Avery v. Comm'r

T.C. Memo. 2007-60

UNITED STATES TAX COURT

NATHANIEL CALEB AVERY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17314-05. Filed March 14, 2007.

Peter J. Gibbons, for petitioner.1

Michele Craythorn, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Respondent determined a $39,890 deficiency in

petitioner’s 2002 Federal income tax and additions to tax of

$6,743.70 under section 6651(a)(1), $4,046.22 under section

1
Peter J. Gibbons entered his appearance on Sept. 21, 2006.
Petitioner had filed the petition pro se on Sept. 15, 2005.
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6651(a)(2), and $964.76 under section 6654.2 After concessions

by respondent,3 the issues for decision are:

(1) Whether payroll summaries of petitioner’s employer are

admissible into evidence under the Federal Rules of Evidence. We

hold they are;

(2) whether petitioner had $157,553 of unreported income as

respondent determined. We hold petitioner did;

(3) whether petitioner is liable for an addition to tax

under section 6651(a)(1). We hold he is;

(4) whether petitioner is liable for an addition to tax

under section 6654. We hold he is not; and

(5) whether petitioner is liable for a penalty pursuant to

section 6673(a)(1) for instituting this proceeding primarily for

delay and/or advancing in this proceeding frivolous or groundless

claims. We hold he is and impose upon him a penalty of $5,000.

FINDINGS OF FACT

In 2002, petitioner was the chief executive officer of

Efeckta Technologies Corp. (Efeckta). During that year, Efeckta

2
Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Some dollar amounts have been rounded.
3
Respondent concedes that petitioner is not liable for the
addition to tax under sec. 6651(a)(2) and asserts an increase in
the addition to tax under sec. 6651(a)(1) to $7,493 (i.e., the
25-percent maximum addition to tax under that section multiplied
by the difference between the deficiency of $39,890 and withheld
tax of $9,918).
 -3-

paid him wages totaling $157,553. Federal income tax of $9,918

was withheld from those wages.

Petitioner did not file a Federal income tax return for 2002

and did not make any estimated tax payments for that year (with

the exception of the withheld tax). Respondent prepared a

substitute for return for petitioner for 2002 based on

information reported to respondent by a third party.4 Respondent

issued to petitioner a notice of deficiency reflecting the same.

In his petition to this Court, petitioner acknowledged that he

did not file a tax return for 2002 and alleged in part that

“Since Petitioner did not file a tax return for 2002,

Petitioner’s alleged ‘deficiency’ was not determined by

Respondent ‘examining’ any tax return filed by the Petitioner,”

that “Petitioner ‘determined’ he had no taxable income since he

received no ‘income’ in the ‘constitutional sense”, and that “no

statues [sic] make the Petitioner ‘liable’ for the ‘income’ taxes

at issue.”5 Petitioner did not deny that he received the wages

referenced in the notice of deficiency (nor has petitioner made

such a denial at any time during this proceeding).

4
The third party, Efeckta, reported on a 2002 Form W-2,
Wage and Tax Statement, that it had paid petitioner wages of
$157,553 during 2002.
5
When the petition was filed, petitioner resided in San
Rafael, California.
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On September 25, 2006, the Court called the case from the

calendar of cases set to be tried on the regular session of this

Court commencing on that date in San Francisco, California.

Counsel for respondent and counsel for petitioner made their

respective appearances. Upon the completion of the calendar

call, the parties were informed that they should be prepared to

try this case on September 26, 2006, at 9 a.m. When the

scheduled time for trial arrived, neither petitioner nor his

counsel was in the courtroom. Respondent was represented by his

counsel. The Court postponed the start of trial for 45 minutes

in expectation that either petitioner or his counsel would

appear. At 9:46 a.m., the Court recalled this case.

Respondent’s counsel appeared for respondent. Neither petitioner

nor his counsel made an appearance. Respondent moved to dismiss

the case for lack of prosecution, stating in part that petitioner

had been uncooperative throughout the proceeding and had not

stipulated any of the facts of this case. Respondent also

informed the Court that respondent believed that he bore a burden

as to the issues in this case and introduced the following five

exhibits into evidence:

(1) Exhibit 1-R: a document described as the payroll

summaries of Efeckta for the semimonthly pay periods in 2002 from

January 1 through July 15 and other payroll related records for

2002 through August 30;
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(2) Exhibit 2-R: a certified photocopy of the Information

Return Master File Tax Account Transcript printout summarizing

employee compensation reported to respondent with regard to

petitioner and his 2002 taxable year;

(3) Exhibit 3-R: a Form 4340, Certificate of Assessments,

Payments and Other Specified Matters, for petitioner and his 2002

taxable year;

(4) Exhibit 4-R: the notice of deficiency at issue; and

(5) Exhibit 5-R: a motion filed by petitioner in the U.S.

