T.C. Memo. 2005-141
UNITED STATES TAX COURT
TERRY I. AND LOUISE MAJOR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20846-03. Filed June 16, 2005.
Ps failed to file a Federal income tax return for
the 2001 year. R subsequently determined a deficiency
and additions to tax, which Ps then contested primarily
on the basis of R’s failure to carry his burden of
proof and the inapplicability of the filing
requirement.
Held: Ps are liable for the deficiency determined
by R and for additions to tax under sec. 6651(a)(1),
I.R.C.
Terry I. and Louise Major, pro sese.
Kelly Davidson, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: Respondent determined a Federal income tax
deficiency for Terry Major’s 2001 taxable year in the amount of
$5,613 and an addition to tax pursuant to section 6651(a)(1) in
the amount of $1,403.25 and for Louise Major’s 2001 taxable year
a Federal income tax deficiency in the amount of $1,016 and an
addition to tax pursuant to section 6651(a)(1) in the amount of
$254.1 The issues for decision are:
(1) Whether petitioner Terry Major (Terry) is liable for a
deficiency in the amount of $5,613 for the 2001 taxable year;
(2) whether petitioner Louise Major (Louise) is liable for a
deficiency in the amount of $1,016 for the 2001 taxable year;
(3) whether petitioners are liable for additions to tax
under section 6651(a)(1); and
(4) whether the Court should impose a penalty, sua sponte,
under section 6673.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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FINDINGS OF FACT
Some of the facts have been stipulated and are so found.2
The stipulations of the parties, with accompanying exhibits, are
incorporated herein by this reference. At the time this petition
was filed, petitioners resided in Glendale, Arizona.
On August 29, 2003, respondent issued to petitioner Terry a
notice of deficiency determining that in 2001 Terry received
$18,407 in miscellaneous income from The Dollarhide Financial
Group LLC (Dollarhide) and $8,182 in miscellaneous income from
Lincoln Financial & Insurance Services of Nebraska or Lincoln
Financial Group (Lincoln) for computer services rendered under
the d.b.a. name, Major Computer Services. These amounts were
reported to respondent on Forms 1099-MISC, Miscellaneous Income.
Respondent also determined that in 2001 Terry received $15 from
National Financial Services LLC, as reported to respondent on
Form 1099-DIV, Dividends and Distributions, and $1 from Robert
2
Petitioners objected to many of the paragraphs in the
Stipulation of Facts on Fifth Amendment grounds. The Court
informed petitioners that they were not permitted to use the
Fifth Amendment privilege as both a sword and a shield. See
United States v. Rylander, 460 U.S. 752, 758 (1983).
Furthermore, the Court warned petitioners that both the Supreme
Court and the Courts of Appeals have held that a person does not
have a right to claim the Fifth Amendment privilege to avoid
filing a Federal income tax return or to refuse signing a Federal
income tax return under penalties of perjury. See United States
v. Sullivan, 274 U.S. 259, 263 (1927).
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McCauley, Jr. as reported to respondent on a Form 1041, Schedule
K-1, Beneficiary’s Share of Income, Deductions, Credits, etc.3
On August 29, 2003, respondent also issued to petitioner
Louise a notice of deficiency determining that in 2001 Louise
received $18,037 in demutualization compensation4 from Principal
Financial Group, Inc., Mellon Investor Services (Mellon) as
reported to respondent on Form 1099-B, Proceeds from Broker and
Barter Exchange Transactions 2001, and $343 in interest income
from Principal Life Insurance Company (Principal) as reported to
respondent on Form 1099-INT, Interest Income, and $12 in interest
income from Desert Schools Federal Credit Union as reported on
Form 1099-INT.5 None of the payors withheld any Federal income
tax from either Terry’s or Louise’s reported income. Petitioners
3
Respondent did not address these amounts on brief or at
trial. As addressed, infra p. 16, respondent’s “presumption of
correctness” with respect to the determination is appropriate
where respondent has furnished evidence linking the taxpayer to
the “tax generating activity.” Gold Emporium, Inc. v.
Commissioner, 910 F.2d 1374, 1378 (7th Cir. 1990), affg. Malicki
v. Commissioner, T.C. Memo. 1988-559. Respondent did not provide
any third party payor information or any other evidence linking
these amounts to petitioner. Thus, the Court deems that
respondent has conceded these amounts.
