T.C. Memo. 2012-232
UNITED STATES TAX COURT
DAVID LOVEN NELSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21102-10. Filed August 13, 2012.
David Loven Nelson, pro se.
Horace Crump, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: On June 30, 2010, respondent issued notices of deficiency
in which he determined the following deficiencies and additions to tax with respect
to petitioner’s Federal income tax:
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[*2] Additions to tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
2005 $40,153 $9,034 $9,837 $1,611
1
2008 86,440 12,112 3,499 -0-
1
In the posttrial memorandum respondent states that petitioner’s deficiency
for 2008 is $86,444. Respondent appears to have made a typographical error in
quantifying the 2008 deficiency.
After concessions,1 the issues for decision are: (1) whether petitioner had
unreported compensation income for the years at issue; (2) whether petitioner is
liable for additions to tax under section 6651(a)(1)2 for 2005 and 2008; and (3)
whether the Court should impose a penalty under section 6673(a)(1).
1
In the notice of deficiency for 2005 respondent determined that petitioner
had failed to report wages, capital gains, and interest income. In the notice of
deficiency for 2008 respondent determined that petitioner had failed to report
wages, capital gains, interest income, ordinary dividends, qualified dividends, and
gain from the sale or exchange of assets.
In his petition, petitioner assigns error only to respondent’s determinations
that he received wages of $154,749 and $264,640 in 2005 and 2008, respectively.
Ordinarily, we deem conceded any issue not raised in the assignments of error in the
petition. See Rule 34(b)(4). This Court concludes that petitioner has conceded the
other income adjustments in the notices of deficiency. Respondent also conceded
the secs. 6651(a)(2) and 6654 additions to tax for 2005 and the sec. 6651(a)(2)
addition to tax for 2008.
2
Unless otherwise indicated, all section references are to the Internal Revenue
Code (Code), as amended and in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure. All monetary
amounts have been rounded to the nearest dollar.
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[*3] FINDINGS OF FACT
Some of the facts have been deemed established for purposes of this case in
accordance with Rule 91(f).3 The deemed facts are incorporated herein by this
reference. Petitioner resided in Florida when he filed his petition.
Petitioner began his career as an aviator in the U.S. Navy. Beginning in 1980
he worked for three different airlines. During the years at issue he was employed by
Northwest Airlines, Inc. (Northwest). In 2005 he received wages of $154,749 from
Northwest. In 2008 he received wages of $264,640 from Northwest.
Petitioner submitted for filing a Form 1040, U.S. Individual Income Tax
Return, for 2005 on March 27, 2006. On his Form 1040, he reported his occupation
as “American citizen”. He reported zero taxable income and requested
3
On March 4, 2011, respondent filed a motion to show cause why proposed
facts and evidence should not be accepted as established under Rule 91(f) and
attached a proposed stipulation of facts. By order dated March 15, 2011, this Court
ordered that petitioner file a response to respondent’s motion in accordance with
Rule 91(f)(2). In response, petitioner submitted a document titled “Petitioner’s
Objection to Stipulation of Facts”, which this Court filed as petitioner’s response to
our order of March 15, 2011. Petitioner’s response did not comply with Rule
91(f)(2). Consequently, by order dated March 30, 2011, this Court made (with
specified revisions) the order to show cause under Rule 91(f) absolute and deemed
established the facts and evidence set forth in respondent’s proposed stipulation of
facts. On April 8, 2011, petitioner filed a motion for relief from stipulations, which
this Court denied.
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[*4] a refund of a claimed $29,814 overpayment. He attached to his 2005 return a
self-prepared Form 4852, Substitute for Form W-2, Wage and Tax Statement, or
Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc., on behalf of Northwest. On the Form 4852
he reported that Northwest paid him zero wages and that it withheld Federal income
tax of $21,787. Respondent processed petitioner’s 2005 Form 1040 and refunded
the $29,814 claimed overpayment to him.
Petitioner submitted for filing a Form 1040 for 2008 on May 12, 2009. On
his Form 1040 he reported his occupation as “American Citizen”. He reported zero
taxable income and requested a refund of a claimed $25,778 overpayment. He
attached to his 2008 return a self-prepared Form 4852 on behalf of Northwest. On
the Form 4852 he reported that Northwest paid him zero wages and withheld
Federal income tax of $17,214. Respondent did not accept petitioner’s 2008 Form
1040 for filing.
