Commissioner, T.C. Memo. 2004-194.
Petitioner’s positions at trial that being paid is not a
taxable event and that respondent has refused to identify the
statutes that makes him liable to pay the taxes at issue are
frivolous. Petitioner had five previous cases in this Court and
has previously been found liable for the penalty under section
6673. He has had ample warning of the penalty under section
6673. We conclude that petitioner instituted these proceedings
primarily for delay and that he is liable for a penalty under
section 6673 of $12,500.
To reflect the foregoing and concessions by respondent,
Decision will be
entered under Rule 155.