4
See infra p. 20.
5
With respect to the amount received from Desert Schools
Federal Credit Union, respondent did not address this amount on
brief or at trial or provide any third party payor information.
The Court assumes that respondent has conceded this amount. See
also supra note 3.
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timely filed a joint petition disputing the determinations with
this Court.6
Petitioners did not file tax returns for 2001 as reflected
by Form 4340, Certificate of Assessments, Payments and Other
Specified Matters, dated October 1, 2004, for each petitioner.
During 2004, Terry wrote a letter, in response to respondent’s
correspondence and proposed audit adjustments for his 2001
taxable year, containing essentially tax protester rhetoric.
At trial, Terry generally agreed that for a living he
“work[ed] on people’s computers”. However, Terry did not
characterize what he received in exchange for those services as
taxable income compensation. Terry described his receipts as
being in exchange for his services, “People occasionally pay me
in trade for my time, yes.”
Respondent offered a copy of Terry’s online resume listing
his employment history, d.b.a Major Computer Services in
Glendale, Arizona, from January 1981 to July 2003. Terry
described the Web site carrying his resume as “way out of date
since it was put up in 1996 and it no longer is relevant”, and he
further stated that he “gained nothing from the website”. Terry
6
The Court on Dec. 2, 2003, filed as a petition a letter
received from petitioners, which was postmarked on Nov. 26, 2003.
By an order dated Dec. 8, 2003, the Court directed petitioners to
file an amended petition complying with the Rules of the Court as
to form and content of a proper petition. Petitioners filed an
amended petition on Jan. 27, 2004.
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confirmed that his online resume and Web site were in existence
in 2001 and remained in existence as of the date of trial.
Terry acknowledged that in 2001 he had provided computer
services for both Dollarhide and Lincoln, but, generally, he
denied that he had received compensation for his services.
Respondent provided copies of checks issued by Dollarhide to
Major Computer Services and a copy of the Dollarhide general
ledger showing the same check amounts issued to Terry Major as
the vendor. Julie Yows, director of operations for Dollarhide,
testified that in 2001 Dollarhide paid Terry for computer
services rendered and issued him a Form 1099-MISC for 2001
reflecting total compensation of $18,407.94. Terry admitted that
when he received the notice of deficiency claiming he received a
Form 1099-MISC from Dollarhide, he did nothing to investigate
what he apparently contended was an error by Dollarhide.
Louise was not present at trial. Although respondent, in an
opening statement, referenced the deficiency and addition to tax
for Louise, Terry did not address any items respondent listed in
the notice of deficiency with respect to Louise.
Respondent presented as evidence the declaration of Donna
Cooper, an employee in the tax department at Lincoln National
Corporation which together with its affiliates is known as
Lincoln Financial Group. Accompanying Ms. Cooper’s declaration
was a duplicate of the original Form 1099-MISC which Lincoln
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issued to Terry in 2001 reflecting nonemployee compensation of
$8,812.72. The declaration of Deborah S. Kerns, a paralegal
analyst employee at Principal Life Insurance Company, was offered
into evidence. Attached to Ms. Kerns’s declaration was a copy of
a Form 1099-INT issued to Louise for interest paid to her in 2001
in the amount of $343.58. Respondent also sought to admit into
evidence the declaration of Marlene Mills, an employee of Mellon,
and the attached Form 1099-B issued to Louise in 2001 for
demutualization compensation received in the form of cash in the
amount of $18,037.50. The Court admitted these declarations into
evidence despite Terry’s objections.
OPINION
I. Contentions of the Parties
Petitioners contended that they were not required to file a
Federal income tax return for the taxable year 2001.
Specifically, they argued that they did not receive any amounts
that constitute gross income and asserted that respondent’s
evidentiary documents were inadmissible. Petitioners raised tax
protester arguments in opposition to the constitutionality of the
filing requirement of section 6011.
Respondent claimed that petitioners earned income in the
form of compensation and interest for 2001. Since petitioners
did not provide any evidence or documentation to contradict
respondent’s evidence, respondent contended that the
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determinations of petitioners’ tax liability and additions to tax
are correct.