On June 30, 2010, respondent issued to petitioner notices of deficiency for
2005 and 2008. On the basis of the Forms W-2 filed by Northwest respondent
determined that petitioner failed to report wages of $154,749 and $264,640 for
2005 and 2008, respectively. Respondent also determined that petitioner was
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[*5] liable for additions to tax under sections 6651(a)(1) and (2) and 6654 for 2005
and 2008.
On September 22, 2010, petitioner filed a petition with this Court contesting
respondent’s determinations in the notices of deficiency. This Court set this case
for trial at the Mobile, Alabama, trial session beginning April 26, 2011. At trial this
Court warned petitioner that if he continued to assert frivolous or groundless
positions, this Court would consider imposing a penalty under section 6673. In
addition, this Court repeatedly told petitioner that any testimony must be directed to
relevant factual issues and that this Court would give him an opportunity to make his
arguments after the testimony was completed and the evidentiary record was closed.
Despite the Court’s warnings, petitioner continued to ignore the Court’s instructions
and assert arguments in lieu of proper testimony. Specifically, he argued that he did
not receive wages in 2005 and 2008 because his activities during those years did not
satisfy the definition of “employment” in the Code. He also referenced during his
testimony various Code sections and regulations that purportedly support his
argument. Because he repeatedly violated this Court’s express instructions and
ignored those instructions after repeated warnings, this Court closed the evidentiary
record and removed petitioner from the courtroom.
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[*6] Because the Court had informed petitioner that he would be allowed an
opportunity to present to the Court his arguments in this case, on May 23, 2012, this
Court ordered each party to file a posttrial memorandum of facts and law setting
forth each party’s factual and legal positions. In his posttrial memorandum,
petitioner continues to advance frivolous and groundless arguments, including the
following: (1) he is not engaged in “employment”, he is not an “employee”, and he
did not receive “wages”, as those terms are defined in the Code; and (2) he is not
subject to tax because he did not perform services in “the District of Columbia, the
Commonwealth of Puerto Rico, the Virgin Islands, Guam, or American Samoa”.
Petitioner’s posttrial memorandum cites numerous authorities, including cases and
Code sections, out of context.
OPINION
I. Burden of Proof and Burden of Production
Ordinarily, the taxpayer bears the burden of proving that the determinations
are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The
burden of proof shifts to the Commissioner, however, if the taxpayer produces
credible evidence to support the deduction or position, the taxpayer complied with
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[*7] the substantiation requirements, and the taxpayer cooperated with the
Secretary4 with regard to all reasonable requests for information. Sec. 7491(a); see
also Higbee v. Commissioner, 116 T.C. 438, 440-441 (2001).
Petitioner does not contend that section 7491(a)(1) applies, and the record
establishes that he did not satisfy the section 7491(a)(2) requirements.
Consequently, petitioner bears the burden of proof as to any disputed factual issue.
See Rule 142(a).
Under section 6201(d), if a taxpayer asserts a reasonable dispute with
respect to an item of income reported on an information return filed by a third
party and the taxpayer meets certain other requirements, the Commissioner bears
the burden of producing reasonable and probative evidence, in addition to the
information return, concerning the deficiency attributable to the income item. The
record establishes that petitioner received $154,749 and $264,640 from Northwest
in 2005 and 2008, respectively. In his petition and at trial, petitioner argued only
that the payments from Northwest did not constitute “wages” as defined by the
4
The term “Secretary” means “the Secretary of the Treasury or his delegate”,
sec. 7701(a)(11)(B), and the term “or his delegate” means “any officer, employee,
or agency of the Treasury Department duly authorized by the Secretary of the
Treasury directly, or indirectly by one or more redelegations of authority, to perform
the function mentioned or described in the context”, sec. 7701(a)(12)(A)(i).
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[*8] Code. Petitioner has raised no reasonable dispute with respect to the accuracy
of the information returns. We conclude that petitioner’s attempt to dispute the
accuracy of the information returns under these circumstances is not reasonable and
that the burden of production with respect to the income did not shift to respondent
under section 6201(d).5 See, e.g., Carlson v. Commissioner, T.C. Memo. 2012-76.
II. Unreported Income
Section 61(a) defines gross income as “all income from whatever source
derived”, including “compensation for services, including fees, commissions, fringe
benefits, and similar items”. Wages and salaries are compensation for services that
are includable in gross income. See sec. 1.61-2(a), Income Tax Regs.
