Batsch v. Comm'r

T.C. Memo. 2016-140

UNITED STATES TAX COURT

ROBERT F. BATSCH, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 28568-13, 28694-13, Filed July 26, 2016.
10597-14, 10638-14.

Robert F. Batsch, pro se.

Patricia Hyde, pro se.

H. Elizabeth H. Downs and Jamie M. Stipek, for respondent.

1
Cases of the following petitioners are consolidated herewith: Robert F.
Batsch, docket No. 10638-14; and Patricia Hyde, docket Nos. 28694-13 and
10597-14.
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[*2] MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: Respondent determined deficiencies and additions to tax

as follows:

Robert F. Batsch, Docket Nos. 28568-13 and 10638-14

Additions to tax
Sec. Sec. Sec.
Year Deficiency 6651(f) 6651(a)(2) 6654

2007 $35,534.89 $25,762.80 $8,883.72 $1,617.29

2008 23,070.00 16,725.75 5,767.50 741.40

2009 18,971.00 13,753.98 (1) 454.25

2010 12,375.00 8,971.88 (1) 265.39

2011 11,117.00 8,059.83 (1) 220.07

2012 10,117.00 7,334.83 (1) 181.36

1
To be computed at a later date.
Patricia Hyde, Docket Nos. 28694-13 and 10597-14

Additions to tax
Sec. Sec. Sec.
Year Deficiency 6651(f) 6651(a)(2) 6654

2007 $54,046 $39,183.35 $13,511.50 $2,459.78

2008 33,870 24,555.75 8,467.50 1,088.47

2009 22,159 16,065.28 (1) 530.56
 -3-

[*3]

2010 15,732 11,405.70 (1) 337.40

2011 13,028 9,445.30 (1) 257.94
2012 11,374 8,246.15 (1) 203.93

1
To be computed at a later date.
The notices of deficiency for 2007-11 were sent September 10, 2013, and

the notices for 2012 were sent February 10, 2014. The deficiencies were

determined after the Internal Revenue Service (IRS) had prepared substitutes for

returns under section 6020(b) that were based upon an analysis of bank deposits

into accounts maintained and controlled by petitioners. All section references are

to the Internal Revenue Code for the years in issue, and all Rule references are to

the Tax Court Rules of Practice and Procedure.

Despite repeated warnings by the Court of the consequences of their

positions, petitioners refused to testify or to present any evidence concerning their

income and deductions. Throughout these cases they have presented only

frivolous arguments denying their obligations to file tax returns and pay taxes on

their income. Thus, the only issue for decision is whether petitioners are liable for

the fraudulent failure to file additions to tax under section 6651(f).
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[*4] FINDINGS OF FACT

Background Facts

The following facts have been deemed stipulated pursuant to Rule 91(f)

because petitioners’ response to the motion made under that Rule was evasive and

not fairly directed to the proposed stipulation. See Rule 91(f)(3). In addition to

the facts found here, the stipulation included copies of petitioners’ bank records

supporting respondent’s determination and copies of official records of the IRS

showing petitioners’ failure to file returns. Because petitioners have not addressed

the amounts determined other than by their frivolous procedural arguments, it is

unnecessary to set forth the details of transactions apparent from the bank

deposits.

Petitioners resided in Arkansas at the time they filed their petitions. They

are not married but have resided together at least since 2006. On correspondence

with the IRS they used an address of 8334 W. McNelly Road, Bentonville,

Arkansas 72712 (petitioners’ residence). The Batsch Revocable Trust and

petitioners, as co-trustees of the trust, own petitioners’ residence.

Between taxable years 2007 and 2012, receipts from the Spanker Creek

Farm Arts and Crafts Fair were deposited into at least three bank accounts--an

account with Arvest Bank ending in 0093 held jointly in the names of Patricia
 -5-

[*5] Hyde and Robert F. Batsch; an account with Arvest Bank ending in 3981 held

in the name of Patricia Hyde, Trustee for Patricia L. Hyde Revocable Trust (also

known as Patricia L. Hyde Irrevocable Trust); and an account with Arvest Bank

ending in 4637 held in the name of Patricia Hyde, Trustee for Spanker Creek

Farm.

