T.C. Memo. 2008-152
UNITED STATES TAX COURT
SAMUEL D. BATES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4010-06. Filed June 12, 2008.
R determined deficiencies and penalties under sec.
6662, I.R.C., for 2001 and 2002. The deficiencies and
sec. 6662, I.R.C., penalties were based on P’s failure
to include Social Security benefits and the
disallowance of a deduction.
Held: R’s determinations are sustained.
Held, further, P is liable for a sec. 6673, I.R.C.,
penalty.
Samuel D. Bates, pro se.
Alan E. Staines, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: After concessions by petitioner,1 the issues
for decision are:2
(1) Whether petitioner is entitled to a loss deduction of
$1,999 for “Hotel Connect” for taxable year 2002;
(2) whether petitioner is liable for the section 6662
penalty in the amounts of $3 and $285 for taxable years 2001 and
2002, respectively;3 and
(3) whether the Court should sua sponte impose a section
6673 penalty.
FINDINGS OF FACT
Some of the facts have been stipulated by the parties. The
stipulations, with accompanying exhibits, are incorporated herein
1
Petitioner conceded that his wife, Joyce M. Bates, received
Social Security benefits of $8,739 and $8,824 for 2001 and 2002,
respectively, which should have been included on their 2001 and
2002 joint Federal income tax returns.
2
Respondent initially determined that petitioner was
entitled to a sec. 6428 rate reduction tax credit of $205.50 but
now indicates on brief that the correct amount of the credit is
$393.50 for 2001. Petitioner did not raise any issue with the
credit. As the credit is a computational adjustment that is
based on petitioner’s taxable income, it will be addressed in the
Rule 155 computation. See infra note 4. The Court will not
address this issue further.
3
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
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by this reference. At the time the petition was filed,
petitioner resided in Sacramento, California.
In 2001, petitioner’s wife, Joyce M. Bates (Mrs. Bates),
received $8,739 in Social Security benefits. Respondent received
petitioner’s 2001 joint Form 1040, U.S. Individual Income Tax
Return, on November 18, 2002. That return, which was prepared by
Melisa Coates (Ms. Coates), did not include Mrs. Bates’s Social
Security benefits, as petitioner did not provide any
documentation regarding those benefits to Ms. Coates. Respondent
received petitioner’s self-prepared joint amended Federal income
tax return for 2001 on June 3, 2005. On that return petitioner
deleted his previously reported $27,577 of wages from Form W-2,
Wage and Tax Statement, claiming that the amounts received were
not “wages as defined in 3401(a) and 3121(a)” and also failed to
include Mrs. Bates’s Social Security benefits.
In 2002, Mrs. Bates received $8,824 in Social Security
benefits. Respondent received petitioner’s 2002 joint Federal
income tax return on October 16, 2003. That return, prepared by
Ms. Coates, did not include Mrs. Bates’s Social Security
benefits, as once again petitioner did not provide any
documentation regarding those benefits to Ms. Coates. The return
included a deduction for an alleged partnership loss of $1,999
for “Hotel Connect”. Petitioner has no books, records, or
documents that substantiate his “Hotel Connect” loss deduction.
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Respondent also received petitioner’s self-prepared 2002 joint
amended Federal income tax return on June 3, 2005, and a second
self-prepared 2002 joint amended return on August 22, 2005, both
of which deleted petitioner’s previously reported $46,097 of Form
W-2 wages and failed to include Mrs. Bates’s Social Security
benefits.
On November 18, 2005, respondent mailed a notice of
deficiency to petitioner and Mrs. Bates for their 2001 and 2002
taxable years, which reflected deficiencies and penalties
pursuant to section 6662(b) for each taxable year.4 Petitioner
filed a timely petition that contained frivolous and meritless
tax-protester arguments.5
4
The notice of deficiency included items that were stricken
when the Court, on May 21, 2007, granted respondent’s Apr. 26,
2007, motion to dismiss for lack of jurisdiction and to strike,
as to portions of the petition relating to partnership items of
Security Plus, Ltd. and related affected items. As a result, a
Rule 155 computation is required.
The Court notes that the notice of deficiency included a
sec. 6651(a)(1) addition to tax for taxable year 2001. However,
respondent never addressed the addition to tax at trial, having
determined that it was de minimis after respondent’s motion was
granted. The sec. 6651(a)(1) addition to tax is deemed conceded
by respondent.
5
Petitioner focused his arguments on the lack of delegated
authority to the person who issued and signed the notice of
deficiency. It is well established that the Secretary or his
delegate may issue notices of deficiency. Secs. 6212(a),
7701(a)(11)(B) and (12)(A)(i); see Nestor v. Commissioner, 118
T.C. 162, 165 (2002).
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On May 14, 2007, petitioner lodged a motion for summary
judgment and supporting memorandum of law. Petitioner’s motion
and supporting memorandum were filed on May 21, 2007, the date of
trial in San Francisco, California. Petitioner’s motion and
memorandum were voluminous documents containing only frivolous
and meritless tax-protester arguments.6 Respondent lodged an
objection to petitioner’s motion for summary judgment on May 18,
2007, which was filed on the date of trial. Also on the date of
trial, petitioner filed a reply to respondent’s objection, which
contained frivolous and meritless tax-protester arguments. On
May 22, 2008, the Court denied petitioner’s frivolous motion for
summary judgment.
