Hyde v. Comm'r

T.C. Memo. 2011-104

UNITED STATES TAX COURT

PATRICIA LOUISE HYDE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8225-10. Filed May 19, 2011.

Patricia Louise Hyde, pro se.

Dessa J. Baker-Inman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Respondent determined a $33,498 deficiency in

petitioner’s 2006 Federal income tax and additions to tax of

$7,537 under section 6651(a)(1), $4,857 under section 6651(a)(2),

and $1,585 under section 6654(a).1 After concessions,2 we decide

1
Section references are to the applicable version of the
(continued...)
 - 2 -

whether petitioner: (1) Had unreported income in the amounts

determined by respondent; (2) is liable for the 10-percent

additional tax on early distributions from her individual

retirement account (IRA); (3) is liable for self-employment tax

on her earnings of nonemployee compensation; (4) is liable for

the addition to tax determined by respondent under section

6651(a)(1); (5) is liable for the addition to tax determined by

respondent under section 6651(a)(2); and (6) is liable for the

addition to tax under section 6654. In addition, we consider

whether the Court should sua sponte impose a penalty under

section 6673.

FINDINGS OF FACT

No written stipulation of facts was filed in this case. An

oral stipulation was made at trial as to one fact: Petitioner

lived in Arkansas at the time the petition was filed.

During 2006 petitioner worked as a consultant for Key

Apparel Resources, Ltd. (Key Apparel), and Star of India

Fashions, Inc. (Star). Petitioner was paid total compensation of

1
(...continued)
Internal Revenue Code (Code), and Rule references are to the Tax
Court Rules of Practice and Procedure. Some dollar amounts are
rounded.
2
Respondent concedes that the sec. 6654 addition to tax was
improperly calculated by determining such addition on the basis
of a required annual payment of $30,148. Respondent contends,
and we agree, that such an addition should have been calculated
on the basis of a required annual payment of $330.
 - 3 -

$92,500 for her services to Key Apparel and Star. Also in 2006

Merrill Lynch Bank and Trust Co. made a taxable distribution of

$9,166 to petitioner from an IRA. Petitioner was also paid (1)

$1,297 in dividends from Merrill, Lynch, Pierce, Fenner & Smith,

Inc., (2) $15 in dividends from Scottrade, Inc., (3) $31 in

interest from Arvest Bank, and (4) an income tax refund of $1,912

from the State of Arkansas Department of Finance and

Administration. Petitioner does not dispute having received

these payments.3

Petitioner did not file a Federal income tax return for

2006, and she did not make estimated tax payments.4 Respondent

prepared a substitute for return on petitioner’s behalf for 2006

using information reported by third-party payers. See sec.

6020(b)(1). On the basis of that substitute for return,

respondent issued to petitioner a notice of deficiency dated

January 4, 2010. Attached to the notice of deficiency was Form

4549, Income Tax Examination Changes, on which respondent

calculated petitioner’s 2006 Federal taxable income as follows:

3
We found petitioner’s testimony at trial regarding these
payments to be evasive. She attempted to avoid answering basic
questions on whether she had received that income or stated that
she did not know whether she had received that income.
4
Petitioner submitted a “Tax Statement” for 2006 which did
not comply with the requirements of sec. 6011(a). See sec.
1.6011-1(b), Income Tax Regs.
 - 4 -

Adjustment to Income Amount

Nonemployee compensation $92,500
Taxable distributions from pensions 9,166
Prior year State refund 1,912
Dividend income 1,312
Interest income 31
SE AGI adjustment (6,535)
Standard deduction (5,150)
Exemptions (3,300)
Corrected taxable income1 89,936
1
Respondent used a filing status of “single”.

In response to the notice of deficiency, petitioner

petitioned the Court on April 2, 2010. A trial was held on

January 11, 2011.

OPINION

I. Validity of the Notice of Deficiency and Substitute for
Return

Absent a stipulation to the contrary, an appeal in this case

would lie in the U.S. Court of Appeals for the Eighth Circuit.

See sec. 7482(b)(1)(A). At trial and on brief petitioner

advances a hodgepodge of frivolous and groundless claims that

both this Court and the Eighth Circuit have consistently

rejected. See, e.g., United States v. Gerads, 999 F.2d 1255,

1256 (8th Cir. 1993); Newman v. Schiff, 778 F.2d 460, 467 (8th

Cir. 1985); Michael v. Commissioner, T.C. Memo. 2003-26. First,

petitioner argues that the notice of deficiency upon which this

case is based is invalid because it was based on a substitute for

return which petitioner did not authorize to be filed. According

to petitioner, respondent was precluded from preparing a
 - 5 -

substitute for return on her behalf and therefore was unable to

make a valid assessment of Federal income tax against her because

she did not file a 2006 Form 1040, U.S. Individual Income Tax

Return. We reject petitioner’s allegation that the notice of

deficiency is invalid because it was based on a substitute for

return. 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). That respondent issued the notice of

