T.C. Memo. 2007-301
UNITED STATES TAX COURT
DANIEL G. CALLAHAN, ET AL.,1 Petitioners v. COMMISSIONER
OF INTERNAL REVENUE, Respondent
Docket Nos. 10256-04, 10257-04, Filed October 2, 2007.
23879-04.
Daniel G. and Mary E. Callahan, pro se.
James M. Klein and Mark J. Miller, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GALE, Judge: Respondent determined the following
deficiencies in, and additions to, petitioners’ Federal income
tax:
1
Cases of the following petitioner are consolidated
herewith: Mary E. Callahan, docket Nos. 10257-04 and 23879-04.
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Daniel G. Callahan Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6654(a)
1997 $2,936 $734.00 $157.07
1998 3,064 766.00 140.23
1999 3,086 771.50 149.34
Mary E. Callahan Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6654(a)
1997 $9,971 $1,337.75 $258.82
1998 9,994 1,330.50 219.77
1999 10,509 1,373.00 238.80
2002 10,433 3,129.90 348.64
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as in effect for the years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
These cases were consolidated for trial, briefing, and
opinion. At trial, respondent moved to amend the pleadings to
conform to the proof, to the effect that petitioner Mary E.
Callahan (Mrs. Callahan) was required to report one-half of
petitioner Daniel G. Callahan’s (Mr. Callahan) income of $41,290
for 2002. We must decide the following issues: (1) Whether
petitioners had unreported income in 1997, 1998, 1999, and 2002,
as respondent determined; (2) whether petitioners must split
their income in each year at issue on account of Wisconsin’s
marital property laws; (3) whether petitioners are liable for
additions to tax under section 6651(a)(1) for those years; (4)
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whether petitioners are liable for additions to tax under section
6654 for those years; and (5) whether petitioners are liable for
penalties under section 6673(a)(1).
FINDINGS OF FACT
Some of the facts have been stipulated and are incorporated
by this reference. At the time the petitions were filed,
petitioners resided in Wisconsin.
Mr. Callahan and Mrs. Callahan were married in 1990 and have
resided together in the same household in Wisconsin since that
time, through the years in issue. Petitioners do not have a
marital property agreement and have not opted out of the marital
property laws of Wisconsin.
Mrs. Callahan provided medical services at a medical group
in Racine, Wisconsin. For her services as a nurse practitioner,
she received payments of $51,117, $51,092, $53,630, and $59,656
in 1997, 1998, 1999, and 2002, respectively. She received
dividend income of $151, $177, $210, and $221 in 1997, 1998,
1999, and 2002, respectively, as well as interest income of $26
in 1999 and $26 in 2002.
Mr. Callahan received payment of $1,000 from Idea Consulting
in 1998, as well as interest income of $36 and $30 in 1997 and
1998, respectively. He also received $41,290 as compensation for
his services from J. Tyson & Associates in 2002.
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Petitioners did not file Forms 1040, U.S. Individual Income
Tax Return, for any of the taxable years 1997, 1998, 1999, and
2002. The last time petitioners filed Federal income tax returns
before the years at issue was in 1993. Petitioners made no
estimated tax payments for any of the years at issue.
OPINION
Respondent determined that petitioners had unreported income
in the aforementioned amounts for 1997, 1998, and 1999, as well
as additions to tax under section 6651(a)(1) for failing to file
returns and under section 6654 for failing to make estimated tax
payments for each of those years. Respondent determined
deficiencies for each petitioner based on the full amount of his
or her income earned in each year, as well as half of the income
earned by each petitioner’s spouse in that year.2 Respondent
also determined that Mrs. Callahan had unreported income in 2002
as well as additions to tax under sections 6651(a)(1) and 6654.
Respondent also asserted, in a motion to amend the pleadings,
that she had marital income equal to one-half of Mr. Callahan’s
compensation for services in that year.
2
Respondent acknowledges that the notices of deficiency at
issue create a “whipsaw” for each petitioner. He concedes that
in the event the Court finds that Wisconsin marital property law
gives each petitioner a present undivided one-half interest in
the income of his or her spouse earned during the years in issue,
each petitioner is not taxable on the half of his or her income
in which his or her spouse holds the aforementioned interest.
Instead the income is attributable to the spouse who holds the
present undivided interest in it.
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Respondent’s Motion To Amend Pleadings
At trial, respondent moved to amend the pleadings to conform
them to the evidence adduced concerning Mr. Callahan’s income in
2002 and to increase Mrs. Callahan’s deficiency for 2002, on
account of her marital share of Mr. Callahan’s income in that
year.
