Rhodes v. Comm'r

T.C. Memo. 2007-206

UNITED STATES TAX COURT

ALEX B. RHODES, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7844-05. Filed July 30, 2007.

Alex B. Rhodes, Jr., pro se.

Alvin A. Ohm, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HAINES, Judge: Respondent determined deficiencies in

petitioner’s Federal income taxes for 2000, 2001, 2002, and 2003

(years at issue) of $24,351, $24,222, $25,608, and $26,426, as

well as additions to tax under section 6651(a)(1) of $6,073,
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$6,045, $6,248, and $6,465, and under section 6654(a) of $1,297,

$966, $833, and $675, respectively.1

After concessions,2 the issues for decision are: (1)

Whether petitioner received taxable income for the years at

issue; (2) whether petitioner is liable for the additional tax

under section 72(t) for early distributions from retirement

plans; (3) whether petitioner is liable for additions to tax

under section 6651(a)(1) for the years at issue; (4) whether

petitioner is liable for additions to tax under section 6654(a)

for the years at issue; and (5) whether the Court should impose a

penalty against petitioner under section 6673(a).

FINDINGS OF FACT

Some of the facts have been deemed stipulated pursuant to

Rule 91(f) and are so found.3 The stipulation of facts and the

attached exhibits are incorporated herein by this reference.

Petitioner resided in Plano, Texas, when he filed the petition.

At the time of trial, petitioner was 42 years old. During

the years at issue, petitioner was employed with various

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
2
Respondent concedes that petitioner did not receive
capital gain income of $164 from the American Express Certificate
Co. and a taxable distribution of $642 from the American Express
Trust Co. in 2000.
3
Proposed stipulations of fact were deemed established by
the Court’s order on Feb. 27, 2006.
 - 3 -

companies as a data communication network designer and engineer.

For each year at issue, petitioner gave his employers Forms W-4,

Employee’s Withholding Allowance Certificate, certifying he was

exempt from Federal income tax withholding.

Petitioner did not file a Federal income tax return for

2000. Using third-party-payor information, respondent determined

that in 2000 petitioner received: (1) Wage income of $12,733,

$10,595, $4,716, $44,250, $14,271, and $9,279, from Metro

Information Services, Ajilon LLC, Texas Temp Limited Partnership

(Texas Temp),4 MBNA Hallmark Information Services (MBNA), SCB

Computer Technology, Inc., and CCC, Inc., respectively; (2)

capital gain income of $412 and $164 from AXP Blue Chip Advantage

Fund (AXP) and American Express, respectively; and (3) a taxable

distribution of $295 from his individual retirement account with

Federal Savings Bank. Petitioner failed to make estimated tax

payments, other than tax withheld of $59 by Federal Savings Bank.

Respondent determined petitioner was liable for the additional

tax of 10 percent on the distribution from Federal Savings Bank

pursuant to section 72(t) because it was an early distribution

from a qualified retirement plan.

4
On Feb. 10, 2006, petitioner filed with the Court
Petitioner’s Reply to Respondent’s Reply to Petitioner’s Response
to Order to Show Cause, in which he asserted that he had never
provided services for Texas Temp.
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Petitioner did not file a Federal income tax return for

2001. Using third-party-payor information, respondent determined

that in 2001 petitioner received wage income of $99,949 from MBNA

and capital gain income of $73 from AXP. Petitioner failed to

make estimated tax payments, other than tax of $43 withheld by

MBNA.

Petitioner did not file a Federal income tax return for

2002. Using third-party-payor information, respondent determined

that in 2002 petitioner received wage income of $99,771 from MBNA

Technology, Inc. (MBNA Technology), capital gain income of $456

from MBNA Corp., and a taxable distribution of $4,449 from MBNA

Corp. 401K Plus Savings Plan (MBNA Corp. 401K). Petitioner

failed to make estimated tax payments, other than tax withheld by

MBNA Corp. 401K of $615. Respondent determined petitioner was

liable for the additional tax of 10 percent on the distribution

from MBNA Corp. 401K pursuant to section 72(t) because it was an

early distribution from a qualified retirement plan.

Respondent received petitioner’s Form 1040, U.S. Individual

Income Tax Return, for 2003 (2003 return) on February 3, 2004.