6
Petitioner expanded on his frivolous and meritless
arguments regarding delegated authority, see supra note 5, to
include frivolous and meritless challenges to the Internal
Revenue Code generally and its applicability to him personally.
All of petitioner’s arguments are time-worn tax-protester
arguments. See, e.g., United States v. Nelson (In re Becraft),
885 F.2d 547, 548 (9th Cir. 1989) (“For over 75 years, the
Supreme Court and the lower federal courts have both implicitly
and explicitly recognized the Sixteenth Amendment’s authorization
of a non-apportioned direct income tax on United States citizens
residing in the United States and thus the validity of the
federal income tax laws as applied to such citizens.”); Olson v.
United States, 760 F.2d 1003, 1005 (9th Cir. 1985) (“This court
has repeatedly rejected the argument that wages are not income as
frivolous.”). The Court will not further address petitioner’s
arguments “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).
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OPINION
I. Petitioner’s “Hotel Connect” Loss Deduction
As a general rule, the Commissioner’s determination of a
taxpayer’s liability in the notice of deficiency is presumed
correct, and the taxpayer bears the burden of proving that the
determination is improper. See Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). However, pursuant to section 7491(a),
the burden of proof on factual issues that affect the taxpayer’s
tax liability may be shifted to the Commissioner where the
“taxpayer introduces credible evidence with respect to * * * such
issue.” The burden will shift only if the taxpayer has, inter
alia, complied with substantiation requirements pursuant to the
Internal Revenue Code and “cooperated with reasonable requests by
the Secretary for witnesses, information, documents, meetings,
and interviews”. Sec. 7491(a)(2). Petitioner did not raise the
burden-of-proof issue, failed to comply with the substantiation
requirements, and did not introduce any credible evidence.
Accordingly, the burden of proof remains on petitioner.
Deductions are a matter of legislative grace, and the
taxpayer bears the burden of proving that he is entitled to any
claimed deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). Taxpayers must maintain records relating to their income
and expenses and must prove their entitlement to all claimed
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deductions, credits, and expenses in controversy. See sec. 6001;
Rule 142(a); INDOPCO, Inc. v. Commissioner, supra at 84; Welch v.
Helvering, supra at 115. Petitioner has no books, records, or
documents that substantiate his “Hotel Connect” loss deduction.
Accordingly, the Court concludes that petitioner is not entitled
to the deduction.
II. Section 6662 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
section 7491(c) burden of production with respect to the section
6662 penalty for 2001 and 2002. As explained below, the Court
concludes that petitioner was negligent.
Subsection (a) of section 6662 imposes an accuracy-related
penalty 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
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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. 1.6662-
3(b)(2), Income Tax Regs. 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 (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 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.
The notice of deficiency included the imposition of the
section 6662(a) penalty for taxable years 2001 and 2002 on the
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basis that petitioner was negligent in failing to include Mrs.
Bates’s Social Security benefits for each year and did not
maintain adequate books and records to substantiate his “Hotel
Connect” deduction. Petitioner admitted that he should have
included his wife’s Social Security benefits on their 2001 and
2002 joint Federal income tax returns and amended returns and
that he did not have any records to substantiate the “Hotel
Connect” deduction. Petitioner has not contended that the
reasonable cause exception applies, and we do not see any
evidence that it does. Accordingly, the Court concludes that
petitioner is liable for the section 6662 penalty for taxable
years 2001 and 2002.
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
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). Courts have ruled that arguments to avoid tax
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obligations and requirements, such as those arguments espoused by
petitioner, are groundless and wholly without merit. See
Williams v. Commissioner, T.C. Memo. 1999-277 (imposing section
6673 penalty for tax-protester arguments); Morin v. Commissioner,
T.C. Memo. 1999-240 (same); Sochia v. Commissioner, T.C. Memo.
1998-294 (same).
Groundless litigation diverts the time and energies of
judges from more serious claims; it imposes needless costs
on other litigants. Once the legal system has resolved a
claim, judges and lawyers must move on to other things.
They cannot endlessly rehear stale arguments. Both
appellants say that the penalties stifle their right to
petition for redress of grievances. But there is no
constitutional right to bring frivolous suits, see Bill
Johnson’s Restaurants, Inc. v. NLRB, 461 U.S. 731, 743, 103
S.Ct. 2161, 2170, 76 L.Ed.2d 277 (1983). People who wish to
express displeasure with taxes must choose other forums, and
there are many available. * * * [Coleman v. Commissioner,
supra at 72.]
Petitioner repeatedly raised frivolous and meritless tax-
protester arguments in his petition, in his voluminous motion for
summary judgment and memorandum of law in support of petitioner’s
motion for summary judgment, at trial, and on brief. He did so
in his most recently filed document despite being warned by the
Court in an order dated September 6, 2007, that his arguments
were frivolous and meritless and could warrant the imposition of
the section 6673 penalty. The Court concludes that a penalty is
appropriate and therefore exercises its discretion sua sponte to
impose upon petitioner a section 6673 penalty of $1,000 to be
paid to the United States. Although a greater penalty is
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warranted, we exercise restraint in light of petitioner’s
cooperation in the stipulation process.
The Court has considered all of petitioners’ 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,
Decision will be entered
under Rule 155.