The Commissioner’s deficiency determination ordinarily is entitled to a
presumption of correctness. See Bone v. Commissioner, 324 F.3d 1289, 1293
(11th Cir. 2003), aff’g T.C. Memo. 2001-43. However, when a case involves
5
In his pretrial memorandum petitioner argues that the notices of deficiency
constitute “naked assessments”. See United States v. Janis, 428 U.S. 433, 441
(1976). The presumption of correctness does not apply and the burden of proof
shifts to the Commissioner when he fails to make a determination and issues a
“‘naked’ assessment without any foundation whatsoever”. Id. The record
establishes that petitioner received payments from Northwest in 2005 and 2008.
The notices of deficiency are adequately supported and are not “naked
assessments”, and therefore the burden of proof did not shift to respondent. See
Gale v. Commissioner, T.C. Memo. 2002-54.
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[*9] unreported income, the U.S. Court of Appeals for the Eleventh Circuit, to
which an appeal in this case would lie absent a stipulation to the contrary, see sec.
7482(b)(1)(A), (2), has held that the Commissioner’s determination of unreported
income is entitled to a presumption of correctness only if the determination is
supported by a minimal evidentiary foundation linking the taxpayer to an income-
producing activity, see Blohm v. Commissioner, 994 F.2d 1542, 1549 (11th Cir.
1993), aff’g T.C. Memo. 1991-636. Once the Commissioner produces evidence
linking the taxpayer to an income-producing activity, the presumption of correctness
applies and the burden of production shifts to the taxpayer to rebut that presumption
by establishing that the Commissioner’s determination is arbitrary or erroneous. Id.
at 1549; see also United States v. Janis, 428 U.S. 433, 441-442 (1976).
The record establishes, and petitioner has conceded, that he received
payments as reported by Northwest on Forms W-2 for the years at issue. We
conclude that respondent laid the requisite minimal evidentiary foundation for the
contested unreported income adjustments and that respondent’s determinations of
tax due are entitled to a presumption of correctness.
At trial petitioner argued that the compensation amounts he received are not
wages and that he was not engaged in any “employment” activity, as that term is
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[*10] defined in the Code. In his posttrial memorandum petitioner continues to
advance these same arguments. Petitioner also argues that his compensation
income is not subject to tax because he did not perform services within “the
District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands,
Guam, or American Samoa”. Petitioner raised no other arguments regarding the
accuracy of the information returns.
Petitioner has raised only frivolous and groundless arguments. The U.S.
Court of Appeals for the Eleventh Circuit has held similar arguments to be
frivolous and without merit. See United States v. Morgan, 419 Fed. Appx. 958,
959 (11th Cir. 2011) (taxpayers’ arguments concerning the definitions of
“employment” and “wages” were frivolous and without merit); United States v.
Ward, 833 F.2d 1538, 1539 (11th Cir. 1987); Motes v. United States, 785 F.2d
928, 928 (11th Cir. 1986); Biermann v. Commissioner, 769 F.2d 707, 708 (11th
Cir. 1985); Waters v. Commissioner, 764 F.2d 1389, 1390 (11th Cir. 1985); see
also United States v. Nelson (In re Becraft), 885 F.2d 547, 548-549 (9th Cir.
1989). Petitioner’s frivolous and groundless arguments warrant no further
discussion. See Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984)
(“We perceive no need to refute these arguments with somber reasoning and
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[*11] copious citation of precedent; to do so might suggest that these arguments
have some colorable merit.”); Wnuck v. Commissioner, 136 T.C. 498, 512 (2011).
Petitioner admitted that he provided services and received compensation
income during the years at issue. Because wages must be included in petitioner’s
income under section 61, we sustain respondent’s determination with respect to the
deficiencies in tax.
III. Additions to Tax Under Section 6651(a)(1)
Under section 7491(c), the Commissioner bears the burden of producing
evidence with respect to the liability of the taxpayer for any penalty, addition to tax,
or additional amount. See Higbee v. Commissioner, 116 T.C. at 446-447. To meet
his burden of production, the Commissioner must come forward with sufficient
evidence that it is appropriate to impose the addition to tax. Id. Once the
Commissioner meets his burden, the taxpayer must come forward with evidence
sufficient to persuade this Court that the determination is incorrect. Id.