The 2003 return showed zeros on lines 7 through 22, zero adjusted

gross income (line 33), zeros on lines 35 through 43, zeros on

lines 53 through 59, zero total tax, Federal income tax

withholding of $569, and a claimed refund of $569. Under Rule
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91(f), it was deemed stipulated that petitioner failed to file a

Federal income tax return for 2003.

Petitioner attached to the 2003 return: (1) A Form W-2,

Wage and Tax Statement, reporting that petitioner received

$109,395 in wages from MBNA Technology and had $21 of Federal

income tax withheld; (2) a Form 1099-R, Distributions From

Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,

Insurance Contracts, etc., reporting that petitioner received

$4,687 from MBNA Corp. 401K and had $548 of Federal income tax

withheld; and (3) a letter which stated “he had no ‘income’ in a

‘constitutional sense’ as the word ‘income’ is used in Section 61

of the Internal Revenue Code” and other frivolous tax-protester

arguments. Petitioner failed to make estimated tax payments for

2003, other than the tax withheld of $569. Respondent determined

petitioner was liable for the additional tax of 10 percent on the

distribution from MBNA Corp. 401K pursuant to section 72(t)

because it was an early distribution from a qualified retirement

plan.

On July 2, 2004, respondent mailed petitioner a letter

indicating respondent would not accept petitioner’s 2003 return

and requesting him to file a proper return. In response, by

letter dated July 29, 2004, petitioner asserted that under the

Sixteenth Amendment to the U.S. Constitution, wages, salary, and
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compensation for services are not taxable income unless

apportioned, and other frivolous arguments.

On October 5, 2004, respondent mailed petitioner a letter

for each year at issue requesting that petitioner explain his

failure to file income tax returns for the years at issue and

that he provide respondent with any relevant information

petitioner wanted respondent to consider in determining

petitioner’s tax liability. In response, by letter dated

November 24, 2004, petitioner again raised frivolous arguments

asserting he was not required under the Constitution to file a

return or pay Federal income tax.

On February 2, 2005, respondent mailed notices of deficiency

to petitioner for the years at issue. Petitioner timely filed a

petition on April 29, 2005, in which he raised only frivolous

arguments.

On August 31, 2006, petitioner filed a motion for summary

judgment in which he asserted only tax-protester arguments. On

September 5, 2006, this Court denied petitioner’s motion and

found “Petitioner failed to even assert, let alone demonstrate,

that no genuine issues exist as to any material fact”.

This Court also found in its September 5, 2006, order:

Petitioner has previously been a litigant in this
Court, and based on his frivolous arguments, the Court
imposed a penalty on petitioner of $2,000 under section
6673(a)(1). See Rhodes v. Commissioner, T.C. Memo.
2003-133; affd. 152 Fed. Appx. 340 (5th Cir. 2005). In
the above-docketed case, the Court has warned
 - 7 -

petitioner on six occasions of the possibility of
imposing a penalty under section 6673(a)(1) if he
continues to advance frivolous arguments. See Orders
dated Nov. 14, 2005; Feb. 8, 2006; Feb. 27, 2006; Mar.
23, 2006; May 30, 2006; and Jul. 11, 2006. For the
seventh time, the Court warns petitioner that it will
impose a penalty of up to $25,000 under section
6673(a)(1) if he continues to advance frivolous
arguments.

At trial, the Court warned petitioner on numerous occasions

that the arguments he was making have been deemed frivolous by

the Court and it has imposed penalties under section 6673 against

taxpayers who raise such arguments. Despite the Court’s

warnings, petitioner continued with the frivolous and groundless

arguments at trial.

