T.C. Memo. 2009-179
UNITED STATES TAX COURT
LEVI KENNETH HODGES, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 10741-04, 1046-05, Filed August 4, 2009.
15189-05.
Levi Kenneth Hodges, pro se.
Edwina L. Jones, for respondent.
MEMORANDUM OPINION
WELLS, Judge: Respondent determined Federal income tax
deficiencies for Levi Kenneth Hodges’ or Levi K. Hodges’
1
Cases of the following petitioners are consolidated
herewith for purposes of trial, briefing, and opinion: Levi
Kenneth Hodges, docket No. 1046-05, and Levi K. Hodges, docket
No. 15189-05. These cases are collectively referred to herein as
the instant case.
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(petitioner’s) 2001, 2002, and 2003 taxable years of $51,152.24,
$46,790.30, and 40,784.08, respectively. For 2001 respondent
determined additions to tax under sections 6651(a)(1) and
6654(a)2 of $17,136 and $2,024.25, respectively. For 2002
respondent determined additions to tax under sections 6651(a)(1)
and 6654(a) of $22,225.39 and $1,563.59, respectively. For 2003,
respondent determined additions to tax under sections 6651(a)(1)
and 6654(a) of $11,419.54 and $1,052.35, respectively. The
issues we must decide are: (1) Whether petitioner received and
failed to report taxable income for his 2001, 2002, and 2003
taxable years and (2) whether petitioner is liable for the
additions to tax determined by respondent pursuant to sections
6651(a)(1) and 6654(a) for the taxable years in issue.
Background
Some of the facts and certain exhibits have been stipulated.
The parties’ stipulations of fact are incorporated in this
opinion by reference and are found as facts in the instant case.
At the time of filing the petitions, petitioner resided in South
Carolina.
Petitioner did not timely file a Federal income tax return
for his 2001, 2002, or 2003 taxable year.
2
All section references are to the Internal Revenue Code 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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During 2001 petitioner received nonemployee compensation of
$120,541, interest income of $61, stock sale proceeds of $3,605,
and real estate sale proceeds of $30,500. During 2002 petitioner
received nonemployee compensation of $116,889, interest income of
$31, and real estate sale proceeds of $27,000. During 2003
petitioner received nonemployee compensation of $126,835 and
interest income of $1,819.
Respondent determined tax deficiencies and additions to tax
for petitioner’s 2001, 2002, and 2003 taxable years as follows:3
Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6654
2001 $51,152.24 $17,136.00 $2,024.25
2002 46,790.30 22,225.39 1,563.59
2003 40,784.08 11,419.54 1,052.35
On April 7 and November 2, 2004, and May 5, 2005, respondent
sent petitioner notices of deficiency for petitioner’s 2001,
2002, and 2003 taxable years, respectively.
On June 23, 2004, and January 18 and August 16, 2005,
petitioner filed petitions with this Court for redetermination of
the deficiencies for his 2001, 2002, and 2003 taxable years,
respectively. In each of those petitions, petitioner stated that
he did not have any tax liability, denied the figures and
3
The sec. 6651(a)(1) additions to tax set forth in this
opinion are those that respondent determined in the notices of
deficiency. The sec. 6651(a)(1) additions to tax set forth in
respondent’s pretrial memorandum differed from those listed in
this opinion. We do not decide which figures are correct but
expect the parties to resolve this issue in the computations we
will order pursuant to Rule 155.
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contents of the notices of deficiency, disputed the computations,
and claimed that for the years in issue he had dependents,
deductions, credits, costs of doing business, losses, and
depreciation.
In a letter to respondent dated September 18, 2004,
petitioner made the frivolous assertion that he did not realize
gain on the sale of his labor and thus had no income and was not
required to file a Federal income tax return under section 6012.
On July 22, 2005, petitioner submitted to respondent a Form
1040, U.S. Individual Income Tax Return, for his 2002 taxable
year and attached what purports to be a corrected Form 1099-MISC,
Miscellaneous Income, for 2002. The “corrected” Form 1099-MISC
was prepared by petitioner and shows zero nonemployee
compensation for 2002. Petitioner’s 2002 Form 1040 showed
interest income of $31 and no other income for his 2002 taxable
year, resulting in no tax allegedly due for 2002.
