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.
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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
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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
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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
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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
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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.
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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.