II. Admissibility of Respondent’s Exhibits
Respondent introduced the following exhibits at trial to
which Terry objected on the grounds that the declarations and
accompanying documentation did not satisfy the substantive
requirements of rule 803(6) and rule 902(11) of the Federal Rules
of Evidence: (1) Copies of Form 4340, for each petitioner for
2001; (2) declarations of (and accompanying Forms 1099) Julie
Yows, Donna Cooper, Deborah S. Kerns, and Marlene Mills; and (3)
copies of three checks from Dollarhide payable to Major Computer
Services.7
In general, section 7453 and Rule 143(a) provide that Tax
Court proceedings shall be conducted in accordance with the rules
of evidence (Federal Rules of Evidence) applicable in trials
without a jury in the United States District Court for the
District of Columbia. Clough v. Commissioner, 119 T.C. 183, 188
(2002).
7
The Court notes that respondent submitted two exhibits
consisting of checks from Dollarhide to Major Computer Services.
At trial, Terry objected to one of the two exhibits, identified
as “8-R”, but he did not offer any objection to an exhibit that
was substantially similar, identified as “7-R”. The Court
admitted both exhibits into evidence. However, on brief, it
appears that petitioners now object to the admission of both
exhibits “7-R” and “8-R”.
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A. Form 4340, Certificate of Assessments, Payments and
Other Specified Matters
Fed. R. Evid. 902 sets forth the rules for self-
authentication of various types of evidence. The Court has
thoroughly examined the copies of Form 4340 presented by
respondent, and the Forms 4340 meet the requirements under Fed.
R. Evid. 902(1) for admissibility.
B. Declarations and the Accompanying Forms 1099
Respondent provided third party records, the Forms 1099,
accompanying the declarations of Ms. Yows, Ms. Cooper, Ms. Kerns,
and Ms. Mills. Rule 803 of the Federal Rules of Evidence
specifies exceptions to the general rule, Fed. R. Evid. 802,
excluding hearsay. The Court’s examination of the declarations
and their respective attached Forms 1099 reveals that such
records were kept in the course of a regularly conducted business
activity. Except for the Dollarhide checks, the exhibits were
made available to petitioner at least 14 days before the calendar
call and the trial as required by the Court’s pretrial order.
The Dollarhide checks were made available to petitioners 4 days
before the trial and were also admitted as rebuttal exhibits.
The Court is satisfied that each payor is a “business” for
purposes of Fed. R. Evid. 803(6) and Fed. R. Evid. 902(11).
Neither Fed. R. Evid. 803(6) nor Fed. R. Evid. 902(11) requires
that the custodian of the record have any personal knowledge of
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the recorded facts. What is required is the custodian’s
certification that the records were made by a person with
knowledge of the matters recorded therein. Each of the
custodians here certified that the records were made in the
course of the business’s regularly conducted activity, and a
duplicate or copy of the original Form 1099 accompanied the
declaration of each custodian.
Although Fed. R. Evid. 1002 requires an original to prove
the content of a writing, Fed. R. Evid. 1003 generally allows
duplicates, as defined in Fed. R. Evid. 1001(4), to be admitted
into evidence “to the same extent as an original unless (1) a
genuine question is raised as to the authenticity of the original
or (2) in the circumstances it would be unfair to admit the
duplicate in lieu of the original.” Likewise, Rule 143(d) allows
a copy to be “admissible to the same extent as an original unless
a genuine question is raised as to the authenticity of the
original or in the circumstances it would be unfair to admit the
copy in lieu of the original.” Petitioners have not questioned
the authenticity of the original, nor have they demonstrated that
admission of the duplicates or copies would be unfair under the
circumstances. Thus, the Court finds that the declarations and
the Forms 1099 are sufficient, and such records satisfy the
requirements of Fed. R. Evid. 803(6) and Fed. R. Evid. 902(11).
Clough v. Commissioner, supra at 190. Moreover, petitioners did
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not present any arguments that the records received into evidence
were unreliable.
C. Copies of Checks From Dollarhide
Petitioners further claimed that copies of checks from
Dollarhide offered by respondent were not a complete record since
they were only copies of the front of the checks and not the back
of the checks. Checks are admissible as commercial paper under
Fed. R. Evid. 902(9). “A check is a negotiable instrument, a
legally operative document, and falls within the category of
‘verbal acts’ which are excludable from the hearsay rule.”
Spurlock v. Commissioner, T.C. Memo. 2003-124 (citing Advisory
Committee’s Note to Federal Rule of Evidence 801(c)).
