Hamilton v. Comm'r

T.C. Memo. 2009-271

UNITED STATES TAX COURT

RONALD L. HAMILTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 26158-08. Filed November 25, 2009.

Ronald L. Hamilton, pro se.

Louis H. Hill, for respondent.

MEMORANDUM OPINION

HALPERN, Judge: By notice of deficiency (the notice),

respondent determined a deficiency in petitioner’s 2006 Federal

income tax of $11,901 and additions to tax of $2,599, $809,1 and

$545 under sections 6651(a)(1) and (2) and 6654(a),

1
Computed through the date of the notice.
 - 2 -

respectively.2 Petitioner has conceded certain adjustments

giving rise to respondent’s determination of deficiency, and the

items remaining for decision are the additions to tax and five

adjustments that respondent made increasing petitioner’s 2006

gross income.3

The parties failed to stipulate any facts. The evidence on

which we rely consists of the transcript of trial, 1 joint

exhibit (the notice), and 11 exhibits received from petitioner at

trial. Petitioner attached to his posttrial memorandum of law

(petitioner’s memorandum) four items that we assume he wishes us

to consider as evidence, but which we shall not, since

unsupported statements in a brief and exhibits that have not been

properly admitted into evidence at trial do not constitute

competent evidence. Rule 143(b); e.g., Edwards v. Commissioner,

T.C. Memo. 2005-52.

Petitioner bears the burden of proof. See Rule 142(a).

Petitioner has not raised the issue of section 7491(a), which

shifts the burden of proof to the Commissioner in certain

situations. We conclude that section 7491(a) does not apply here

2
Unless otherwise stated, all section references are to the
Internal Revenue Code of 1986, as amended and in effect for 2006,
and all Rule references are to the Tax Court Rules of Practice
and Procedure. We round all dollar amounts to the nearest
dollar.
3
There are also certain computational adjustments that
follow from the adjustments described in the text, but they are
not in controversy and we need not discuss them.
 - 3 -

because petitioner has not produced any evidence that he has

satisfied the preconditions for its application.

At the time the petition was filed, petitioner resided in

Ohio.

Background

Petitioner testified that he submitted to the Internal

Revenue Service (IRS) three returns for 2006 (apparently an

original return and two amended returns). Respondent’s counsel

stated at trial (and petitioner does not disagree) that (1) the

IRS initially accepted petitioner’s originally filed 2006 return

but later determined that it was not a tax return (and rejected

it) since it contained all zeros, and (2) the IRS then made a

return for petitioner, see sec. 6020(b), under its so-called

substitute for return procedures. Petitioner would not stipulate

the original return, and the only return in evidence is a Form

1040X, Amended U.S. Individual Income Tax Return, for 2006, dated

February 4, 2008, with zeros entered for all amounts except that

positive amounts are shown for Federal income tax withheld.

Petitioner has failed to show that respondent accepted that

return.

The five adjustments remaining at issue are all positive

adjustments to petitioner’s 2006 gross income resulting from

third-party reports to the IRS of amounts paid to petitioner.

Those reports and the resulting adjustments are as follows:
 - 4 -

1. A Form 1099-R, Distributions From Pensions, Annuities,

Retirement or Profit Sharing Plans, IRAs, Insurance Contracts,

etc., received from Charles Schwab & Co., Inc., reporting $26,064

distributed to petitioner;

2. a Form 1099-R, received from State Street Retiree

Services (State Street), reporting $17,796 distributed to

petitioner;

3. Forms 1099-B, Proceeds From Broker and Barter Exchange

Transactions, received from Charles Schwab & Co., Inc.,

reporting total proceeds of $1,410 from sales or exchanges of

stocks and bonds;

4. a Form W-2, Wage and Tax Statement, received from Reed

Elsevier, Inc., reporting wages, tips, and other compensation of

$9,855 paid to petitioner;

5. a Form W-2 received from First Union Third reporting

wages, tips, and other compensation of $14,664 paid to

petitioner.4

At trial, petitioner conceded that he had received the five

amounts reported to the IRS (although the $17,796 reported by

State Street represented not the receipt of any payment in 2006

but, rather, the discharge of indebtedness with respect to

amounts previously received as loans). He claimed that all the

4
Petitioner claims that the correct payee here is “First
Unum Provident”; he does not, however, challenge that he received
the amount.
 - 5 -

receipts (other than the $17,796 received from State Street) were

either nontaxable disability pensions or received because of his

disability. He claimed that the $17,796 received from State

Street constituted a nonvoluntary withdrawal from his retirement

account to pay a loan from that account.