deficiency on the basis of the substitute for return does not, in

and of itself, invalidate the notice of deficiency. Petitioner

has not offered any credible evidence which would require that we

otherwise invalidate the notice of deficiency.5

Second, petitioner argues that the notice of deficiency is

invalid because the substitute for return respondent prepared

does not comply with the Paperwork Reduction Act of 1980 (PRA),

Pub. L. 96-511, 94 Stat. 2812. Similar arguments concerning the

5
At trial, petitioner attempted to introduce numerous
documents into evidence which we declined to admit because we
found that they were irrelevant, inadmissible hearsay, unable to
be authenticated, or some combination thereof. Petitioner also
objected on the grounds of hearsay to evidence respondent
submitted. We considered all of petitioner’s objections and
overruled those objections because we found respondent’s
proffered evidence to be relevant and properly authenticated.
See Fed. R. Evid. 803(6), (8), 902(1), (11).
 - 6 -

duty to file a tax return and the PRA have been consistently

recognized as frivolous. See, e.g., Pitts v. Commissioner, T.C.

Memo. 2010-101; Wolcott v. Commissioner, T.C. Memo. 2007-315;

Dodge v. Commissioner, T.C. Memo. 2007-236, affd. 317 Fed. Appx.

581 (8th Cir. 2009). We thus reject petitioner’s argument that

the PRA invalidates her notice of deficiency.

Third, petitioner argues that she is not liable for Federal

income tax because the tax laws are incomprehensible to her.

While we recognize that the tax laws are complex, we have

consistently held that complexity alone does not relieve a

taxpayer of his or her duty to file a Federal income tax return

and pay any tax determined on that return to be due and owing.

See, e.g., Cook v. Commissioner, T.C. Memo. 2010-137. Petitioner

filed a Federal income tax return for 2005, which suggests to us

that she was aware of her filing obligation for 2006. Moreover,

she earned significant income in 2006, and we believe that she

possesses the resources to seek out the advice of a professional

tax adviser to aid in her comprehension of the tax laws.

Petitioner made no apparent effort to determine her tax liability

for 2006, and she cannot now claim harbor from her liability

under the pretense that the tax laws are too complex.

Petitioner’s remaining arguments are unintelligible shopworn

tax-protester rhetoric which we have considered and now reject as

baseless. We do not devote any more time to these arguments
 - 7 -

because to do so might suggest that they have merit. Accord

Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984).

II. Unreported Income

As a general rule, the Commissioner’s determinations in a

notice of deficiency are presumed correct, and the taxpayer bears

the burden of proving these determinations erroneous in order to

prevail. See Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,

115 (1933); Jones v. Commissioner, T.C. Memo. 1994-230, affd. 68

F.3d 430 (4th Cir. 1995). As relevant here, two statutory

provisions modify the general rule. First, section 6201(d)

provides that if a taxpayer asserts a reasonable dispute with

regard to income reported on an information return and has fully

cooperated with the Commissioner, then the Commissioner must

supplement the information return with additional reasonable and

probative information. Second, section 7491(a) provides that the

burden of proof as to factual matters may shift to the

Commissioner under certain circumstances. Petitioner has not

alleged that sections 6201(d) or 7491(a) apply to this case. Nor

do we find that she has fully cooperated with respondent, see

sec. 6201(d), or established her compliance with the

substantiation and recordkeeping requirements of the Code, see

sec. 7491(a)(2)(A) and (B). Accordingly, petitioner bears the

burden of proof.
 - 8 -

Gross income includes all income from whatever source

derived, unless otherwise specifically excluded. Sec. 61(a).

The definition of gross income broadly includes any instance of

undeniable accessions to wealth, clearly realized, and over which

the taxpayer has complete dominion and control. Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 431 (1955). Specifically

included in gross income are compensation for services, interest,

dividends, and distributions from an IRA. See secs. 61(a)(1),

(4), (7), 72(a); see also sec. 402(a). State income tax refunds

are also includable in gross income under the “tax benefit rule”.

See Francisco v. Commissioner, 119 T.C. 317, 333-334 (2002),

affd. 370 F.3d 1228 (D.C. Cir. 2004).