Furthermore, checks are self-authenticating documents under Fed.
R. Evid. 902(9). United States v. Hawkins, 905 F.2d 1489, 1494
(11th Cir. 1990); United States v. Little, 567 F.2d 346 n.1 (8th
Cir. 1977). Self-authenticating documents are not considered
hearsay. Since the checks are admissible documents, copies of
the checks are admissible under Rule 143(d). See Fed. R. Evid.
1003. Petitioners’ contention does not impugn the authenticity
of the original, nor have they shown that the introduction of the
checks copies would be unfair. In the present case, it is not
necessary that copies of both the front and the back of the check
be presented for the copies of the front of the check to be
admitted into evidence. See United States v. Hawkins, supra at
1494.
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D. Forms 1099 and 1096
Petitioners offer an additional argument against admitting
the Forms 1099. They maintain that copies of Forms 1099 were not
complete and could not have been prepared in the normal course of
business because they did not also include a Form 1096, Annual
Summary of Transmittal of U.S. Information Returns. Although the
Court holds that the Forms 1099 are admissible, we address
petitioners’ argument.
A Form 1099 shows the amount paid by the payor to the
recipient listed in the form for a certain taxable year. In this
case, petitioners received two Forms 1099-MISC, Form 1099-B, and
Form 1099-INT. Each Form 1099 was attached to a declaration,
which, as discussed previously, satisfied Fed. R. Evid. 803(6)
and Fed. R. Evid. 902(11). The purpose of Form 1096 is to
transmit paper forms such as Form 1099 to the Internal Revenue
Service. As the title implies, Form 1096 summarizes the
information contained in all the forms transmitted with it.
Forms 1099 supply the details underlying Form 1096. United
States v. Carroll, 345 U.S. 457, 459 (1953). Form 1096
effectively acts as a verifying cover sheet to the Internal
Revenue Service for transmitted Forms 1099, providing information
on who is submitting the attached forms, the total number of
forms submitted, the total amount listed on the forms, and the
total amount of Federal income tax withheld on the forms. United
States v. Yagow, 953 F.2d 423, 425 (8th Cir. 1992). It is not
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necessary for Form 1096 to accompany Form 1099 for a Form 1099 to
be a record that satisfies the requirements of Fed. R. Evid.
803(6) and Fed. R. Evid. 902(11). See Spurlock v. Commissioner,
supra.
E. Petitioners’ Opportunity To Challenge Records
Petitioners contend that the declarations and the underlying
records should be excluded because they were not provided with
sufficient time to challenge the adequacy of their foundation.
Thus, petitioners claim they were not given a fair opportunity to
challenge the documents under the notice requirement of Fed. R.
Evid. 902(11). The notice requirement directs that a proponent
of the evidence must provide both the records sought to be
introduced, as well as the declaration of the custodian of those
records “sufficiently in advance of their offer into evidence”.
The Court finds that respondent has complied with the notice
requirement. Respondent provided copies of his exhibits or
unsigned proposed exhibits and gave written notice to petitioners
of the possibility of introducing those exhibits and proposed
exhibits as evidence under Fed. R. Evid. 803(6) and Fed. R. Evid.
902(11) on October 1, 2004, more than 2 weeks before the October
18, 2004, calendar call. Exchange of the documents by that date
was in accordance with the Court’s Standing Pretrial Order of May
14, 2004. Respondent identified the declarants, the payors
involved, and the underlying records to be introduced by the
declarations. Petitioners were, therefore, adequately informed
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of the information in advance of trial, and petitioners had
sufficient time to contact any witnesses named in respondent’s
trial memorandum and payors listed in the notices of deficiency.
A deposition or other types of discovery were not the only
opportunities available to petitioners to challenge respondent’s
records, for petitioners had the opportunity to call those
witnesses or parties to testify at trial.
Petitioners also argue that certain records comprised of the
Dollarhide checks and the declaration of Marlene Mills should be
excluded because respondent failed to meet the provisions of the
Court’s Standing Pretrial Order, dated May 14, 2004, requiring
the exchange of documents 14 days prior to the trial session.