Bankruptcy Court for the District of Delaware as to the

bankruptcy case of Efeckta.

The Court admitted the exhibits into evidence and granted

respondent’s motion. The recall was concluded at 9:55 a.m.

At 10:24 a.m., the case was recalled a second time.

Petitioner’s counsel appeared, unaccompanied by petitioner.

Petitioner’s counsel moved the Court to vacate our order of

dismissal, stating that he tried to be in the courtroom at 9:30

a.m. but was not able to arrive at the courthouse until 10 a.m.

because of “very congested city and parking difficulties”.

Petitioner’s counsel stated that he was “remiss” to not have

informed the Court that he would be tardy. The Court granted

petitioner’s motion to vacate our earlier dismissal for lack of

prosecution and reopened the record to allow petitioner to make
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any objections and motions to the aforementioned exhibits

received into evidence.

The Court allowed petitioner’s counsel to examine the five

exhibits admitted into evidence earlier in the day “and to make

now any objections and appropriate motions.” Petitioner’s

counsel objected to two of the exhibits; namely, Exhibits 1-R and

2-R. As to Exhibit 1-R, petitioner’s counsel stated his

objection as follows: “I object to this as hearsay. I do not

believe that it rises to the level of an exception under the

business records rule. There’s no attestation as to its

veracity. The only thing we have for identification is an Avery

C. Anybody could have created these spreadsheets.” Respondent’s

counsel replied: “I received these records from the bankruptcy

trustee. They did not have any way to reach a custodian of the

records, because Efeckta is in bankruptcy right now. These

records are accurate payroll records that were faxed to me. The

bankruptcy trustee said this was all he had for Nathaniel Caleb

Avery.” The Court took petitioner’s objection to the

admissibility of Exhibit 1-R under advisement.

As to Exhibit 2-R, petitioner’s counsel acknowledged that

the exhibit was a certified copy of a computer-generated

transcript of the Internal Revenue Service (IRS) showing that the

respondent’s records reported that the respondent had received

the Form W-2 at issue herein, but petitioner’s counsel stated
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that the exhibit was hearsay. Respondent’s counsel replied that

the exhibit “is an official business record from the I.R.S. It

is not purporting to be a W-2. What it purports to be is W-2

information that was recorded from a third party, Efeckta

Technologies, for Nathaniel Caleb Avery for the 2002 year. It

reports his wages, his withholding, and this is a certified copy

of that matter.” The Court overruled petitioner’s objection to

the admissibility of Exhibit 2-R and admitted that exhibit into

evidence.

Petitioner did not stipulate any facts or documents, call

any witnesses, or offer to introduce any evidence at trial.

OPINION

1. Admissibility of Exhibit 1-R

At trial, petitioner’s counsel objected to the admission of

Exhibit 1-R on the grounds of hearsay. We overrule the

objection.

Proceedings in this Court are conducted in accordance with

the Federal Rules of Evidence. See sec. 7453; Rule 143. Rule

801(c) of the Federal Rules of Evidence defines “hearsay” as “a

statement, other than one made by the declarant while testifying

at the trial or hearing, offered in evidence to prove the truth

of the matter asserted.” Rule 802 of the Federal Rules of

Evidence provides that hearsay generally is not admissible except

as otherwise provided.
 -8-

Respondent argues that the Court should admit Exhibit 1-R

into evidence pursuant to rule 807 of the Federal Rules of

Evidence. That rule allows admission of a statement not

expressly within any of the other exceptions to the hearsay rule

when the statement is material and probative and when “the

interests of justice will best be served by admission of the

statement into evidence.” The documents underlying Exhibit 1-R

are both material and probative of the issue of whether

petitioner had unreported taxable income, and petitioner does not

deny that he was paid the wages referenced in those documents.