At the conclusion of the trial, the Court ordered respondent

to file a memorandum of law in lieu of a brief, see Rule 151, and

invited petitioner to respond if he wished. Petitioner did

respond with petitioner’s memorandum. In that memorandum, under

the heading “Facts”, petitioner disavows the claim that any

amount he received was a disability pension but avows, instead,

that those amounts were “Workman’s Compensation”. Under the

heading “Legal Discussion and Analysis”, petitioner mixes his

claim that he received workman’s compensation with typical tax-

protester rhetoric. For instance, petitioner makes the following

claims:

It is blatantly clear that Congress, based on the
language contained therein, never intended for 26 USC,
specifically TITLE 26 – Subtitle A – Income Taxes, to
apply to anyone or anything other than Federal
Employees and Federal Employers as a result of being an
associative Privilege. * * *

* * * * * * *

Congress also never intended to tax Private
Citizens which would certainly exceed the boundaries
set forth in the Constitution. Instead it seeks to tax
revenue proceeding from the voluntary, profitable
exercise of the government’s own property or powers
(whether directly or by proxy through investment) is
 - 6 -

[sic] an indirect tax having nothing to do with the
taxpayer’s rights. * * *

* * * * * * *

[T]his petitioner has firmly discovered how 26 USC, and
specifically TITLE 26 – Subtitle A – Income Taxes, does
not apply to anyone or anything other than Federal
Employees and Federal employers or the such utilizing
government facilities for gain and/or profit.

Discussion

I. Deficiency in Tax

Section 61(a) provides in part: “Except as otherwise

provided in this subtitle, gross income means all income from

whatever source derived”. It further provides an enumeration of

items of gross income, including compensation for services, gains

derived from dealings in property, annuities, income from life

insurance and endowment contracts, pensions, and income from

discharge of indebtedness in paragraphs (1), (3), (9), (10),

(11), and (12), respectively. Those categories would seem to

encompass the five adjustments that petitioner disputes.

Petitioner’s argument--that because he is not a Federal employee

he does not have to pay income tax--is a common, frivolous, tax-

protester argument of no merit. E.g., Deputy v. Commissioner,

T.C. Memo. 2003-210.

Section 104(a)(1) does exclude from gross income “amounts

received under workmen’s compensation acts as compensation for

personal injuries or sickness”, but petitioner has failed to
 - 7 -

prove that any of the five disputed adjustments involves receipts

that so qualify.

In his memorandum, petitioner also argues that, if the

Internal Revenue Code applies to him, at least some of the

receipts in question are excludable from his gross income under

section 105. Section 105(a) provides that amounts received under

employer-funded plans for personal injuries or sickness must be

included in the employee’s gross income, unless they fall within

the exceptions provided in section 105(b) or (c), which exclude

from gross income reimbursement of medical expenses and

compensation for permanent bodily injury, respectively.

Petitioner received a Wage and Income Transcript from the IRS

that shows “Disability” as the “Distribution Code” in connection

with the Form 1099-R petitioner received from Charles Schwab &

Co., Inc., that reports a distribution to him of $26,064.

Nonetheless, petitioner failed to show that he meets the

particular requirements of section 105(c); i.e, that the payment

(1) “constitute[s] payment for the permanent loss or loss of use

of a member or function of * * * [his] body, or * * * [his]

permanent disfigurement” and (2) is “computed with reference to

the nature of the injury without regard to the period” of his

absence from work. Indeed, petitioner has failed to prove that

any of five disputed adjustments involves receipts qualifying for

exclusion from income under either section 105(b) or (c), and he
 - 8 -

has also failed to prove that the receipts would be excludable

because of disability under any other provision of the Internal

Revenue Code.