OPINION

A. Petitioner’s Federal Income Tax Deficiencies

Throughout this case, petitioner presented tax-protester

arguments to assert he was not liable for Federal income tax

deficiencies as determined in the notices of deficiency for the

years at issue, including: (1) He is not a taxpayer; (2)

respondent has no jurisdiction over him; (3) his wages did not

constitute gross income; and (4) respondent lacks authority to

assert income tax deficiencies. Petitioner’s assertions have

been rejected by this Court and other courts, and “We perceive no

need to refute these arguments with somber reasoning and copious

citation of precedent; to do so might suggest that these

arguments have some colorable merit.” Crain v. Commissioner,
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737 F.2d 1417, 1417 (5th Cir. 1984); see Stelly v. Commissioner,

761 F.2d 1113, 1115 (5th Cir. 1985) (“It is clear beyond

peradventure that the income tax on wages is constitutional”);

United States v. Romero, 640 F.2d 1014, 1016 (9th Cir. 1981)

(compensation for labor or services, paid in the form of wages or

salary, has been universally held by the courts of this republic

to be income, subject to the income tax laws currently

applicable); Wetzel v. Commissioner, T.C. Memo. 2005-211

(rejecting as frivolous the argument that the taxpayer was not a

taxpayer); Nunn v. Commissioner, T.C. Memo. 2002-250 (rejecting

as without merit the argument that the Commissioner had no

jurisdiction over the taxpayer or his documents). The Court

rejects petitioner’s tax-protester arguments as frivolous and

without merit.

Section 61(a) defines gross income for purposes of

calculating taxable income as “all income from whatever source

derived”. Section 1 imposes a tax on individuals for taxable

income received. The liability for the payment of the income tax

is on the individual earning the income. Lucas v. Earl, 281 U.S.

111, 114-115 (1930).

Respondent determined that in the years at issue petitioner

received and failed to report gross income in the form of wages,

capital gains, and distributions from qualified retirement plans.

Respondent also determined petitioner failed to file Federal
 - 9 -

income tax returns for the years at issue and make estimated tax

payments, other than the tax withheld.

Generally, the taxpayer has the burden of proving the

Commissioner’s determinations are in error. Rule 142(a). The

Court of Appeals for the Fifth Circuit, the Circuit in which

appeal in this case would lie, has held that in unreported income

cases “The Commissioner has no duty to investigate a third-party

payment report that is not disputed by the taxpayer.” Parker v.

Commissioner, 117 F.3d 785, 787 (5th Cir. 1997); Andrews v.

Commissioner, T.C. Memo. 1998-316. Generally, a third-party

payment report is not in dispute unless the taxpayer files a Form

1040 or other sworn document denying receipt of unreported

income. Parker v. Commissioner, supra at 787; Spurlock v.

Commissioner, T.C. Memo. 2003-248; Andrews v. Commissioner,

supra.

Petitioner received from third-party payors: (1) In 2000,

wage income of $12,733, $10,595, $44,250, $14,271, and $9,279,

from Metro Information Services, Ajilon LLC, MBNA, SCB Computer

Technology, Inc., and CCC, Inc., respectively, capital gain

income of $412 and $164 from AXP and American Express,

respectively, and a taxable distribution of $295 from Federal

Savings Bank; (2) in 2001, wage income of $99,949 from MBNA and

capital gain income of $73 from AXP; (3) in 2002, wage income of

$99,771 from MBNA Technology, Inc., capital gain income of $456
 - 10 -

from MBNA Corp., and a taxable distribution of $4,449 from MBNA

Corp. 401K; and (4) in 2003, wage income of $109,395 from MBNA

Technology and a taxable distribution of $4,687 from MBNA Corp.

401K.

Although petitioner disputed receiving $4,716 from Texas

Temp, the Court finds that petitioner’s testimony is not

credible. Moreover, petitioner failed to cooperate with

respondent in the preparation of this case. See sec. 6201(d).

For the foregoing reasons, the Court finds petitioner received

$4,716 of wage income from Texas Temp in 2000.

Respondent also determined that the taxable distributions

petitioner received from the Federal Savings Bank in 2000 of $295

and from the MBNA Corp. 401K in 2002 and 2003 of $4,449 and

$4,687, respectively, were early distributions from qualified

retirement plans pursuant to section 72(t)(1). As a result,

petitioner was liable for the 10-percent additional tax on the

distributions he received from these plans. Petitioner does not

dispute that the distributions were from qualified retirement

plans pursuant to section 72(t). Petitioner also does not argue,

and the record is devoid of any evidence which would indicate,

that he is qualified for any exception to section 72(t). For the

foregoing reasons, the Court finds that petitioner is liable for

the 10-percent additional tax on the early distributions from his

qualified retirement plans in 2000, 2002, and 2003.
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B. Additions to Tax

1. Burdens of Production and Proof

Respondent bears the burden of production with respect to

petitioner’s liability for the additions to tax. See sec.