Petitioner submitted to respondent an affidavit dated August
24, 2005, frivolously asserting, among other things, that
respondent had no authority to issue a notice of deficiency for
his 2001 taxable year because petitioner had not filed an income
tax return. Along with that affidavit petitioner submitted a
Form 1040 for his 2001 taxable year and a purportedly “corrected”
Form 1099-MISC prepared by petitioner and showing zero
nonemployee compensation for 2001. Petitioner’s 2001 Form 1040
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showed interest income of $62, capital gain of $2,352, a rental
loss of $594, and no tax due for 2001.
On October 3, 2005, petitioner sent respondent a letter
asserting that petitioner did not have taxable income for his
2003 taxable year and frivolously asserting that respondent did
not have the authority to issue a notice of deficiency for his
2003 taxable year because petitioner had not filed an income tax
return for that year. Along with that letter, petitioner also
sent respondent a Form 1040 for his 2003 taxable year and a
“corrected” Form 1099-MISC prepared by petitioner and showing
zero nonemployee compensation for 2003. Petitioner’s 2003 Form
1040 showed interest income of $25 and no other income for 2003,
resulting in no tax due for 2003.
On November 7, 2005, petitioner submitted to respondent
another affidavit, frivolously asserting, among other things,
that petitioner did not receive any income as that term has been
defined by the Supreme Court of the United States and that
petitioner had no income tax liability for his 2001, 2002, and
2003 taxable years. Petitioner attached to the affidavit copies
of Form 1040 for his 2001, 2002, and 2003 taxable years, dated
November 7, 2005, showing no tax due for any of those years.
The instant case was set for trial in Columbia, South
Carolina, on January 9, 2006. At that trial petitioner conceded
he had received the amounts determined in the notices of
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deficiency and agreed to provide receipts for the expenses that
he claimed should offset those receipts. On the basis of those
representations, this Court continued the instant case to allow
to the parties to reach a settlement.
Subsequently, petitioner provided respondent with
documentation to support business expenses for his 2001, 2002,
and 2003 taxable years and with evidence of his bases in the real
estate and stocks sold in those years. Consequently, respondent
conceded that petitioner is entitled to deduct business expenses
of $72,565.77, $53,541, and $63,669 for his 2001, 2002, and 2003
taxable years, respectively. Additionally, respondent conceded
that petitioner incurred a long-term capital loss of $3,179 on
the real estate and stock sales in 2001; a long-term capital loss
of $27,000 on the sale of real estate in 2002; an ordinary loss
of $8,316 on the sale of business property in 2002; and a rental
loss of $319 in 2002.
The parties reached a tentative agreement regarding
petitioner’s tax liabilities for his 2001, 2002, and 2003 taxable
years. Petitioner apparently had a change of heart, and, instead
of signing the settlement documents, filed a motion to dismiss on
July 25, 2006. In that motion, petitioner asserted that this
Court lacked jurisdiction over him.
On September 27, 2006, petitioner’s motion to dismiss was
denied, and this case was again set for trial on March 17, 2008.
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At the trial, petitioner did not dispute receiving the amounts
shown in the deficiency notices but claimed on the basis of
various tax-protester arguments that those amounts were not
taxable income.
Discussion
Petitioner’s Taxable Income for 2001, 2002, and 2003
As a general rule, the Commissioner’s determinations in a
notice of deficiency are presumed correct, Welch v. Helvering,
290 U.S. 111, 115 (1933), and Rule 142(a) places the burden of
proving an error on the taxpayer. Petitioner conceded at trial
that he received the amounts of compensation, interest, and sale
proceeds set out in the notices of deficiency for his 2001, 2002,
and 2003 taxable years. In the light of that concession there
are no disputed issues of fact in respect of his receipt of those
amounts. Accordingly, the only issue remaining for this Court to
decide is the legal question of whether the amounts petitioner
received are taxable under the Internal Revenue Code, a question
we decide as a matter of law without reference to the presumption
of correctness or the burden of proof.
Petitioner argues that the income he received in 2001, 2002,
and 2003 was not taxable income within the relevant meaning of
the law. To support his assertion, petitioner offered only tax-
protester arguments and corrected Forms 1099-MISC for years 2001,
2002, and 2003 prepared by petitioner himself. The corrected
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Forms 1099-MISC were based on tax-protester arguments, and we do
not find them worthy of belief.
Gross income means all income from whatever source derived,
including compensation for services, interest, and gains from
dealings in property. Sec. 61. Compensation for services
rendered constitutes taxable income, and a taxpayer has no basis
in his labor. Abrams v. Commissioner, 82 T.C. 403, 407 (1984).
