T.C. Memo. 2008-138
UNITED STATES TAX COURT
RICHARD CLARKE RANDALL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24992-06. Filed May 20, 2008.
R determined a deficiency and a penalty under sec.
6662, I.R.C., for 2004. The deficiency and sec. 6662,
I.R.C., penalty were based on P’s failure to include
amounts reported on Forms 1099-MISC on his Federal
income tax return.
Held: R’s determinations are sustained.
Held, further: P is liable for a sec. 6673,
I.R.C., penalty.
Richard Clarke Randall, pro se.
Steven I. Josephy, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: This case is before the Court on a petition
for redetermination of a deficiency. The issues for decision
are:
(1) Whether petitioner had unreported nonemployee income for
2004;
(2) whether petitioner is liable for the section 6662(a)
accuracy-related penalty for 2004;1 and
(3) whether the Court should sua sponte impose upon
petitioner a section 6673 penalty.
FINDINGS OF FACT
Some of the facts have been stipulated. These stipulations,
with accompanying exhibits, are incorporated herein by this
reference. At the time the petition was filed petitioner resided
in Colorado.
Petitioner’s 2004 Form 1040EZ, Income Tax Return for Single
and Joint Filers With No Dependents, was received by the Internal
Revenue Service on August 17, 2005. Petitioner’s Form 1040EZ
reflected zero wages on line 1, and taxable interest of $322.61
on line 2. Petitioner attached to his Form 1040EZ a Form 1099-
DIV, Dividends and Distributions, from Southern Company which
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986 (Code), as amended and in
effect for the year in issue.
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reflected that petitioner had received total ordinary dividends
of $260.44 and that no Federal income tax had been withheld.
Petitioner also attached a Form 1099-INT, Interest Income, from
Firstbank of Arapahoe County, which reflected $62.17 in interest
income and that no Federal income tax had been withheld.
In addition, petitioner attached to his Form 1040EZ four
Forms 1099-MISC, Miscellaneous Income, from the following payers
reflecting the following nonemployee compensation: (1) Labtest
Int’l Inc., $38,358.60, (2) Network Courier Services, Inc.,
$12,231.59, (3) NATIONAL QUALITY ASSURANCE USA, INC., $33,275,
and (4) NQA LABORATORY SERVICES, INC., $900. All of the Forms
1099-MISC had the nonemployee compensation amount crossed out and
replaced with a handwritten zero, as well as the following typed
notation at the bottom of the form:
This corrected Form 1099-MISC is submitted to rebut a
document known to have been submitted by the party
identified above as “PAYER” which erroneously alleges a
payment to the party identified above as the
“RECIPIENT” OF “gains, profit or income” made in the
course of a “trade or business”. Under penalties of
perjury, I declare that I have examined this statement
and to the best of my knowledge and belief, it is true,
correct, and complete.
[Signature]
Richard C. Randall
15 August, 2005
All of the Forms 1099-MISC reflected that no Federal income tax
had been withheld from the nonemployee compensation paid to
petitioner.
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On May 22, 2006, respondent mailed to petitioner a Notice
CP2000, We Are Proposing Changes To Your Tax Return, that
reflected a tax increase of $26,519, a $5,304 penalty, and
interest (if paid by June 21, 2006) of $2,590. In response,
petitioner sent respondent a letter containing frivolous and
meritless tax-protester arguments. Specifically, petitioner
alleged that the Internal Revenue Service must recognize the
altered Forms 1099-MISC that he submitted with his “zero return”,
that “the income tax is a tax on gains from voluntary involvement
in federal activities”, “the income tax is an excise tax (which
is a tax on exercising a privilege)”, and “The monies that I
received from all of the corporations * * * during 2004 was non-
privileged compensation to a private, self-employed, natural
person; not subject to being reported via the 1099-MISC form.”
On September 11, 2006, respondent mailed to petitioner the
aforementioned notice of deficiency. The notice reflected a
deficiency in petitioner’s 2004 Federal income tax of $26,519
based on the inclusion in petitioner’s taxable income of the
$84,764 reported on the Forms 1099-MISC. The notice further
reflected an accuracy-related penalty pursuant to section 6662(a)
of $5,304. Petitioner filed a timely petition with this Court in
which he asserted:
The Petitioner requests a Writ of Mandamus ordering the
I.R.S. to process the properly submitted 1040EZ tax
return.
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Four separate entities (LABTEST INT’L INC, NETWORK
COURIER SERVICES INC., NATIONAL QUALITY ASSURANCE USA
INC., and NQA LABORATORY SERVICES INC.) each submitted
separate 1099-MISC forms (as the “PAYER”) erroneously
alleging a payment to the party identified as the
“RECIPIENT” of “gains, profit or income” made in the
course of a “trade or business”. I, the Petitioner,
rebutted each of these allegations in a 1040EZ
submitted to the IRS.