7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).

To meet his burden of production, respondent must come forward

with sufficient evidence indicating it is appropriate to impose

the additions to tax. See Higbee v. Commissioner, supra at 446-

447. Once respondent meets his burden of production, petitioner

must come forward with evidence sufficient to persuade the Court

that respondent’s determinations are incorrect.

2. Section 6651(a)(1)

Respondent determined that petitioner is liable for

additions to tax under section 6651(a)(1) for the years at issue.

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

a return on the date prescribed (determined with regard to any

extension of time for filing), unless the taxpayer can establish

that such failure is due to reasonable cause and not willful

neglect. Petitioner is deemed to have stipulated that he failed

to file Federal income tax returns for the years at issue. The

Court finds respondent has met his burden of production with

regard to the additions to tax under section 6651(a)(1).
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Petitioner has presented no evidence indicating his failure

to file was due to reasonable cause or that respondent’s

determination is otherwise incorrect. Accordingly, the Court

finds petitioner is liable for additions to tax under section

6651(a)(1) for the years at issue.

3. Section 6654(a)

Respondent determined that petitioner is liable for

additions to tax under section 6654(a) for failure to make

estimated tax payments for the years at issue. A taxpayer has an

obligation to pay estimated tax for a particular year only if he

has a “required annual payment” for that year. Sec. 6654(d). A

“required annual payment” is 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)(A), (B), and (C); Wheeler v.

Commissioner, 127 T.C. 200, 210-212 (2006); Heers v.

Commissioner, T.C. Memo. 2007-10.

Respondent introduced evidence to prove petitioner was

required to file Federal income tax returns for the years at

issue. Petitioner failed to file returns for the years at issue,

and petitioner failed to make any estimated tax payments for the

years at issue, other than the amounts withheld. Petitioner also
 - 13 -

failed to file a Federal income tax return for 1999.5 See Rhodes

v. Commissioner, T.C. Memo. 2003-133, affd. 152 Fed. Appx. 340

(5th Cir. 2005). Thus, the Court finds that respondent has met

his burden of production with regard to the additions to tax

under section 6654(a). Petitioner offered no evidence to refute

respondent’s evidence or to establish a defense to respondent’s

determination that petitioner is liable for the section 6654

additions to tax. Therefore, the Court finds petitioner is

liable for additions to tax under section 6654 for the years at

issue.

C. Penalty Under Section 6673(a)(1)

Section 6673(a)(1) authorizes the Court to require a

taxpayer to pay the United States a penalty in an amount not to

exceed $25,000 whenever the taxpayer’s position is frivolous or

groundless or the taxpayer has instituted or pursued the

proceeding primarily for delay. Respondent has not asked the

Court to impose a penalty under section 6673(a) against

petitioner. However, the Court may, sua sponte, impose this

penalty. Pierson v. Commissioner, 115 T.C. 576, 580 (2000);

Rewerts v. Commissioner, T.C. Memo. 2004-248; Jensen v.

Commissioner, T.C. Memo. 2004-120.

5
Sec. 6654(d)(1)(B)(ii) is inapplicable for 2000 because
petitioner failed to file his return for 1999.
 - 14 -

In Rhodes v. Commissioner, T.C. Memo. 2003-133, the Tax

Court imposed a penalty of $2,000 on petitioner pursuant to

section 6673(a)(1) because petitioner had advanced frivolous

arguments. Before trial in the instant case, the Court warned

petitioner on seven occasions that it would impose a penalty

under section 6673(a)(1) if he continued to advance frivolous

arguments. At trial, the Court also warned petitioner on

numerous occasions that if he continued to advance frivolous

arguments, it would impose a penalty under section 6673(a)(1).

Despite the warnings of the Court, petitioner continued to

assert groundless arguments. Under the circumstances, the Court

will, on its own motion, impose a penalty of $15,000 on

petitioner pursuant to section 6673(a)(1).

In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.