T.C. Memo. 2010-237
UNITED STATES TAX COURT
DONALD W. ERNLE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20450-09. Filed October 26, 2010.
Donald W. Ernle, pro se.
Derek Kaczmarek, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: Respondent determined a deficiency of $4,124
in petitioner’s Federal income tax for 2007. At trial respondent
(1) filed a motion to conform pleadings to the evidence, which
the Court granted, (2) filed an amended answer alleging fraud or
in the alternative negligence, and (3) orally moved for the
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imposition of a penalty against petitioner pursuant to section
6673, which the Court took under advisement.
The issues for decision are (1) whether petitioner received
unreported income totaling $35,792; (2) whether petitioner is
liable for the fraud penalty pursuant to section 6663 with
respect to the underpayment of tax or alternatively the accuracy-
related penalty pursuant to section 6662; and (3) whether a
penalty under section 6673 should be imposed against petitioner.
All section references are to the Internal Revenue Code
(Code) in effect for 2007, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
FINDINGS OF FACT
At the time he filed his petition, petitioner resided in
Arizona.
On his timely filed 2007 Form 1040, U.S. Individual Income
Tax Return, petitioner reported total income of $661. Petitioner
claimed a standard deduction of $5,350 and a personal exemption
of $3,400. Petitioner reported $3,049 of Federal income tax
withholding; and because the Form 1040 showed zero taxable
income, petitioner claimed a $3,049 refund.
Petitioner’s 2007 Form 1040 was manifestly false. In
actuality, petitioner received $2,730 in nonemployee compensation
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from CAVU, Inc.,1 $12,019 in taxable retirement income from the
Defense Finance and Accounting Service (an agency of the
Department of Defense), $20,183 in taxable retirement income from
American Century Services, L.L.C., and $860 in wages from Aziza
Dujmic-Palm View Assisted Living. These income items were
reported to respondent by the respective payors.
Instead of attaching copies of the documents he received
from the third-party payors, petitioner attached to his Form 1040
the following documents that were created and signed by him: (1)
A “corrected” Form 1099-MISC, Miscellaneous Income, purporting to
be from CAVU, Inc., reporting no nonemployee compensation; (2) a
“corrected” Form 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,
etc., purporting to be from the Defense Finance and Accounting
Service reporting no gross distribution and no taxable amount but
reporting $1,032 in Federal income tax withheld; (3) a series of
“corrected” Forms 1099-R purporting to be from American Century
Services TEFRA Agent collectively reporting no gross
distributions and no taxable amount but reporting $3,048.76 in
Federal income tax withheld; and (4) a Form 4852, Substitute for
Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions
From Pensions, Annuities, Retirement or Profit-Sharing Plans,
1
This nonemployee compensation is subject to self-
employment tax.
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IRAs, Insurance Contracts, etc., indicating that petitioner
received no income from Aziza Dujmic-Palm View Assisted Living.2
Respondent examined petitioner’s 2007 Form 1040 as an
underreporting of income case. On March 30, 2009, respondent
sent petitioner a CP2000 notice stating that the amount of income
petitioner reported on his 2007 Form 1040 did not match the
amount of income paid to petitioner as reported on documents
received from third-party payors. The notice requested that
petitioner explain the reason therefor by April 29, 2009.
Petitioner failed to do so.
On June 8, 2009, petitioner filed a Form 1040X, Amended U.S.
Individual Income Tax Return, for tax year 2007 in which he
overreported both his gross income and his Federal income tax
withholding. Attached to the Form 1040X were several documents
purporting to corroborate this overreporting: (1) A Form 1099-
OID, Original Issue Discount, purporting to be from Countrywide
Home Loans, Inc., showing original issue discount of $72,000 and
Federal income tax withheld of $71,900; (2) a Form 1099-OID
purporting to be from Bank of the West showing original issue
discount of $60,604.84 and Federal income tax withheld of
$60,504.84; and (3) a Form 1099-A, Acquisition or Abandonment of
2
We note that the “corrected” Forms 1099-R collectively
report that $4,080.76 ($1,032 plus $3,048.76) was withheld from
petitioner. The record does not reveal why petitioner claimed a
lesser amount, $3,049, as a refund.