The total gross receipts deposited into those accounts and determined from

that source were:

2007 2008 2009 2010 2011 2012

$97,643.44 $86,062.80 $77,980.84 $70,923.80 $62,646 $57,525

Petitioners also had additional income from rents, dividends, capital gains,

interest, and other sources during the years in issue.

Batsch has not filed Federal income tax returns for years 1998 through

2012. The IRS prepared substitutes for returns under section 6020(b) for Batsch

for 2007, 2008, 2009, 2010, 2011, and 2012.

Hyde’s last filed Federal income tax return was for 2005. She has not filed

Federal income tax returns for 2006 through 2012. The IRS prepared substitutes

for returns under section 6020(b) for her for 2006, 2007, 2008, 2009, 2010, 2011,

and 2012.
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[*6] Chronology

Hyde has had similar cases in this Court before, and the history of those

cases and the course of these cases are set forth here because these facts are

material in determining whether petitioners’ admitted pattern of refusing to file

returns or pay Federal income tax was fraudulent.

In the case at docket No. 25406-08, decided in Hyde v. Commissioner, T.C.

Memo. 2011-131, Hyde contested her liability for a deficiency and an accuracy-

related penalty for 2005. She claimed to have rescinded her 2005 return and

raised a plethora of frivolous issues. The Court rejected Hyde’s arguments about

the administrative circumstances surrounding the determination, explained that

this Court conducts a proceeding de novo to redetermine a taxpayer’s tax liability

on the basis of evidence presented, sustained the determination that Hyde’s

compensation for services was taxable, and sustained a section 6662 penalty.

In the case at docket No. 8225-10, decided in Hyde v. Commissioner, T.C.

Memo. 2011-104, aff’d per curiam, 471 F. App’x 537 (8th Cir. 2012), Hyde

contested her liability for a deficiency and failure to file additions to tax for 2006.

The Court rejected the “hodgepodge of frivolous and groundless claims that both

this Court and the Eighth Circuit have consistently rejected.” Those claims

included Hyde’s arguments concerning the validity of the substitute for return and
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[*7] her liability for Federal income tax. The Court imposed a $3,000 penalty

under section 6673, noting that Hyde had been warned at trial but had ignored the

warning. In its opinion filed July 2, 2012, the Court of Appeals for the Eighth

Circuit affirmed this Court’s decision and found no abuse of discretion in the

imposition of the penalty.

The examination for petitioners’ years in issue was conducted by Revenue

Agent Michael Shaun Oliver. Oliver began his work with respect to Batsch and

expanded it to include Hyde. He determined that neither had filed tax returns for

2007 through 2012. Petitioners failed to respond to letters, notices, or summonses

or to cooperate otherwise with Oliver. They responded only after they received

his examination reports. Upon receipt of a letter dated May 28, 2013, from

petitioners, Oliver sent them a copy of the IRS publication “The Truth About

Frivolous Tax Arguments”. Petitioners responded by acknowledging receipt of

the publication in a letter dated June 14, 2013. (Hyde denied receipt of the

publication during trial.)

Because petitioners failed to cooperate, Oliver researched various available

materials concerning, among other things, the Spanker Creek Farm Arts and Crafts

Fair. He obtained records from the Benton County Planning Commission, the tax

assessor’s office, brokerages, and several banks. He performed a thorough bank
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[*8] deposits analysis of multiple accounts in the names of petitioners or over

which Hyde had signature authority. In that process he identified apparent income

items and likely deductible expenses related to petitioners. He observed frequent

withdrawals of cash.

During his analysis Oliver discovered that petitioners had unreported

income from sales of stock and financial instruments, dividends, retirement

account distributions, rents, and farming income. He carefully allocated items

such as rents, interest, capital gains, and other income to one or the other petitioner

to the extent apparent from the records. He identified nontaxable receipts and

transfers and allowable deductions to the extent possible. He also discovered that

petitioners had written checks to “Hearts Desire”. Following that discovery, he

issued a summons to Hearts Desire Precious Jewelry/NWA Gold & Silver and

received records showing that Batsch had made substantial purchases of precious

metals.