On the basis of third-party information, respondent

determined that in 2006 petitioner received $92,500 in

compensation for services, $31 in interest, $15 in dividends,

$9,166 in taxable distributions from an IRA, and an income tax

refund of $1,912 from the State of Arkansas. Respondent

introduced these information returns at trial and prepared the

substitute for return on the basis of those returns. Petitioner

has not produced any credible evidence to dispute the receipt of

any of the income she received in 2006. Therefore, we sustain

respondent’s determination that petitioner had $104,921 in

unreported income in 2006.
 - 9 -

III. 10-Percent Additional Tax for IRA Distribution

Section 72(t)(1) imposes a 10-percent additional tax on the

amount of any early distribution from a qualified retirement plan

unless that distribution satisfies any of the exceptions

enumerated in section 72(t)(2)(A). An IRA is a qualified

retirement plan to which section 72(t)(1) applies. See secs.

408(a), 4974(c)(4). Respondent introduced evidence at trial from

third-party payers which established that petitioner received

gross distributions of $183,007 from an IRA and that $9,166 of

that amount was taxable to her. Petitioner has not asserted any

reasonable dispute with regard to her receipt of the early

distribution from the IRA. See sec. 6201(d). Nor has she

established her entitlement to any of the section 72(t)(2)(A)

exceptions. See Bunney v. Commissioner, 114 T.C. 259, 265-266

(2000). Accordingly, we hold that petitioner is liable for the

section 72(t)(1) 10-percent additional tax on the distribution

she received from the IRA.

IV. Self-Employment Tax

Respondent determined that the nonemployee compensation

petitioner earned from Key Apparel and Star was subject to self-

employment tax and that she was entitled to a deduction for one-

half of the self-employment tax to be paid. Section 1401 imposes

a tax on the self-employment income of every individual. See

sec. 1401(a) and (b); Schelble v. Commissioner, 130 F.3d 1388,
 - 10 -

1391 (10th Cir. 1997), affg. T.C. Memo. 1996-269. Self-

employment income includes the net earnings from self-employment

derived by an individual during the taxable year. Sec. 1402(b).

The term “net earnings from self-employment” means the gross

income derived by an individual from the carrying on of any trade

or business, reduced by the deductions attributable to that trade

or business. Sec. 1402(a); sec. 1.1402(a)-1, Income Tax Regs.

Section 164(f) allows a taxpayer to deduct one-half of the self-

employment tax imposed by section 1401.

Petitioner received $92,500 in nonemployee compensation in

her capacity as a consultant for Key Apparel and Star.

Respondent determined the amount of that income from information

returns provided by Key Apparel and Star and calculated the

amount of self-employment tax and corresponding deduction using

Schedule SE, Self-Employment Tax. We agree with respondent’s

determination that petitioner is liable for self-employment tax

on the nonemployee compensation she earned. Accordingly, we hold

that amounts Key Apparel and Star paid to petitioner as

nonemployee compensation are self-employment income subject to

$13,070 of tax as respondent calculated under section 1401. We

also hold that petitioner may deduct $6,535 under section 164(f).

V. Section 6651(a)(1) Addition to Tax

Section 6651(a)(1) imposes an addition to tax for failure to

file a required return by its extended due date, unless the
 - 11 -

taxpayer demonstrates that the failure to file was due to

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

tax equals 5 percent for each month that the return is late, but

may not exceed 25 percent in total. Sec. 6651(a)(1). The

Commissioner bears the burden of production with respect to a

taxpayer’s liability for an addition to tax under section

6651(a)(1). See sec. 7491(c); Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001). Petitioner, however, bears the burden of

proving her entitlement to the reasonable cause exception of

section 6651(a)(1). See Higbee v. Commissioner, supra at 447.

To demonstrate the existence of “reasonable cause”, petitioner

must establish that she exercised ordinary business care and

prudence but was still unable to file the 2006 return by the

extended due date. See United States v. Boyle, 469 U.S. 241, 246

(1985); sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful

neglect connotes a taxpayer’s “conscious, intentional failure or

reckless indifference” to timely file a return. United States v.

Boyle, supra at 245.

Petitioner concedes that she never filed a Form 1040 for

2006.6 Respondent has therefore met his burden of production as

6
The “Tax Statement” petitioner filed in 2006 is not a valid
tax return because it consists entirely of zeros and does not
contain sufficient information for the Internal Revenue Service
to calculate her Federal income tax liability. See United States
v. Grabinski, 727 F.2d 681, 687 (8th Cir. 1984); Cabirac v.
Commissioner, 120 T.C. 163, 169 (2003); Holmes v. Commissioner,
(continued...)
 - 12 -

to the section 6651(a)(1) addition to tax. Petitioner has not

offered any credible reason for her failure to file her 2006

return, nor has she produced any evidence to establish the

existence of reasonable cause on her part. To the contrary,

petitioner’s frivolous tax-protester rhetoric leads us to

conclude that her failure to file her 2006 return was in fact

conscious, intentional, and recklessly indifferent. Therefore,

we hold petitioner liable for an addition to tax under section

6651(a)(1).