Whether a motion seeking an amendment of the pleadings
should be granted is within the discretion of the Court.
Commissioner v. Estate of Long, 304 F.2d 136 (9th Cir. 1962).
Leave to amend the pleadings to conform to the proof shall be
given freely when justice so requires and, where the nonmoving
party has objected to the evidence giving rise to the motion to
amend, the nonmoving party has failed to satisfy the Court that
the admission of the evidence would prejudice such party. Rule
41(b)(2).
Respondent seeks to amend the pleadings to assert that Mrs.
Callahan had marital income to the extent of one-half of Mr.
Callahan’s $41,290 in compensation for services from J. Tyson &
Associates in 2002.3 Petitioners did not object to the admission
of the evidence concerning Mr. Callahan’s 2002 income; indeed,
they stipulated that he received it. Moreover, petitioners were
3
Mr. Callahan’s 2002 taxable year is not at issue in this
case.
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directed to address the issue of respondent’s motion to amend the
pleadings on brief but failed to do so.
Petitioners have identified no prejudice, and we fail to see
any. Mrs. Callahan’s 2002 taxable year has at all times been at
issue in this proceeding, and she was on notice by virtue of the
notice of deficiency issued to her for 1997 and 1998, as well as
respondent’s pretrial memorandum, that respondent intended to
allocate marital income to her on account of Wisconsin marital
property law. We conclude that amendment of the pleadings should
be allowed as sought by respondent.4
Wisconsin Marital Property Law
Under Wisconsin law, all income earned during marriage by
spouses domiciled in Wisconsin is presumed to be marital
property.5 Wis. Stat. Ann. sec. 766.31(4), 766.01(8) (West
2001). Marital property includes spousal wages, dividends,
interest, and economic benefits attributed to a spouse. Wis.
Stat. Ann. sec. 766.01(10); Park Bank-West v. Mueller, 444 N.W.2d
754, 759 (Wis. Ct. App. 1989). Each spouse has a present
4
While under Rule 142(a) respondent bears the burden of
proof with respect to Mrs. Callahan’s increased 2002 deficiency
resulting from his amendment of the pleadings, that burden is of
no consequence because petitioners have stipulated the income
giving rise to the deficiency.
5
In enacting the marital property statute, the Wisconsin
legislature intended that marital property be a form of community
property. See Wis. Stat. Ann. sec. 766.001(2) (West 2001). The
Commissioner treats it as such for Federal income tax purposes.
Rev. Rul. 87-13, 1987-1 C.B. 20.
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undivided one-half interest in the other spouse’s income earned
during the marriage. Wis. Stat. Ann. sec. 766.31(1)-(2); see
Gerczak v. Estate of Gerczak, 702 N.W.2d 72, 78 (Wis. Ct. App.
2005); Park Bank-West v. Mueller, supra. Spouses may reclassify
marital property as individual property by, inter alia, a marital
property agreement. Wis. Stat. Ann. sec. 766.31(10).
Petitioners were married during the years at issue and
maintained a residence in Wisconsin. We are therefore satisfied
that they were domiciled in Wisconsin; they have not maintained
otherwise. See Wisconsin v. Corey J.G., 572 N.W.2d 845, 853
(Wis. 1998). Petitioners have not attempted to reclassify their
marital property as individual property. Accordingly, they each
hold an undivided one-half interest in all items of income at
issue in this case.
When a husband and wife who are domiciled in a community
property State file separate returns or no returns, any marital
property income must be split between them.6 United States v.
Mitchell, 403 U.S. 190, 196 (1971); Hopkins v. Bacon, 282 U.S.
122, 127 (1930); Poe v. Seaborn, 282 U.S. 101 (1930); Johnson v.
Commissioner, 72 T.C. 340, 343 (1979). Because all items of
income at issue in this case are marital property and petitioners
6
When a separate return has been filed, married taxpayers
forfeit their right to file a joint return for the relevant year
upon the issuance of a notice of deficiency to, and the filing of
a petition in this Court by, either spouse. Sec. 6013(b)(2)(B).
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did not file returns for the years at issue, all of these items
of income must be equally split between them.
Unreported Income
Petitioners have admitted the receipt of each item of income
respondent determined. Their arguments that this income was not
taxable are frivolous tax-protester arguments that we need not
“refute * * * with somber reasoning and copious citation of
precedent; to do so might suggest that these arguments have some
colorable merit.” Crain v. Commissioner, 737 F.2d 1417, 1417
(5th Cir. 1984). After splitting each item of income at issue
equally between petitioners and attributing half of Mr.