The Court admitted these documents at trial for the purpose of
impeachment. In this case, respondent sought to impeach the
direct testimony of Terry. With respect to impeachment of a
witness, Fed. R. Evid. 607 provides that “The credibility of a
witness may be attacked by any party, including the party calling
the witness.” Further, the Court’s Standing Pretrial Order does
not mandate exclusion of any exhibit not exchanged at least 14
days before the calendar call. It provides only: “The Court may
refuse to receive in evidence any documentation or material not *
* * exchanged, unless otherwise agreed by the parties or allowed
by the Court for good cause shown.” The Court is satisfied that
the Dollarhide checks were admissible.
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Respondent provided to petitioners the written declaration
of Marlene Mills, a Mellon employee, outside the Standing
Pretrial Order’s minimum time period for the exchange of
documents. That document was not in existence until October 7,
2004, and accordingly, it could not be exchanged within the
Court’s requirement of 14 days before the trial session. The
Court does not find that exclusion of the declaration is proper
considering the declaration only replaced the previous defective
declaration of Latoshia Desir, another Mellon employee.
Ms. Desir’s declaration, which was provided to petitioners
in compliance with the Court’s rule on document exchanges prior
to trial, did not comply with Fed. R. Evid. 902(11); therefore,
respondent offered another declaration, that of Ms. Mills,
meeting the requirements of Fed. R. Evid. 902(11). The records
accompanying Ms. Mills’s declaration contained the same content
as Ms. Desir’s declaration. Petitioners argue that the new
records reflected a change in one of respondent’s arguments, but
the Court is convinced that petitioners were sufficiently aware
of this argument in advance since it was referenced in
petitioners’ own pretrial memorandum. Additionally, petitioners
objected to the admission of Form 1099-B in the Stipulation of
Facts, in turn, acknowledging that respondent was seeking to
introduce Form 1099-B as evidence of the $18,037.50 amount from
Principal Life Insurance Company. See Rodriguez v. Commissioner,
T.C. Memo. 2005-12. Consequently, the Court believes that
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petitioners had sufficient notice to reasonably contest the
documents, and, thus, the Court admitted the documents into
evidence.
III. Petitioners’ Income Tax Liability
A. Burden of Proof
In general, the Commissioner’s determination of a taxpayer’s
tax liability is presumed correct, and the taxpayer bears the
burden of proving that respondent’s determination is improper.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The
“presumption of correctness” is appropriate where respondent has
furnished evidence linking the taxpayer to the “tax generating
activity”. Gold Emporium, Inc. v. Commissioner, 910 F.2d 1374,
1378 (7th Cir. 1990), affg. Malicki v. Commissioner, T.C. Memo.
1988-559. If respondent introduces evidence that the taxpayer
received unreported income, then the burden shifts to the
taxpayer to show by a preponderance of the evidence that the
deficiency was arbitrary and erroneous. Hardy v. Commissioner,
181 F.3d 1002, 1004 (9th Cir. 1999), affg. T.C. Memo. 1997-97;
see also Edwards v. Commissioner, 680 F.2d 1268, 1270 (9th Cir.
1982) (“[T]he Commissioner’s assertion of deficiencies are
presumptively correct once some substantive evidence is
introduced demonstrating that the taxpayer received unreported
income.”). In this case, respondent need only present some
substantive evidence that petitioners received income in 2001 to
shift the burden to petitioners. Hardy v. Commissioner, supra at
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1005. The Court finds that Forms 1099 demonstrate that Terry
received income constituting sufficient evidence in this case.
Likewise, Form 1099-B shows that Louise Major received income
from “stocks, bonds, etc.”, and Form 1099-INT reveals that Louise
Major received income from interest. Consequently, respondent
provided sufficient evidence linking petitioners to the income
underlying the statutory notices of deficiency.8
However, section 7491 may shift the burden to respondent in
specified circumstances, for example, where the taxpayer produces
“credible evidence”. Sec. 7491(a)(1). The legislative history
of section 7491 clarifies the meaning of “credible evidence”:
Credible evidence is the quality of evidence which,
after critical analysis, the court would find
sufficient upon which to base a decision on the issue
if no contrary evidence were submitted (without regard
to the judicial presumption of IRS correctness). A
taxpayer has not produced credible evidence for these
purposes if the taxpayer merely makes implausible
factual assertions, frivolous claims, or tax protestor-
type arguments. The introduction of evidence will not
meet this standard if the court is not convinced that
it is worthy of belief. If after evidence from both
sides, the court believes that the evidence is equally
balanced, the court shall find that the Secretary has
not sustained his burden of proof. * * * [H. Conf.
Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-
995.]
In addition, to effectuate a shift in the burden, petitioners
must also maintain all records required by the Code and
regulations thereunder and cooperate with reasonable requests by
8
This is with exception to amounts referred to supra notes
3 and 5.
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the Secretary for witnesses, information, documents, meetings,
and interviews. Sec. 7491(a)(2). Petitioners here did not
satisfy the prerequisites under section 7491(a)(1) and (2) for
such a shift. Consequently, except for additions to tax subject
to section 7491(c), as to which respondent bears the burden of
production, petitioners bear the burden of persuasion and the
burden of production in this case.
B. Filing Requirement
The Code imposes a Federal tax on the taxable income of
every individual. Sec. 1. Gross income for the purposes of
calculating taxable income is defined as “all income from
whatever source derived”. Sec. 61(a). Every U.S. resident
individual whose gross income for the taxable year equals or
exceeds the exemption amount is required to make an income tax
return.9 Sec. 6012(a)(1)(A). Petitioners had aggregate gross
income totaling at least $44,971.74, and each individually had
gross income totaling at least $18,381.08 for taxable year 2001.
Both petitioners’ gross incomes exceeded the filing threshold for
the 2001 taxable year, and petitioners were, therefore, required
to file an income tax return.10
9
Terry denied he was a “U.S. person”; however, at trial, he
asserted that he was a “citizen of the United States”. Section
7701(a)(30) defines the term “United States person” as, inter
alia, a “citizen or resident of the United States”.
10
In petitioners’ letter, contained in the record, Terry
makes reference to the validity of the filing requirement. Our
(continued...)
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C. Petitioners’ Taxable Income
1. Terry I. Major’s Income
Terry contended that he did not receive any income as
defined in section 61 for the taxable year 2001, but he did not
offer any evidence supporting his position. Respondent, on the
other hand, provided documentation showing that Terry earned
income of at least $26,590.66 in 2001.
Terry’s online resume established that he was a computer
consultant for Major Computer Services. Ms. Yows confirmed: (1)
Terry furnished computer services for Dollarhide in 2001; (2)
Dollarhide paid Terry shortly after receiving invoices from him;
and (3) Dollarhide issued Terry a Form 1099-MISC for 2001.
Respondent also provided Forms 1099-MISC for both Dollarhide and
Lincoln for 2001. Terry offered no evidence or testimony
contesting respondent’s evidence. Terry had the opportunity to
cross-examine respondent’s two witnesses to attempt to elicit
favorable testimony, but he chose not to. The Court therefore
sustains the deficiency determined by respondent with respect to
Terry.
10
(...continued)
tax system, the Code, and the Tax Court have been firmly
established as constitutional. Crain v. Commissioner, 737 F.2d
1417, 1417-1418 (5th Cir. 1984); Ginter v. Southern, 611 F.2d
1226, 1229 (8th Cir. 1979); Rev. Rul. 2005-19, 2005-14 I.R.B.
819.
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2. Louise Major’s Income
In support of respondent’s position, respondent provided
Form 1099-B and the declaration of Marlene Mills, a Mellon
employee, evidencing that in 2001 Louise Major received
$18,037.50 of demutualization11 income in the form of cash and
Form 1099-INT, reflecting interest income of at least $343.58.
Louise did not appear at trial. While Terry was present at
trial, he did not offer any evidence contesting Louise’s
deficiency or addition to tax.12 Thus, respondent’s
determination of Louise’s deficiency is sustained.
11
Demutualization, as it applies here, is the process of
converting from a mutual insurance company to a stock company
pursuant to a written plan of conversion. Prior to Oct. 26,
2001, Louise had an interest in an insurance policy administered
by Principal Financial Group, Inc., a mutual insurance company.
On Oct. 26, 2001, Principal Financial Group, Inc.’s initial
public offering became effective. Demutualization of the company
also became effective on this same date. On Dec. 10, 2001,
Mellon distributed demutualization compensation to the former
Principal Financial Group, Inc. policyholders. Former policy
holders could choose to receive their demutualization
compensation in the form of Principal Financial Group, Inc.
common stock, cash, or policy credits. As stated above, Louise
received $18,037.50 in cash as demutualization compensation.