Given the circumstantial guaranties of trustworthiness present in

this case, the inability of respondent to procure a custodian of

the records of the bankrupt Efeckta, and the lack of any evidence

in the record to suggest that the payroll summaries are anything

other than what they purport to be, we shall admit the documents

into evidence.6 See Karme v. Commissioner, 673 F.2d 1062, 1065

(9th Cir. 1982) (Fed. R. Evid. 807 authorizes a court to admit a

record into evidence so long as the record is material,

probative, and trustworthy), affg. 73 T.C. 1163 (1980); see also

6
Petitioner had fair opportunity to challenge the documents
underlying Exhibit 1-R in advance of trial but did not take that
opportunity. Respondent’s pretrial memorandum gave notice to
petitioner of the possibility of respondent’s introducing
evidence that might be supplied by the custodian of records for
Efeckta. Petitioner had sufficient time to call witnesses to
testify at trial on the matter of the payroll records of Efeckta.
Finally, Exhibit 1-R involves a matter which should be familiar
to petitioner; namely, petitioner’s own income for 2002.
 -9-

United States v. Linn, 880 F.2d 209, 216 (9th Cir. 1989) (the

Court of Appeals for the Ninth Circuit has granted lower courts

broad discretion to decide whether a particular record is

trustworthy).

2. Unreported Income

As a general rule, the Commissioner’s determinations of

deficiencies in tax set forth in a notice of deficiency are

presumed correct, and the taxpayer bears the burden of showing

that these determinations are in error. See Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933); see also Rapp v.

Commissioner, 774 F.2d 932, 935 (9th Cir. 1985); Delaney v.

Commissioner, 743 F.2d 670, 671 (9th Cir. 1984), affg. T.C. Memo.

1982-666. In order for the presumption of correctness to attach

to the deficiency determination in unreported income cases, the

Commissioner must establish “some evidentiary foundation”

connecting the taxpayer with the income-producing activity,

Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir.

1979), revg. 67 T.C. 672 (1977), or demonstrate that the taxpayer

received unreported income, see Edwards v. Commissioner, 680 F.2d

1268, 1270 (9th Cir. 1982) (the Commissioner’s assertion of a

deficiency is presumptively correct once some substantive

evidence is introduced demonstrating that the taxpayer received

unreported income); McManus v. Commissioner, T.C. Memo. 2006-57;

see also Palmer v. United States, 116 F.3d 1309, 1312 (9th Cir.
 -10-

1997) (“The Commissioner’s deficiency determinations and

assessments for unpaid taxes are normally entitled to a

presumption of correctness so long as they are supported by a

minimal factual foundation.”). If the Commissioner introduces

some evidence that the taxpayer received unreported income, the

burden shifts to the taxpayer to show by a preponderance of the

evidence that the deficiency was arbitrary or erroneous. See

Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), affg.

T.C. Memo. 1997-97.7

We conclude that respondent has met his burden of production

as to the unreported income determined in the notice of

deficiency. Respondent introduced, and we admitted, into

evidence respondent’s computer-generated form stating that

respondent had received from Efeckta a Form W-2 reporting that it

had paid petitioner wages of $157,553 during 2002. See id. at

1005 (the Commissioner satisfied the sufficient foundation

requirement when the taxpayer’s employer reported the taxpayer’s

income to the Commissioner); Hughes v. United States, 953 F.2d

531, 540 (9th Cir. 1992) (upholding the use of official,

7
Pursuant to sec. 7491(a), the burden of proof as to
factual matters affecting liability for tax shifts to the
Commissioner under certain circumstances. Petitioner has neither
alleged that sec. 7491(a) applies nor established his compliance
with the requirements of sec. 7491(a)(2)(A) and (B) to
substantiate items, maintain records, and cooperate fully with
respondent’s reasonable requests. We conclude that sec. 7491(a)
is inapplicable to this case.
 -11-

computer-generated IRS forms in a deficiency determination); see

also Parker v. Commissioner, 117 F.3d 785 (5th Cir. 1997)

(holding that it is not arbitrary for the Commissioner to rely

upon third-party payor reports in a case of unreported income

where the taxpayer does not file a return or other sworn document

disputing the income reflected in those reports). Petitioner

presented no evidence to suggest that this form was inaccurate.

See Hardy v. Commissioner, supra at 1004 (shifting to the

taxpayer the burden of showing the unreported income

determination was not erroneous after the Commissioner presented

substantive evidence of unreported income); see also Green v.