Callahan’s 2002 income to Mrs. Callahan, we conclude that
petitioners had unreported income in the following amounts:
Mr. Callahan
Compensation for Dividends &
Year Services Interest Marital Income
1997 -0- $18 $25,634
1998 $500 15 25,635
1999 -0- -0- 26,933
Mrs. Callahan
Compensation for Dividends &
Year Services Interest Marital Income
1997 $25,559 $76 $18
1998 25,546 89 515
1999 26,815 118 -0-
2002 29,828 124 20,645
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Additions to Tax
Under section 7491(c), respondent has the burden of
production with respect to petitioners’ liability for the
additions to tax under sections 6651(a)(1) and 6654. Respondent
must accordingly offer sufficient evidence to indicate that it is
appropriate to impose each addition. See Higbee v. Commissioner,
116 T.C. 438, 446 (2001). Once this burden is met, petitioners
bear the burden of proving error in the determination, including
evidence of exculpatory factors. Id. at 446-447.
A. Section 6651(a)(1) Additions
Section 6651(a)(1) provides for an addition to tax for a
taxpayer’s failure to file a required return on or before the due
date, including extensions. Respondent determined that Mrs.
Callahan is liable for section 6651(a)(1) additions for 1997,
1998, 1999, and 2002 and determined that Mr. Callahan is liable
for section 6651(a)(1) additions for 1997, 1998, and 1999.
Petitioners have admitted receiving income during each of
these years in amounts sufficient to obligate them to file
Federal income tax returns. See sec. 6012. Petitioners admitted
that they did not file returns for any of their years in issue.
Therefore, respondent has met his burden of production under
section 7491(c).
Petitioners have offered no evidence of reasonable cause for
their failure to file. Accordingly, we sustain respondent’s
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determination that petitioners are liable for additions to tax
under section 6651(a)(1) for each of their years in issue.
B. Section 6654 Additions
Respondent determined that Mrs. Callahan is liable for
additions to tax pursuant to section 6654 for failure to pay
estimated tax for 1997, 1998, 1999, and 2002 and determined that
Mr. Callahan is liable for additions pursuant to section 6654 for
1997, 1998, and 1999.
An individual taxpayer generally has an obligation to pay
estimated tax for a particular year only if he or she 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 year, 100 percent of the tax shown on that
return. Sec. 6654(d)(1). Respondent’s burden of production
under section 7491(c) for the section 6654 addition to tax
requires him to produce evidence that petitioners had required
annual payments for the years in issue. See Wheeler v.
Commissioner, 127 T.C. 200, 210-212 (2006).
As our deficiency determinations establish, petitioners had
tax due for each of their years in issue. Since petitioners
admitted they had not filed returns since 1993, they did not file
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for any year that immediately preceded any of the years at issue,
nor did they pay any estimated tax for their years at issue. We
accordingly conclude that respondent has met his burden of
production regarding the section 6654 additions with sufficient
evidence to indicate that petitioners had required annual
payments for each of their years at issue.
We do not find that petitioners are entitled to any of the
statutorily provided exceptions to the section 6654 addition to
tax or that respondent’s determinations were incorrect.
Accordingly, we sustain the additions under section 6654 for each
of petitioners’ years at issue.
Section 6673 Penalty
Respondent has moved for a penalty under section 6673(a)(1).
Whenever it appears to the Court that proceedings have been
instituted or maintained primarily for delay or the taxpayer’s
position in such proceedings is frivolous or groundless, the
Court may require the taxpayer to pay a penalty not in excess of
$25,000. Sec. 6673(a)(1).
Petitioners presented no substantive evidence in support of
their positions. Instead, they advanced numerous frivolous tax-
protester arguments, such as claiming that labor is property that
gives rise to an “even” exchange when it is traded for money and
that income is not defined in the Internal Revenue Code.
Petitioners were warned at trial that their arguments were
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frivolous and could subject them to penalties under section 6673.
Petitioners were directed to address in their brief the question
of whether a section 6673 penalty should be imposed on them.
They failed to do so, instead persisting in advancing frivolous
tax-protester arguments.
Petitioners’ conduct in this case has wasted the time and
resources of this Court. Their disregard of the Court’s warning
indicates that stronger deterrents are appropriate.
Consequently, the Court will exercise its discretion to impose a
penalty of $1,500 upon each petitioner pursuant to section
6673(a)(1).
To reflect the foregoing,
Appropriate orders and
decisions will be entered under
Rule 155.