12
In petitioners’ pretrial memorandum and in an objection
to stipulation #9 in the Stipulation of Facts, they contended
that the amounts received from Mellon should be treated as a
return of premium or excess premium and, thus, not income.
Petitioners also confirmed that Louise received these amounts in
cash. However, since petitioners did not argue this assertion on
brief or at trial, the Court deems that petitioners have
abandoned it.
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IV. Additions to Tax
With respect to the examinations beginning after July 22,
1998, the Commissioner bears the burden of production in any
court proceeding involving an individual’s liability for
penalties or additions to tax. Sec. 7491(c). To meet this
burden, the Commissioner must come forward with sufficient
evidence indicating that it is appropriate to impose the relevant
penalty or addition to tax. Higbee v. Commissioner, 116 T.C.
438, 446 (2001). In instances where an exception to the penalty
or addition of tax is afforded upon a showing of reasonable
cause, the taxpayer bears the burden of showing such cause. Id.
at 447.
Section 6651(a) provides for a 5-percent addition to tax for
each month or portion thereof that the return is filed late, not
to exceed 25 percent in the aggregate, imposed upon a taxpayer
for failure to timely file a tax return, unless such failure to
file is due to reasonable cause and not due to willful neglect.
Although not defined in the Code, “reasonable cause” is viewed in
the applicable regulations as the “exercise of ordinary business
care and prudence”. Sec. 301.6651-1(c)(1), Proced. & Admin.
Regs; see also United States v. Boyle, 469 U.S. 241, 246 (1985).
“Willful neglect” can be interpreted as a “conscious, intentional
failure or reckless indifference.” United States v. Boyle, supra
at 245. With respect to section 6651(a) additions to tax,
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reliance on misguided constitutional beliefs is not reasonable.
Edwards v. United States, 680 F.2d at 1271 n.2; see also Ginter
v. Southern, 611 F.2d 1226, 1229 (8th Cir. 1979).
On the basis of the record in this case, the Court concludes
that respondent’s relevant burdens of production and proof have
been met. Specifically, respondent provided Forms 4340 showing
that petitioners did not file a return for the 2001 taxable year.
Petitioners have not provided any evidence that they filed a tax
return for 2001 or that their failure to file was due to
reasonable cause. Therefore, the Court sustains the imposition
of an addition to tax under section 6651(a)(1).
V. Section 6673 Penalty
Section 6673 allows this Court to award a penalty to the
United States in an amount not in excess of $25,000 for
proceedings instituted by the taxpayer primarily for delay or for
proceedings in which the taxpayer’s position is frivolous or
groundless. “A petition to the Tax Court, or a tax return, 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)(imposing
penalties on taxpayers who made frivolous constitutional
arguments in opposition to the income tax). Courts have ruled
that constitutional defenses to the filing requirement, such as
petitioner presents, are groundless and wholly without merit.
- 23 -
Ginter v. Southern, supra at 1229; see also Williams v.
Commissioner, T.C. Memo. 1999-277; Morin v. Commissioner, T.C.
Memo. 1999-240; Sochia v. Commissioner, T.C. Memo. 1998-294 (all
of which imposed a section 6673 penalty for tax protester
arguments).
Groundless litigation diverts the time and energies of
judges from more serious claims; it imposes needless costs
on other litigants. Once the legal system has resolved a
claim, judges and lawyers must move on to other things.
They cannot endlessly rehear stale arguments. Both
appellants say that the penalties stifle their right to
petition for redress of grievances. But there is no
constitutional right to bring frivolous suits, see Bill
Johnson’s Restaurants, Inc. v. NLRB, 461 U.S. 731, 743, 103
S.Ct. 2161, 2170, 76 L.Ed.2d 277 (1983). People who wish to
express displeasure with taxes must choose other forums, and
there are many available. * * * [Coleman v. Commissioner,
supra at 72.]
Respondent has not sought a section 6673 penalty in this case,
and the Court declines to impose such a penalty today. However,
the Court explicitly admonishes petitioners that they may, in the
future, be subject to a penalty under section 6673 for any
proceedings instituted or maintained primarily for delay or for
any proceedings which are frivolous or groundless.
The Court has considered all of petitioners’ contentions,
arguments, requests, and statements. To the extent not discussed
herein, we have found them to be meritless, irrelevant, or moot.
To reflect the foregoing,
Decision will be entered
under Rule 155.