Oliver prepared and certified substitutes for returns under section 6020(b)

for each petitioner for each year, pursuant to authority under Delegation Order 5-2,

set forth in Internal Revenue Manual (IRM) pt. 1.2.44.3 (Sept. 19, 2012 & rev.

Oct. 21, 2013). He recommended assertion of the fraudulent failure to file

addition to tax because of the unreported income, assignment of assets to a trust,
 -9-

[*9] use of cash, dealings in gold and silver, and history of nonfiling. He also

became aware of Hyde’s assertion of frivolous arguments in cases decided by this

Court. The substitutes for returns were submitted to IRS Technical Services for

review and certification and were duly approved as the basis for the notices of

deficiency.

Each notice of deficiency was signed on behalf of the Commissioner of the

IRS by the Technical Services Territory Manager or the Acting Technical Services

Territory Manager, pursuant to Delegation Order 4-8, set forth in IRM pt. 1.2.43.9

(Sept. 4, 2012).

The petitions in these cases, all filed in 2013 and 2014, reasserted Hyde’s

previously rejected arguments and added additional arguments that have been

repeatedly and consistently rejected by this and other courts. Petitioners did not

identify any bank deposits that would not constitute taxable income or any

expenditures that would be allowable as deductions, and petitioners’ position is

that, as stated at trial by Hyde, “Your Honor, to my knowledge, we have no subject

items of income; therefore, no deductions of any kind.”

Throughout the course of these proceedings, petitioners have filed various

requests and motions reasserting their frivolous positions. The cases were first set

for trial on June 8, 2015. On May 14, 2015, the Judge scheduled to preside at the
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[*10] June 8, 2015, calendar denied petitioners’ then-pending discovery motions

except to the extent that respondent was ordered to provide third-party contacts

made that related to the determinations of petitioners’ income and deductions for

the years at issue in these cases. The orders in each case also stated:

It appears to the Court that petitioner is making frivolous and
groundless arguments that have been rejected repeatedly by this and
other courts. Petitioner is hereby warned that such conduct may lead
to a penalty against him [or her, as to Hyde] in an amount not to
exceed $25,000 under section 6673. However, buried among the
frivolous arguments in the motions under consideration, [one or two]
discovery request[s] could be read to be aimed at discovering
information relevant to a determination of petitioner’s income and
deductions, which is the issue to be resolved.

The cases were continued from the June 8, 2015, calendar, but the Judge

presiding at that calendar retained jurisdiction in order to assist the parties in

preparing for a later trial, specifically in reaching a stipulation of facts. On July 8,

2015, the Judge summarized proceedings to that time and denied another frivolous

motion of petitioners, explaining:

Contrary to petitioners’ Motion for Sanctions, the record in
these cases supports the conclusion that petitioners, not respondent,
have failed to comply with this Court's Standing Pretrial Order. As
that Order states, if the failure to stipulate is “due to lack of
cooperation by either party, the Court may order sanctions against the
uncooperative party.”

On the basis of the record before us, it appears that petitioners
do not intend to prosecute their cases in accordance with the Court’s
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[*11] rules, but rather insist on making frivolous arguments and
impeding preparation of this case for trial. We already have warned
petitioners about the consequences of making frivolous arguments (a
penalty in an amount not to exceed $25,000 under section 6673). We
also warn petitioners that failure to put on any evidence may result in
a default or dismissal of their cases and entry of decision in favor of
respondent, pursuant to Rule 123.

As we did at the June 8, 2015, hearing, we again remind
petitioners that the purpose of a trial in this Court is to consider
evidence of petitioners’ income or deductions for the tax years 2007,
2008, 2009, 2010, 2011, and 2012 to determine their tax liability. If
petitioners do not put on any such evidence, they risk being assessed
tax twice on the same income should the Court sustain the notices of
deficiency at issue here, as respondent, in the absence of any evidence
allocating the income between them, attributed certain income to both
petitioners in those notices. Furthermore, because deductions are a
matter of legislative grace, petitioners must put on evidence showing
that they are entitled to deductions; otherwise they may not be
entitled to reduce their taxable income by those amounts.