Petitioner is no stranger to this Court. In Randall v.
Commissioner, T.C. Memo. 2007-1, affd. without published opinion
100 AFTR 2d 6946, 2007-2 USTC par. 50,839 (10th Cir. 2007), in
which the facts were almost identical to those in the instant
case, the Court concluded that “Petitioner’s argument is clearly
without merit, and we hold that the amounts of nonemployee
compensation received by petitioner are includable in his taxable
income for 2003.” The Court also found petitioner liable for the
section 6662(a) accuracy-related penalty for taxable year 2003.
See id.
In the instant case, a trial was held on October 30, 2007,
in Denver, Colorado. Petitioner filed with the Court a pretrial
memorandum full of frivolous and meritless arguments, such as his
contention, which he also made in his case regarding his 2003
taxable year, that his nonemployee compensation
was received in exchange for services provided by the
Petitioner acting as a private, self-employed, natural
person pursuing an occupation of common right, which if
taxed, would necessarily fall within the class of a
direct tax. Therefore, the compensation received by
the Petitioner was non-privileged earnings; not subject
to 1099-MISC reporting as the Petitioner, Richard C.
Randall, does not meet the criteria of a “Trade or
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Business” as defined in U.S.C. Title 26, Subtitle F,
Chapter 79, Sec. 7701,(a),(26) or U.S.C. Title 26,
Subtitle A, Chapter 2, Sec. 1402,(c),(1).
Petitioner also made frivolous and meritless arguments regarding
the Sixteenth Amendment to the U.S. Constitution.2 During trial,
petitioner repeatedly argued that his nonemployee compensation
was not taxable.
OPINION
I. Nonemployee Compensation
Section 61(a) provides that “gross income means all income
from whatever source derived”, including compensation for
services and interest. Petitioner does not dispute that he
received the amounts listed on the Forms 1099-MISC. Rather, he
argues that the amounts are not taxable. Petitioner’s arguments
are frivolous and meritless tax-protester arguments that have
been rejected by this and other courts. See generally Wilcox v.
Commissioner, 848 F.2d 1007 (9th Cir. 1988), affg. T.C. Memo.
1987-225; Carter v. Commissioner, 784 F.2d 1006, 1009 (9th Cir.
1986); Ficalora v. Commissioner, 751 F.2d 85, 87-88 (2d Cir.
1984); Abrams v. Commissioner, 82 T.C. 403 (1984); Watson v.
2
Our 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). Specifically, the Court notes
that the “Federal income tax laws are constitutional. * * * The
whole purpose of the 16th Amendment was to relieve all income
taxes when imposed from apportionment and from a consideration of
the source whence the income was derived.” Abrams v.
Commissioner, 82 T.C. 403, 406-407 (1984).
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Commissioner, T.C. Memo. 2007-146; Randall v. Commissioner,
supra; Brunner v. Commissioner, T.C. Memo. 2004-187, affd. 142
Fed. Appx. 53 (3d Cir. 2005); Oldland v. Kurtz, 528 F. Supp. 316,
320 (D. Colo. 1981).
Petitioner also argued, for the first time at trial, that
“Some portion of the monies received were reimbursements for
expenses”, specifically $11,033 of the $38,358 he received from
Lab Test Int’l, and $10,800 of the $12,231 he received from
Network Courier Services, Inc. Petitioner also claimed that he
incurred $8,285 in “occupation-related expenses”. Petitioner did
not present any evidence to substantiate these expenses other
than his vague testimony, and he admitted at trial that he had
not provided any documentation to the Internal Revenue Service
regarding his alleged expenses. Petitioner’s uncorroborated
testimony cannot serve to establish that he incurred expenses.
Accordingly, the Court sustains respondent’s deficiency
determination.
II. Section 6662 Accuracy-Related Penalty
Under section 7491(c), respondent bears the burden of
production with respect to petitioner’s liability for the section
6662(a) penalty. This means that respondent “must come forward
with sufficient evidence indicating that it is appropriate to
impose the relevant penalty.” Higbee v. Commissioner, 116 T.C.
438, 446 (2001). The Court concludes that respondent has met the
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section 7491(c) burden of production with respect to the section
6662 penalty for 2004. As explained below, the Court concludes
that petitioner substantially understated his Federal income tax
for 2004 and that the deficiency is attributable to petitioner’s
negligence.
Subsection (a) of section 6662 imposes an accuracy-related
penalty in the amount of 20 percent of any underpayment that is
attributable to causes specified in subsection (b). Among the
causes justifying the imposition of the penalty are (1)
negligence or disregard of rules or regulations and (2) any
substantial understatement of income tax.