Commissioner, T.C. Memo. 1996-107, affd. without published

opinion 113 F.3d 1251 (11th Cir. 1997). Respondent also

introduced, and we admitted, into evidence records of Efeckta

which support respondent’s determination. The records show that

during 2002 Efeckta paid to petitioner a semimonthly salary of

$6,000. The records are consistent with respondent’s claim of

unreported income, and we hold that respondent has sufficiently

linked petitioner with the unreported income. See Hardy v.

Commissioner, supra at 1005. Given petitioner’s failure to
 -12-

disprove respondent’s determination of unreported income,8 we

sustain the determination.

3. Addition to Tax Under Section 6651(a)(1)

Section 6651(a)(1) imposes an addition to tax for failure to

file a return when due “unless it is shown that such failure is

due to reasonable cause and not due to willful neglect”. The

addition equals 5 percent for each month that the return is late,

not to exceed 25 percent in total. The Commissioner has the

burden of production with respect to the liability of an

individual for an addition to tax under section 6651(a)(1). See

sec. 7491(c); see also Rule 142(a)(1) (the Commissioner bears the

burden of proof as to his allegation in the answer concerning the

increase in the section 6651(a)(1) addition to tax).9 The burden

of showing reasonable cause under section 6651(a) remains on

petitioner. See Higbee v. Commissioner, 116 T.C. 438, 446-448

(2001). “Reasonable cause” requires petitioner to demonstrate

8
Petitioner had an opportunity to show error in
respondent’s determination of unreported income but failed to
take advantage of that opportunity. Instead, petitioner opts to
rely on allegations similar to those that we have previously
rejected as frivolous. We see no need to address petitioner’s
allegations with any further discussion. See Sawukaytis v.
Commissioner, T.C. Memo. 2002-156, affd. 102 Fed. Appx. 29 (6th
Cir. 2004); Heisey v. Commissioner, T.C. Memo. 2002-41, affd. 59
Fed. Appx. 233 (9th Cir. 2003); Hart v. Commissioner, T.C. Memo.
2001-306.
9
Petitioner believes that respondent’s concession in the
answer of the sec. 6651(a)(2) addition to tax invalidates the
notice of deficiency. We disagree.
 -13-

that he exercised ordinary business care and prudence and

nevertheless was unable to file his 2002 Federal income tax

return by the due date. See United States v. Boyle, 469 U.S.

241, 246 (1985); sec. 301.6651-1(c), Proced. & Admin. Regs.

Willful neglect is defined as a “conscious, intentional failure

or reckless indifference.” United States v. Boyle, supra at 245.

Petitioner conceded in his petition that he never filed his

2002 tax return. Respondent has accordingly met his burden with

regard to the section 6651(a)(1) addition to tax. See sec.

7491(c); Higbee v. Commissioner, supra. Petitioner has neither

offered an explanation for his failure to file a 2002 Federal

income tax return nor produced evidence to establish any

reasonable cause for his failure to file this return. Petitioner

does not deny that he lacked reasonable cause; he raises tax-

protester arguments that lead us to conclude that his failure to

file a 2002 tax return was conscious, intentional, and recklessly

indifferent.10 We sustain respondent’s determination of an

addition to tax under section 6651(a) as increased in the answer.

10
Petitioner had an opportunity to show error in
respondent’s determination of this addition to tax but failed to
take advantage of that opportunity. Petitioner alleges that the
addition to tax was erroneously determined because “A 6651
penalty can only apply to alcohol, firearms, and tobacco taxes”,
and he did not engage in such excise activities during the
taxable year in question. We have previously rejected similar
allegations as frivolous, and we see no need to address
petitioner’s allegation with any further discussion.
 -14-

4. Addition to Tax Under Section 6654

Section 6654(a) imposes an addition to tax upon an

individual for an underpayment of a required installment of

estimated tax. If the taxpayer assigns error to the

Commissioner’s determination that the taxpayer is liable for the

addition to tax, the Commissioner has the burden of producing

evidence to show that the addition to tax applies. See sec.

7491(c); Higbee v. Commissioner, supra at 438.

Under section 6654, the addition to tax is calculated with

reference to four required installment payments of the taxpayer’s

estimated tax liability. Sec. 6654(c)(1); Wheeler v.