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Secured Property, purporting to document a loan of property from
petitioner to Bank of the West showing a balance of principal
outstanding of $60,604.84 and the fair market value of property
to be $60,504.84.
Petitioner created the documents in an obvious attempt to
mislead the Internal Revenue Service (IRS) into believing he was
entitled to a $90,190 tax refund. The IRS did not accept the
Form 1040X as valid. Instead, respondent sent petitioner a
notice of deficiency on June 22, 2009.
Petitioner timely petitioned this Court, and a trial was
held on April 20, 2010. Petitioner refused to cooperate in the
required pretrial stipulation process. See Rule 91.
At trial petitioner filed frivolous motions and raised
frivolous objections. Petitioner refused to testify, call
witnesses, or proffer any meaningful or credible evidence.
As noted supra p. 1, at the conclusion of the trial
respondent filed a motion to conform pleadings to the evidence in
order to raise the affirmative issues of a section 6663(a) fraud
penalty or, in the alternative, a section 6662(a) accuracy-
related penalty. The penalty amount respondent asserts is based
on the understatement reflected in petitioner’s 2007 Form 1040
and not on petitioner’s inflated claim to withholding tax credits
as reported on his 2007 Form 1040X.
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OPINION
The Commissioner’s determinations in his notice of
deficiency are presumed correct, and the taxpayer bears the
burden of proving, by a preponderance of the evidence, that these
determinations are incorrect. Rule 142(a)(1); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Petitioner does not assert
that the burden of proof shifts to respondent pursuant to section
7491(a); but even if he did, we need not and do not decide the
issue because we resolve the case on the preponderance of the
evidence and not on an allocation of the burden of proof,
rendering the issue of burden moot. See Knudsen v. Commissioner,
131 T.C. 185, 186-189 (2008).
I. Unreported Income
Section 61(a) generally includes in gross income “all income
from whatever source derived” unless excluded by a specific
provision of the Code. This section is construed broadly to
encompass any accession to a taxpayer’s wealth. Commissioner v.
Schleier, 515 U.S. 323, 327-328 (1995); Commissioner v. Glenshaw
Glass Co., 348 U.S. 426, 429-430 (1955); MacGregor v.
Commissioner, T.C. Memo. 2010-187. Payments for services and
retirement payments are specifically included in the definition
of gross income. Sec. 61(a)(1), (11).
In the absence of adequate records, the Commissioner may
reconstruct income using any method that is reasonable in the
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light of all the surrounding facts and circumstances. Catalano
v. Commissioner, 81 T.C. 8, 13 (1983), affd. without published
opinion sub nom. Knoll v. Commissioner, 735 F.2d 1370 (9th Cir.
1984). We have held that the Commissioner may rely upon third-
party statements, including Forms 1099. See Spurlock v.
Commissioner, T.C. Memo. 2003-124.
The uncontested evidence demonstrates that petitioner
received wages from Aziza Dujmic-Palm View Assisted Living,
nonemployee income from CAVU, Inc., and retirement income (i.e.,
pension income) from the Defense Finance and Accounting Service
and American Century Services, L.L.C., in the amounts respondent
determined. These payments constitute income and generally are
taxable as such. See Wheeler v. Commissioner, 127 T.C. 200, 205
n.11 (2006), affd. 521 F.3d 1289 (10th Cir. 2008) (retirement
income); Rowlee v. Commissioner, 80 T.C. 1111, 1119-1122 (1983)
(wages); Brunsman v. Commissioner, T.C. Memo. 2003-291
(nonemployee compensation); sec. 1.61-11(a), Income Tax Regs.
(retirement income). Petitioner presented no evidence
demonstrating that any of these amounts were nontaxable. We
therefore sustain respondent’s determination that petitioner
received $35,792 in unreported income for 2007.