The cases were calendared for trial on April 11, 2016. On November 17,

2015, respondent filed a motion for order to show cause why proposed facts and

evidence should not be accepted as established pursuant to Rule 91(f). Attached

to the proposed stipulation were over 3,500 pages of exhibits consisting of official

IRS documents and petitioners’ bank records. Petitioners’ response was filed

December 14, 2015. Petitioners did not dispute any of the specific facts set forth

in respondent’s proposed stipulation, and they did not raise any reasonable

objection to the attached exhibits. By order dated December 16, 2015, the Court
 - 12 -

[*12] made the order to show cause absolute and deemed the facts and evidence

set forth in respondent’s proposed stipulation to be stipulated for purposes of these

cases. The order explained:

Rule 91(f)(3) provides, and petitioners were warned, that if
their responses were evasive or not fairly directed to the proposed
stipulation or portion thereof, that matter or portion thereof will be
deemed stipulated for purposes of the pending cases. Petitioners’
response consists of nonsensical denials of facts that should not
reasonably be in dispute and legal arguments that are gibberish and
intended only to obstruct determination of their correct liability.
Petitioners’ pro se status does not excuse their attempt to litter the
docket of this Court with ridiculous allegations. See Parker v.
Commissioner, 117 F.3d 785, 787 (5th Cir. 1997). Their arguments
concerning delegation of authority have been rejected and
characterized as frivolous. See, e.g., Winslow v. Commissioner, 139
T.C. 270, 274, 276 (2012). Their arguments concerning jurisdiction,
validity of the statutory notices, and legality of respondent’s evidence
are “frivolous squared”. United States v. Cooper, 170 F.3d 691, 691
(7th Cir. 1999). See Hyde v. Commissioner, T.C. Memo. 2011-131;
Hyde v. Commissioner, T.C. Memo. 2011-104, aff’d 471 Fed. Appx.
537 (8th Cir. 2012). They have been repeatedly warned of the
adverse consequences that they face if they continue the course they
have adopted in these cases.

OPINION

With the exception of a few responses by Batsch to questions addressed to

him by the Court, Hyde conducted the trial on behalf of petitioners. She began by

stating her disagreement with the stipulation. She was advised by the Court:

The bank records should not be in dispute. This is your last
opportunity to present any evidence [that] the bank deposits do not
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[*13] represent taxable income [or] there’s some nontaxable source,
or that you have deductions that have not been allowed in the
statutory notice. But the documents are in evidence. You may
present contrary evidence, but as far as I can tell from the record, you
haven’t raised any reasonable dispute as to the income. * * * The only
item in dispute from my perspective today is whether your failure to
file tax returns was due to fraud. And as I explained yesterday, your
persistence in frivolous arguments, meritless arguments, your refusal
to cooperate in a correct determination of your liability is an
indication that your claims are not made in good faith because you’re
rejecting the repeated authorities in your own case, Ms. Hyde, that the
Court--the Tax Court and the Court of Appeals that your arguments
are frivolous.

Notwithstanding the clear warnings to petitioners, Hyde spent over an hour

presenting documents that she claimed supported her position, summarized as

follows:

And let me make a couple of more comments just to get them
on the record, Your Honor. And basically the point that we’re getting
at is we are not subject to the jurisdiction of the United States. I don’t
know how that’s even possible. We was not born--the United States
as described in the law and according to that, be it right or wrong,
these laws are what we based the (inaudible) that we are not subject
to. And we can’t find one where we are subject to because according
to this and--and according to what we are as people that is a citizen of
the several states, not of what we see as being defined as the United
States or the state--the term United States when you used in a
geographical sense includes the state of--I mean it--it’s just the--
where Congress has its exclusive jurisdiction. Congress does not
have exclusive jurisdiction within the States.

The factual matters addressed during her presentation were records,

showing that Batsch was born in Missouri and Hyde was born in Texas, in support
 - 14 -

[*14] of her theory that petitioners are not citizens of the United States for

purposes of the tax laws. She also presented records that showed that petitioners’

residence had been the subject of various deeds to the trust and to petitioners as

trustees and is in the county of Benton rather than the city of Bentonville. Both

petitioners declined to testify, asserting their privilege against self-incrimination.