Section 6662(c) defines negligence as “any failure to make a
reasonable attempt to comply with the provisions of this title”.
Regulations promulgated under section 6662 provide that
“‘Negligence’ also includes any failure by the taxpayer to keep
adequate books and records or to substantiate items properly.
* * * Negligence is strongly indicated where--(i) A taxpayer
fails to include on an income tax return an amount of income
shown on an information return”. Sec. 1.6662-3(b)(1), Income Tax
Regs. “[D]isregard” is defined to include “any careless,
reckless, or intentional disregard.” Sec. 6662(c). Under
caselaw, “‘Negligence is a lack of due care or the failure to do
what a reasonable and ordinarily prudent person would do under
the circumstances.’” Freytag v. Commissioner, 89 T.C. 849, 887
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(1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th
Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C. Memo.
1964-299), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.
868 (1991).
There is a “substantial understatement” of income tax for
any taxable year where the amount of the understatement exceeds
the greater of (1) 10 percent of the tax required to be shown on
the return for the taxable year or (2) $5,000.
Sec. 6662(d)(1)(A). However, the amount of the understatement is
reduced to the extent attributable to an item (1) for which there
is or was substantial authority for the taxpayer’s treatment
thereof, or (2) with respect to which the relevant facts were
adequately disclosed on the taxpayer’s return or an attached
statement and there is a reasonable basis for the taxpayer’s
treatment of the item. See sec. 6662(d)(2)(B).
There is an exception to the section 6662(a) penalty when a
taxpayer can demonstrate (1) reasonable cause for the
underpayment and (2) that the taxpayer acted in good faith with
respect to the underpayment. Sec. 6664(c)(1). Regulations
promulgated under section 6664(c) further provide that the
determination of reasonable cause and good faith “is made on a
case-by-case basis, taking into account all pertinent facts and
circumstances.” Sec. 1.6664-4(b)(1), Income Tax Regs.
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In the instant case, there is a substantial understatement
of income tax as well as negligence on petitioner’s part.
Petitioner’s 2004 Form 1040EZ shows total tax due of zero.
Respondent determined a deficiency of $26,519. The deficiency,
which is both greater than $5,000 and greater than 10 percent of
the amount required to be shown on the return, is a substantial
understatement within the meaning of section 6662(d). In
addition, the deficiency is attributable to negligence as
petitioner failed to include the amounts listed on the Forms
1099-MISC on his 2004 Form 1040EZ. See sec. 1.6662-3(b)(1)(i),
Income Tax Regs. The Court concludes that petitioner did not act
with reasonable cause or in good faith.3 Accordingly, the Court
concludes that petitioner is liable for the section 6662 penalty
for taxable year 2004.
III. Section 6673 Penalty
Section 6673(a)(1) authorizes the Tax Court to impose a
penalty not in excess of $25,000 on a taxpayer for proceedings
instituted primarily for delay or 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
3
At trial, petitioner argued that he acted with reasonable
cause and in good faith, as evidenced by his pretrial memorandum.
The Court found all of petitioner’s arguments in his pretrial
memorandum to be timeworn frivolous and meritless tax-protester
arguments.
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for change in the law.” Coleman v. Commissioner, 791 F.2d 68, 71
(7th Cir. 1986).
The Court may sua sponte impose a section 6673 penalty
against a taxpayer. Pierson v. Commissioner, 115 T.C. 576, 580-
581 (2000). Petitioner’s argument that his nonemployee
compensation is not taxable is frivolous and without merit.
Petitioner raised the same arguments in his previous Tax Court
case. See Randall v. Commissioner, T.C. Memo. 2007-1. The
opinion in petitioner’s previous case was filed on January 3,
2007, which gave petitioner ample time to reconsider his position
before he made the same frivolous and meritless tax-protester
arguments in his pretrial memorandum and at trial. Petitioner
was warned by the Court during trial that he could be subject to
the section 6673 penalty if he continued to raise frivolous and
meritless arguments, and he still persisted with his arguments.
The Court concludes that petitioner is liable for a section 6673
penalty in the amount of $1,000. In setting the penalty at
$1,000, the Court has taken into consideration that when
petitioner filed his pretrial memorandum and when this case was
tried on October 30, 2007, the U.S. Court of Appeals for the
Tenth Circuit had not yet decided his appeal of the Tax Court
decision regarding his 2003 taxable year. Petitioner should not
expect such lenient treatment in any similar future case.
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The Court has considered all of petitioner’s contentions,
arguments, requests, and statements. To the extent not discussed
herein, the Court concludes that they are meritless, moot, or
irrelevant.
To reflect the foregoing,
An appropriate order and
decision will be entered.