Petitioner has failed to show that any other provision of

the Internal Revenue Code would exclude from his gross income any

of the receipts in question. We, therefore, sustain the five

adjustments remaining at issue.

II. Additions to Tax

A. Introduction

At trial, in response to the Court’s inquiry as to his

defense to the additions to tax, petitioner stated that as his

defense he relied on the fact that he did not have the income in

question. In his memorandum, however, petitioner does otherwise

discuss at least some of the additions to tax. We shall proceed

in disregard of petitioner’s response to the Court’s inquiry at

trial and treat all the additions to tax as being in issue.

B. Burden of Production

In pertinent part, section 7491(c) provides: “the Secretary

shall have the burden of production in any court proceeding with

respect to the liability of any individual for any * * * addition

to tax”. The Commissioner’s burden of production under section

7491(c) is to produce evidence that imposing the relevant

addition to tax is appropriate. Swain v. Commissioner, 118 T.C.

358, 363 (2002). The taxpayer bears the burden of introducing
 - 9 -

evidence regarding reasonable cause or a similar defense. Higbee

v. Commissioner, 116 T.C. 438, 446 (2001).

C. Section 6651(a)(1)

Section 6651(a)(1) provides for an addition to tax in the

event a taxpayer fails to file a timely return (determined with

regard to any extension of time for filing) unless the taxpayer

shows that such failure is due to reasonable cause and not due to

willful neglect. The amount of the addition is equal to 5

percent of the amount required to be shown as tax on the

delinquent return for each month or fraction thereof during which

the return remains delinquent, up to a maximum addition of 25

percent for returns more than 4 months delinquent. Id.

Petitioner submitted a return for 2006, which, according to

respondent’s counsel, respondent first accepted but then rejected

because it contained all zeros and respondent did not consider it

a return. Petitioner does not disagree with that claim, and we

shall assume it to be true; we find accordingly.

A taxpayer who has received more than a certain amount of

income during the taxable year is required to file an income tax

return for that taxable year. See secs. 6011 and 6012. To

determine whether a taxpayer has filed a valid tax return, we

follow the test set forth in Beard v. Commissioner, 82 T.C. 766,

777 (1984), affd. 793 F.2d 139 (6th Cir. 1986). For a return to

be valid under Beard: “First, there must be sufficient data to
 - 10 -

calculate tax liability; second, the document must purport to be

a return; third, there must be an honest and reasonable attempt

to satisfy the requirements of the tax law; and fourth, the

taxpayer must execute the return under penalties of perjury.” We

have applied the Beard test to determine whether a return is

valid for purposes of section 6651(a)(1). See, e.g., Cabirac v.

Commissioner, 120 T.C. 163, 169 n.10 (2003); Beard v.

Commissioner, supra at 780; Arnett v. Commissioner, T.C. Memo.

2006-134, affd. 242 Fed. Appx. 496 (10th Cir. 2007). We have

consistently held that a tax return containing only zeros on the

relevant lines is not a valid tax return because it does not

contain sufficient information for the Commissioner to calculate

and assess a tax liability. See Cabirac v. Commissioner, supra

at 169; Arnett v. Commissioner, supra; see also United States v.

Rickman, 638 F.2d 182, 184 (10th Cir. 1980); United States v.

Porth, 426 F.2d 519, 523 (10th Cir. 1970).5 Petitioner did not,

therefore, file a valid return for 2006.

5
The Court of Appeals for the Ninth Circuit has held that a
tax return containing only zeros is a valid tax return. United
States v. Long, 618 F.2d 74, 75-76 (9th Cir. 1980). Barring
stipulation to the contrary, appeal of this case lies to the
Court of Appeals for the Sixth Circuit, see sec. 7482(a), (b)(1)
and (2), which has not taken a position on the issue in this case
but has sustained a penalty against a taxpayer under sec. 6702
(“Frivolous Tax Submissions.”) for filing an amended return
stating that his income was zero, Herip v. United States, 106
Fed. Appx. 995, 999-1000 (6th Cir. 2004).
 - 11 -

We find that respondent has carried his burden of production

under section 7491(c), and, as a result, to avoid an addition to

tax, petitioner must come forward with evidence sufficient to

persuade the Court that his failure to file was due to reasonable

cause and not due to willful neglect. Petitioner does not argue

(nor do we find) that his failure to file a valid return was due

to reasonable cause and not due to willful neglect.