The only arguments that petitioner has raised to support his
assertion that the payments he received in 2001, 2002, and 2003
were not taxable income within the relevant meaning of the law
are frivolous tax-protester arguments. We do not address
petitioner’s frivolous and groundless arguments with “somber
reasoning and copious citation of precedent; to do so might
suggest that these arguments have some degree of colorable
merit.” See Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir.
1984). We conclude that the income respondent seeks to tax is
taxable income under the Internal Revenue Code. Accordingly, we
uphold respondent’s determination of deficiencies in petitioner’s
income and self-employment tax for his 2001, 2002, and 2003
taxable years subject to recalculation to reflect the deductions
and losses respondent conceded.
Additions to Tax
Section 6012 generally requires the filing of an income tax
return by all individuals receiving gross income in excess of
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certain minimum amounts. Because petitioner’s gross income for
the years in issue, as determined by respondent in the notices of
deficiency and upheld by this Court above, exceeded the section
6012 minimum amount, petitioner was required to file Federal
income tax returns for his 2001, 2002, and 2003 taxable years.
Section 6651(a)(1) imposes an addition to tax for failure to file
an income tax return by the due date. A taxpayer may be relieved
of the addition, however, if he can demonstrate that the “failure
is due to reasonable cause and not due to willful neglect”. Id.
Section 6654(a) imposes an addition to tax for failure to
pay estimated income tax. Section 6654(a) applies where
prepayments of tax, through either withholdings or estimated
quarterly payments, do not equal the percentage of total
liability required under the statute.
Pursuant to section 7491(c), the Commissioner bears the
burden of production with respect to the additions to tax under
sections 6651(a)(1) and 6654(a). To meet that burden, the
Commissioner must produce sufficient evidence to demonstrate that
the addition to tax is appropriate. See Higbee v. Commissioner,
116 T.C. 438, 446 (2001). However, “the Commissioner’s
obligation under section 7491(c) initially to come forward with
evidence that it is appropriate to apply a particular penalty to
a taxpayer is conditioned upon the taxpayer’s assigning error to
the Commissioner’s penalty determination.” Wheeler v.
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Commissioner, 127 T.C. 200, 206 (2006), affd. 521 F.3d 1289 (10th
Cir. 2008). A taxpayer who fails to assign error to a penalty is
deemed under Rule 34(b)(4) to have conceded the penalty. Swain
v. Commissioner, 118 T.C. 358, 363 (2002).
Petitioner’s petition for his 2001 taxable year assigned
error as follows:
I do not have any tax liability. I deny the figures
and content of the Notice of Deficiency. I dispute the
computations. In the year in question I had
dependents, deductions, credits, costs of doing
business, losses, depreciation. I have no job and I am
not employed. I have no savings, no investments, no
I.R.A. or pension plan.
Petitioner’s assignments of error in his petitions for his 2002
and 2003 taxable years were substantially the same as those
quoted above. We conclude from the foregoing that petitioner did
not assign error to respondent’s determinations that: (1)
Petitioner failed to timely file Federal income tax returns and
(2) petitioner failed to make required payments of estimated
income tax. Consequently, we conclude that petitioner is deemed
to have conceded, pursuant to Rule 34(b)(4), that the penalties
respondent determined are appropriate. Accordingly, the
additions to tax under sections 6651(a)(1) and 6654(a) for the
taxable years in issue are sustained, subject to recalculation to
reflect the recalculated deficiencies conceded by respondent.
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Section 6673 Penalty
Respondent has moved for a penalty under section 6673(a)(1).
Section 6673(a)(1) provides that this Court may require the
taxpayer to pay a penalty not in excess of $25,000 whenever it
appears to this Court that: (a) The proceedings were instituted
or maintained by the taxpayer primarily for delay; (b) the
taxpayer’s position is frivolous or groundless; or (c) the
taxpayer unreasonably failed to pursue available administrative
remedies. Petitioner was warned by this Court and by respondent
that he could be subject to a penalty if he persisted in raising
frivolous tax-protester arguments. Despite being warned,
petitioner continued to delay the instant proceedings with
frivolous arguments. Consequently, pursuant to section 6673, we
impose on petitioner a penalty of $5,000 for the case at docket
No. 10741-04, a penalty of $5,000 for the case at docket No.
1046-05, and a penalty of $5,000 for the case at docket No.
15189-05.
We have considered all of the contentions and arguments of
the parties that are not discussed herein, and we conclude that
they are without merit, irrelevant, or moot.
To reflect the foregoing,
Orders and decisions will
be entered under Rule 155.