Thus, the only evidence in the record relating to petitioners’ taxable income

consists of the bank records, other documents that support Oliver’s analysis, and

the statutory notices. Petitioners never identified an error in Oliver’s

exceptionally detailed analysis of their taxable income for each year. Respondent

has provided far more than the minimal evidentiary foundation to establish

unreported income. See Dodge v. Commisssioner, 981 F.2d 350 (8th Cir. 1992),

aff’g in part, rev’g in part 96 T.C. 172 (1991). Once gross receipts were

established, petitioners had the obligation to show offsets that would reduce

taxable income. See, e.g., DiLeo v. Commissioner, 96 T.C. 858, 872 (1991), aff’d,

959 F.2d 16 (2d Cir. 1992); Brooks v. Commissioner, 82 T.C. 413, 433 (1984),

aff’d without published opinion, 772 F.2d 910 (9th Cir. 1985).

Petitioners’ failure to produce evidence with respect to the deficiencies is a

ground for determination of those issues against them. Despite our reluctance to

reach a decision where taxable income is duplicated to separate taxpayers, we have
 - 15 -

[*15] no alternative to accepting respondent’s whipsaw position. See, e.g.,

Putnam v. Commissioner, T.C. Memo. 2015-160, at *25-*27; Tilley v.

Commissioner, T.C. Memo. 2009-83, slip op. at 12; see also Maggie Mgmt. Co. v.

Commissioner, 108 T.C. 430, 446 (1997).

Petitioners’ arguments about the validity of the section 6020(b) substitutes

for returns are groundless, as Hyde was advised in Hyde v. Commissioner, T.C.

Memo. 2011-104, slip op. at 5, as follows: “It is well settled that a substitute for

return prepared by the Commissioner under section 6020 is prima facie ‘good and

sufficient for all legal purposes’, including to assess Federal income tax liability

shown on a substitute for return as due and owing. See sec. 6020(b)(2); United

States v. Silkman, 220 F.3d 935, 936 (8th Cir. 2000).” See also Rader v.

Commissioner, 143 T.C. 376, 382 (2014); Whittington v. Commissioner, T.C.

Memo. 2015-152.

Equally lacking in merit are petitioners’ arguments about the validity of the

statutory notices. Courts have held consistently, in various contexts, that (1) a

signature is not required on a notice of deficiency and (2) provisions of the IRM

do not give rights to a taxpayer or affect the validity of a notice or this Court’s

jurisdiction. See, e.g., Selgas v. Commissioner, 475 F.3d 697, 699-700 (5th Cir.

2007); Tavano v. Commissioner, 986 F.2d 1389, 1390 (11th Cir. 1993) (per
 - 16 -

[*16] curiam), aff’g T.C. Memo. 1991-237; Urban v. Commissioner, 964 F.2d

888, 889 (9th Cir. 1992) (per curiam), aff’g T.C. Memo. 1991-220; Ball v.

Commissioner, T.C. Memo. 2006-141, slip op. at 7. Arguments concerning

delegation of authority have been rejected and characterized as frivolous. See,

e.g., Winslow v. Commissioner, 139 T.C. at 274, 276; Roye v. Commissioner,

T.C. Memo. 2012-246, at *15, *16 n.6; see also Grunsted v. Commissioner, 136

T.C. 455, 460-461 (2011).

Hyde has a history of pursuing frivolous arguments and rejecting the

conclusions of every court that has considered them. Petitioners’ theory that

citizens and residents of various States are not subject to Federal jurisdiction

because the applicable statutes include certain Federal territories in the statement

of coverage is an argument that “includes” means “only” and excludes anything

else. Such interpretative arguments have been consistently rejected in strong

terms, even in judicial opinions sustaining criminal convictions. See, e.g., United

States v. Ward, 833 F.2d 1538, 1539 (11th Cir. 1987) (per curiam) (“utterly

without merit”); United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985)

(“inane” and “preposterous”); United States v. Rice, 659 F.2d 524, 528 (5th Cir.

1981) (“frivolous non-sequitur”). The Court of Appeals for the Eighth Circuit has

characterized as “absurd” an argument that taxpayers were not citizens of the
 - 17 -

[*17] United States but rather citizens of a State and therefore not subject to

Federal taxation. United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993)

(per curiam) (citing United States v. Kruger, 923 F.2d 587, 587-588 (8th Cir.