Consequently, we hold that petitioner is liable for the addition

to tax under section 6651(a)(1).

D. Section 6651(a)(2)

Section 6651(a)(2) imposes an addition to tax when a

taxpayer fails to pay the amount of tax shown on a return by the

prescribed date unless the taxpayer shows that such failure is

due to reasonable cause and not due to willful neglect. The

amount of the addition is equal to 0.5 percent of the tax for

each month or fraction thereof during which the tax remains

unpaid, up to a maximum addition of 25 percent. Under section

6020(b), when a taxpayer fails to make any return required by

law, the IRS (acting for the Secretary) must make a return from

such information as it can obtain. Under section 6651(g)(2), any

return so made is treated as the taxpayer’s return for purposes

of section 6651(a)(2).

Respondent’s counsel stated that, after rejecting

petitioner’s return, respondent made a return for petitioner
 - 12 -

under section 6020(b). The record, however, contains no copy of

that return, so we cannot determine whether it meets the

requirements for a section 6020(b) return. See Cabirac v.

Commissioner, 120 T.C. at 170-173. Respondent has failed to

carry his burden of producing evidence that an addition to tax

under section 6651(a)(2) is appropriate, see id. at 173, and we

sustain no such addition.

E. Section 6654

Section 6654(a) and (b) provides for an addition to tax in

the event of a taxpayer’s underpayment of a required installment

of estimated tax. As relevant to this case, each required

installment of estimated tax is equal to 25 percent of the

“required annual payment”, which in turn is equal to the lesser

of (1) 90 percent of the tax shown on the taxpayer'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 taxpayer filed a return for the

immediately preceding taxable year, 100 percent of the tax shown

on that return. Sec. 6654(d)(1)(A) and (B).

Attached to the notice is respondent’s “EXPLANATION OF THE

ESTIMATED TAX PENALTY”. Among other things, it shows that (A)

petitioner’s 2006 tax liability is $11,901, (B) 90 percent of

that amount is $10,710, and (C) petitioner’s prior year (2005)

tax liability is zero. It then determines that the smaller of

(B) and (C) “(as adjusted)” is $10,710. No explanation is given
 - 13 -

of any adjustment that would account for that conclusion. We can

only conclude that respondent made an adjustment because

petitioner failed to file a return for 2005. Respondent has,

however, offered no evidence of that failure, and we shall,

therefore, for purposes of determining whether respondent has

satisfied his burden of production, assume that the fact has not

been proved. Given that assumption, we assume that petitioner’s

2005 tax liability was zero and, therefore, that he had no

obligation to make any estimated tax payments for 2006. See sec.

6654(d)(1)(B); Davenport v. Commissioner, T.C. Memo. 2009-248.

Respondent has failed to carry his burden of producing evidence

that an addition to tax under section 6654 is appropriate, and we

shall sustain no such addition.

III. Section 6673 Penalty

Under section 6673(a)(1)(A) and (B), this Court may require

a taxpayer to pay a penalty not in excess of $25,000 if (1) the

taxpayer has instituted or maintained a proceeding primarily for

delay or (2) the taxpayer's position is “frivolous or

groundless”. We may, on our own initiative, require a taxpayer

to pay a section 6673(a)(1) penalty. E.g., Minovich v.

Commissioner, T.C. Memo. 1994-89. As stated supra, petitioner’s

argument that, because he is not a Federal employee he does not
 - 14 -

have to pay income tax is a common, frivolous,6 tax-protester

argument. Petitioner failed to report substantial income for

2006 and deserves a penalty for burdening respondent and this

court with frivolous arguments. We shall, therefore, require

petitioner to pay a penalty under section 6673(a)(1) of $2,000.

An appropriate decision

will be entered.

6
A taxpayer’s position is frivolous if it is contrary to
established law and unsupported by a reasoned, colorable argument
for change in the law. E.g., Nis Family Trust v. Commissioner,
115 T.C. 523, 544 (2000).