II. Section 6663(a) Fraud Penalty
Section 6663(a) provides for a 75-percent penalty for any
portion of an underpayment attributable to fraud. Fraud is
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defined as an intentional wrongdoing designed to evade tax
believed to be owing. Petzoldt v. Commissioner, 92 T.C. 661, 698
(1989). Fraudulent intent is defined as “‘actual, intentional
wrongdoing, and the intent required is the specific purpose to
evade a tax believed to be owing.’” Estate of Temple v.
Commissioner, 67 T.C. 143, 159 (1976) (quoting Mitchell v.
Commissioner, 118 F.2d 308, 310 (5th Cir. 1941), revg. 40 B.T.A.
424 (1939)). If any portion of the underpayment is attributable
to fraud, the entire underpayment is treated as attributable to
fraud unless the taxpayer establishes by a preponderance of the
evidence that part of the underpayment is not due to fraud. Sec.
6663(b).
The Commissioner has the burden of proving by clear and
convincing evidence that (1) an underpayment exists the year in
issue, and (2) that some portion of the underpayment is due to
fraud. See sec. 7454(a); Rule 142(b). Fraud is never imputed or
presumed but must be established by independent evidence that
establishes fraudulent intent. Petzoldt v. Commissioner, supra
at 699. Fraud need not be established by direct evidence, which
is rarely available, but may be proved by surveying the
taxpayer’s entire course of conduct and drawing reasonable
inferences therefrom. Kosinski v. Commissioner, 541 F.3d 671,
679 (6th Cir. 2008), affg. T.C. Memo. 2007-173; see Spies v.
United States, 317 U.S. 492, 499 (1943). Several “badges of
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fraud” have been developed from which fraudulent intent may be
inferred: (1) Understatement of income; (2) failure to cooperate
with tax authorities; (3) filing false documents; (4) intent to
mislead which may be inferred from a pattern of conduct; and (5)
maintaining inadequate records. Bradford v. Commissioner, 796
F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Camien
v. Commissioner, 420 F.2d 283, 287 (8th Cir. 1970), affg. T.C.
Memo. 1968-12.
Respondent has established that petitioner (1) grossly
understated his income; (2) failed to cooperate with respondent’s
agents during the examination of his 2007 Form 1040; (3) filed a
false 2007 Form 1040 to which were attached phony documents
(i.e., the “corrected” Forms 1099-R, 1099-MISC, and the Form
4852); and (4) filed a false 2007 Form 1040X together with false
documents (i.e., the phony Forms 1099-OID and Form 1099-A).
Petitioner engaged in a pattern of conduct by which he attempted
to defraud the Federal Government.
Respondent has met the standard of showing by clear and
convincing evidence that petitioner intentionally filed a
fraudulent Form 1040 for 2007. Petitioner presented no evidence
or arguments to show that any part of the underpayment is not due
to fraud. Accordingly, we hold that petitioner is liable for the
section 6663(a) fraud penalty on the underpayment of tax reported
on his Form 1040. Because of our holding, we need not
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address respondent’s alternative position that petitioner is
liable for the section 6662 accuracy-related penalty.
III. Section 6673(a) Penalty
Section 6673(a)(1) provides for a penalty not in excess of
$25,000 whenever it appears that the taxpayer has instituted
proceedings before this Court primarily for delay, the taxpayer’s
position is frivolous or groundless, or the taxpayer unreasonably
failed to pursue available administrative remedies. 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.” Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986).
Petitioner’s case is frivolous. Petitioner failed to abide
by the Court’s Rules (i.e., Rule 91) to stipulate all relevant
matters not privileged. He refused to stipulate even his own
2007 Form 1040 and the notice of deficiency. At trial petitioner
made frivolous objections. Petitioner filed frivolous motions.
Petitioner refused to testify and failed to provide any colorable
argument in defense of his position.
Petitioner through his chicanery has wasted the Court’s
limited resources. We therefore require petitioner to pay a
penalty pursuant to section 6673(a)(1) of $4,000.
To reflect the foregoing,
Decision will be entered
for respondent.