1991)); see Crain v. Commissioner, 737 F.2d 1417, 1418 (5th Cir. 1984) (per

curiam) (granting penalties against taxpayer whose spurious arguments on taxation

and jurisdiction were “unsupported” and “meritless”). No further discussion of

petitioners’ stale theories is warranted.

We must decide, however, whether petitioners’ failure to file returns for the

years before us was accompanied by an intent sufficient to sustain the section

6651(f) additions to tax. Section 6651(f) provides an increased penalty of 75% of

the amount required to be shown as tax on unfiled returns if the failure to file the

returns is fraudulent. In applying section 6651(f) to determine whether

petitioners’ failure to file tax returns was fraudulent, we consider the same

elements considered in cases involving former section 6653(b) and present section

6663. See Clayton v. Commissioner, 102 T.C. 632, 653 (1994); Niedringhaus v.

Commissioner, 99 T.C. 202, 211-213 (1992). The civil fraud penalty is a sanction

provided primarily as a safeguard for the protection of the revenue and to

reimburse the Government for the heavy expense of investigation and the loss

resulting from the taxpayer’s fraud. Helvering v. Mitchell, 303 U.S. 391, 401
 - 18 -

[*18] (1938). Respondent has the burden of proving fraud by clear and

convincing evidence. See sec. 7454(a); Rule 142(b).

Bank deposits are prima facie evidence of income. See Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C.

651, 656-657 (1975), aff’d, 566 F.2d 2 (6th Cir. 1977). Proof of gross receipts in

the amounts shown by the bank deposits analysis in these cases is sufficient to

satisfy respondent’s burden of showing that petitioners had an obligation to file

returns. See secs. 1, 6011, 6012.

Fraud may be proved by circumstantial evidence, and the taxpayer’s entire

course of conduct may establish the requisite fraudulent intent. Rowlee v.

Commissioner, 80 T.C. 1111, 1123 (1983). Circumstantial evidence of fraud

includes “badges of fraud” such as those present here: a longtime pattern of

failure to file returns, failure to report substantial amounts of income, failure to

maintain adequate records, failure to cooperate with taxing authorities in

determining the taxpayer’s correct liability, and implausible or inconsistent

explanations of behavior. See, e.g., Bradford v. Commissioner, 796 F.2d 303,

307-308 (9th Cir. 1986), aff’g T.C. Memo. 1984-601; Powell v. Granquist, 252

F.2d 56, 60 (9th Cir. 1958); Grosshandler v. Commissioner, 75 T.C. 1, 19-20
 - 19 -

[*19] (1980); Gajewski v. Commissioner, 67 T.C. 181, 199-201 (1976), aff’d

without published opinion, 578 F.2d 1383 (8th Cir. 1978).

The additions to tax for fraud have frequently been imposed on taxpayers

like petitioners “who were knowledgeable about their taxpaying responsibilities

* * * [and] consciously decided to unilaterally opt out of our system of taxation.”

Miller v. Commissioner, 94 T.C. 316, 335 (1990); see Niedringhaus v.

Commissioner, 99 T.C. at 212, 217-219; Porter v. Commissioner, T.C. Memo.

2015-122, at *24; Bennett v. Commissioner, T.C. Memo. 2014-256, at *12; Chase

v. Commissioner, T.C. Memo. 2004-142, slip op. at 10; Madge v. Commissioner,

T.C. Memo. 2000-370, slip op. at 4-5, aff’d, 23 F. App’x 604 (8th Cir. 2001).

Because petitioners refused to testify, they have shown no plausible nonfraudulent

explanation for their behavior. Their arguments about the validity of the statutory

notices are directed at events occurring after the years in issue and do not reflect

the relevant state of mind at the times the returns were due. Petitioners’

persistence in discredited arguments in the face of unanimous rulings by the courts

negates good faith. Thus, they have offered no defense to the inference of

fraudulent intent to be drawn from the circumstantial evidence and objective facts

found. Respondent’s burden of proof has been satisfied.
 - 20 -

[*20] To reflect the foregoing,

Decisions will be entered

for respondent.