Respondent determined that petitioner is liable under section 6651(a)(1) for
additions to tax for failure to timely file a valid return for 2005 and 2008.6 Section
6
Petitioner gave no indication in his pleadings or at trial that he contested the
sec. 6651(a)(1) additions to tax. However, respondent addressed the additions to
tax in his posttrial memorandum of facts and law. Accordingly, this Court deems
this issue tried by consent and will consider it. See Rule 41(b).
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[*12] 6651(a)(1) authorizes the imposition of an addition to tax for failure to
timely file a return, unless it is shown that such failure is due to reasonable cause
and not due to willful neglect. See United States v. Boyle, 469 U.S. 241, 245
(1985); United States v. Nordbrock, 38 F.3d 440, 444 (9th Cir. 1994). A failure to
file a timely Federal income tax return is due to reasonable cause if the taxpayer
exercised ordinary business care and prudence but nevertheless was unable to file
the return within the prescribed time. See sec. 301.6651-1(c)(1), Proced. &
Admin. Regs. Willful neglect means a conscious, intentional failure to file or
reckless indifference toward filing. Boyle, 469 U.S. at 245.
To be considered as having filed a return, a taxpayer must have filed a valid
return. See Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff’d, 793 F.2d 139
(6th Cir. 1986). Under Beard v. Commissioner, 82 T.C. at 777, a valid return is
one that (1) contains sufficient data to calculate a tax liability, (2) purports to be a
return, (3) represents an honest and reasonable attempt to satisfy the requirements
of the tax law, and (4) is executed by the taxpayer under penalties of perjury. A
taxpayer who files a document that purports to be a Federal income tax return but
which contains only zeros on the relevant lines has not filed a valid return because
it does not contain sufficient information for the Commissioner to calculate and
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[*13] assess a tax liability. See Cabirac v. Commissioner, 120 T.C. 163, 169
(2003); Hamilton v. Commissioner, T.C. Memo. 2009-271.
Respondent introduced into evidence petitioner’s 2005 and 2008 Forms 1040
on which petitioner reported zero taxable income. Respondent also introduced
deemed stipulations that petitioner had income from various sources including
wages in amounts sufficient to require the filing of returns and that petitioner failed
to file valid returns for 2005 and 2008. See Cabirac v. Commissioner, 120 T.C. at
168-169. Consequently, we conclude that respondent has satisfied his burden of
production under section 7491(c), and petitioner must come forward with evidence
sufficient to persuade the Court that respondent’s determination is in error.
Petitioner did not introduce any evidence to prove that he is not liable for the
additions to tax or that he had reasonable cause for his failure to timely file his
returns. Accordingly, we sustain respondent’s determination as to the section
6651(a)(1) additions to tax for 2005 and 2008.
IV. 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: (1) the
proceedings were instituted or maintained by the taxpayer primarily for delay, (2)
the taxpayer’s position is frivolous or groundless, or (3) the taxpayer unreasonably
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[*14] failed to pursue available administrative remedies. A taxpayer’s position is
frivolous or groundless if it is “‘contrary to established law and unsupported by a
reasoned, colorable argument for change in the law.’” Williams v. Commissioner,
114 T.C. 136, 144 (2000) (quoting Coleman v. Commissioner, 791 F.2d 68, 71 (7th
Cir. 1986)).
Throughout these proceedings, petitioner repeatedly argued that he was not
an “employee” and that he did not receive “wages” as those terms are defined by
the Code. As noted supra pp. 9-10, these arguments are contrary to well-established
law and are frivolous. At trial petitioner did not testify regarding any disputed
factual matters, and he persisted in asserting his frivolous and groundless arguments.
Although this Court provided ample warning of the potential implications of
continuing to assert those frivolous and groundless arguments, petitioner did not
abandon his arguments or acknowledge his liability for income tax on the income he
received during 2005 and 2008. Instead, petitioner continued to assert these
arguments at trial and in his posttrial memorandum.
Although respondent did not move for the Court to impose a penalty
pursuant to section 6673, this Court believes that petitioner’s conduct deserves an
appropriate sanction under section 6673. Accordingly, we shall require petitioner to
pay to the United States a penalty under section 6673(a)(1) of $2,000. In
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[*15] addition, we warn petitioner that if in the future he maintains frivolous and
groundless positions in this Court, this Court may impose a penalty of up to $25,000
under section 6673(a)(1).
We have considered the parties’ remaining arguments, and to the extent not
discussed above, conclude those arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.