Commissioner, 127 T.C. 200, 210 (2006). Each required

installment of estimated tax is equal to 25 percent of the

“required annual payment”. Sec. 6654(d)(1)(A). The required

annual payment is generally equal to the lesser of (1) 90 percent

of the tax shown on the individual’s return for that year (or, if

no return is filed, 90 percent of his or her tax for such year),

or (2) if the individual filed a return for the immediately

preceding taxable year, 100 percent of the tax shown on that

return. Sec. 6654(d)(1)(B); Wheeler v. Commissioner, supra at

210-211. A taxpayer has an obligation to pay estimated taxes for

a particular year only if he has a “required annual payment” for

that year. Wheeler v. Commissioner, supra at 211.
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Respondent introduced evidence to prove that petitioner was

required to file a Federal income tax return for 2002, that

petitioner did not file a 2002 return, and that petitioner did

not make any estimated tax payments for 2002 (with the exception

of the withheld tax). However, respondent did not introduce

evidence sufficient to prove that petitioner had an obligation to

make any estimated tax payments for 2002. Specifically,

respondent’s burden of production under section 7491(c) required

him to produce evidence that petitioner had a required annual

payment for 2002 under section 6654(d), which in turn required

that respondent produce evidence establishing whether petitioner

filed a 2001 tax return and if so the amount of tax shown

thereon. Id. at 211-212.11 Respondent did not do so.

Consequently, respondent’s determination regarding the section

6654 addition to tax is not sustained.12

11
Although the petition is unclear in many respects and is
replete with frivolous arguments, petitioner nevertheless
asserted in the petition that “the 6654 penalties are erroneously
alleged.” Thus, respondent was put on notice that petitioner’s
liability for the sec. 6654 addition to tax was an issue.
Respondent therefore had the burden of production under sec.
7491(c) to introduce evidence that it is appropriate to hold
petitioner liable for the addition to tax. See Wheeler v.
Commissioner, 127 T.C. 200, 210 (2006).
12
We emphasize that we are not holding that petitioner was
not required to make estimated tax payments for 2002. Rather, we
hold that petitioner is not liable for the sec. 6654 addition to
tax because of respondent’s failure to meet the burden of
production.
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5. Section 6673(a)(1) Penalty

The Court now considers sua sponte whether to impose a

penalty against petitioner pursuant to section 6673(a)(1). That

section provides that the Court may require a taxpayer to pay to

the United States a penalty not in excess of $25,000 whenever,

among other reasons, it appears either that the taxpayer

instituted or maintained the proceeding primarily for delay or

that the taxpayer’s position in the proceeding is frivolous or

groundless.

The record in this case convinces us that petitioner was not

interested in disputing the merits of either the deficiency

in income tax or the additions to tax respondent determined in

the notice of deficiency. Rather, the record demonstrates that

petitioner unreasonably prolonged the proceeding by serving on

respondent and filing with the Court repetitious, groundless, and

frivolous documents. In the petition, motion for summary

judgment, and several other documents petitioner has submitted to

the Court, petitioner raised frivolous tax-protester arguments

and contentions that have previously and universally been

rejected as such. See, e.g., Dashiell v. Commissioner, T.C.

Memo. 2004-210 (as to petitioner’s allegation that no Internal

Revenue Code section makes him liable); Smith v. Commissioner,

T.C. Memo. 2003-45 (as to petitioner’s allegation that the

deficiency determined is an excise tax). Petitioner knew or
 -17-

should have known that his arguments lacked merit. Petitioner

cited the Internal Revenue Code, the Tax Court Rules, the

Constitution, and dozens of cases. We have no doubt that

petitioner was or had reason to be thoroughly familiar with the

precedent which uniformly denied validity to his position.

Petitioner’s failure to provide respondent with information

requested and petitioner’s failure to offer competent evidence at

trial pertaining to substantive issues raised in the notice of

deficiency are further evidence that this lawsuit was instituted

primarily for delay. See Stamos v. Commissioner, 95 T.C. 624,

638 (1990), affd. without published opinion 956 F.2d 1168 (9th

Cir. 1992).

On the record before us, we are convinced that petitioner

has instituted and maintained this proceeding primarily for delay

and has advanced frivolous and groundless arguments. In the

light of the foregoing, we believe sanctions are necessary to

deter petitioner and other similarly situated taxpayers from

comparable dilatory conduct. Pursuant to section 6673(a)(1), we

impose against petitioner a penalty of $5,000.

We have considered all of petitioner’s contentions and

allegations that are not discussed herein, and we find them to be

without merit and/or irrelevant. To reflect the foregoing,

Decision will be entered

for respondent.