VI. Section 6651(a)(2) Addition to Tax

Section 6651(a)(2) generally imposes an addition to tax for

a failure to timely pay the amount of tax shown as due on a

Federal income tax return. Although petitioner did not file a

valid 2006 Federal income tax return, respondent prepared a

substitute for return on her behalf under section 6020(b). It is

well settled that a substitute for return is treated as a return

filed by the taxpayer for purposes of section 6651(a)(2). See

sec. 6651(g)(2); see also Wheeler v. Commissioner, 127 T.C. 200,

208-209 (2006), affd. 521 F.3d 1289 (10th Cir. 2008); Oman v.

Commissioner, T.C. Memo. 2010-276.

At trial respondent introduced a copy of the substitute for

return which was prepared on behalf of petitioner and certified

6
(...continued)
T.C. Memo. 2011-31.
 - 13 -

that the substitute for return was valid under section 6020(b).

Respondent also included a copy of the Form 4549 on which

petitioner’s income tax liability was based and account

transcripts which proved that petitioner had no withholdings or

estimated tax payments against her 2006 tax liability.

Accordingly, we find that respondent produced sufficient evidence

that petitioner is liable for an addition to tax under section

6651(a)(2).

Petitioner does not allege that her failure to pay was due

to reasonable cause and not willful neglect. See sec.

6651(a)(2). Nor did she establish that she exercised ordinary

business care or that she would have suffered undue hardship if

made to pay her tax liability. See sec. 301.6651-1(c)(1),

Proced. & Admin. Regs. To the contrary, petitioner appears to

have been reckless in her decision not to pay her 2006 taxes even

though she earned more than $100,000 that year. Therefore, we

hold that petitioner is liable for an addition to tax under

section 6651(a)(2).

VII. Section 6654 Addition to Tax

Section 6654(a) imposes an addition to tax on an individual

who underpays his or her estimated tax. That addition to tax is

calculated with reference to four required installment payments

of the taxpayer’s estimated tax liability. Sec. 6654(c)(1);

Wheeler v. Commissioner, supra at 210. Each required installment
 - 14 -

of estimated tax must equal 25 percent of the “required annual

payment” to avoid an addition to tax under section 6654. Sec.

6654(d)(1)(A). As relevant here, the required annual payment is

equal to the lesser of (i) 90 percent of the tax shown on the

taxpayer’s return for that year (or, if no return is filed, 90

percent of the tax due for such year), or (ii) 100 percent of the

tax shown on the taxpayer’s return for the preceding taxable

year. Sec. 6654(d)(1)(B). Respondent bears the burden of

proving that imposition of the section 6654 addition to tax is

appropriate.

At trial respondent introduced evidence which proved that

petitioner was required to file a Federal income tax return for

2006, that she did not file a 2006 return, and that she did not

make any estimated tax payments or have income tax withheld for

2006. That evidence included a copy of petitioner’s 2005 Federal

income tax return which showed total tax due of $330. The

substitute for return which respondent prepared on behalf of

petitioner for 2006 showed total tax due of $33,498. Ninety

percent of petitioner’s 2006 tax liability is $30,148. Thus,

petitioner’s required annual payment for 2006 was $330; i.e., the

lesser of 90 percent of her 2006 tax liability and 100 percent of

her 2005 tax liability. Petitioner does not assert, and we do

not find, that any of the statutory exceptions in section 6654(e)

apply to eliminate petitioner’s liability for an addition to tax
 - 15 -

under section 6654(a). Accordingly, we hold that petitioner is

liable for an addition to tax under section 6654 for 2006 based

on a required annual payment of $330.7

VIII. Section 6673 Sanction Awarded by the Court

We now consider sua sponte whether to impose a penalty

against petitioner pursuant to section 6673(a)(1). That section

allows the Court to impose upon a taxpayer a penalty of up to

$25,000 whenever it appears that the taxpayer instituted or

maintained a proceeding primarily for delay or that the

taxpayer’s position is frivolous or groundless. See Pierson v.

Commissioner, 115 T.C. 576, 581 (2000).

The record is clear that petitioner’s positions in this

proceeding are frivolous and groundless. Petitioner was warned

at trial that she could be sanctioned under section 6673 for

asserting frivolous and groundless claims. Petitioner ignored

those warnings by maintaining similar frivolous arguments on

brief. We therefore believe that sanctions are appropriate.

See, e.g., Randall v. Commissioner, T.C. Memo. 2008-138; Avery v.

Commissioner, T.C. Memo. 2007-60, affd. 399 Fed. Appx. 195 (9th

Cir. 2010). Pursuant to section 6673(a)(1), we impose against

petitioner a penalty of $3,000.

7
The amount of the sec. 6654 addition to tax is to be
determined by the parties in their Rule 155 calculations. See
Arnold v. Commissioner, T.C. Memo. 2008-228.
 - 16 -

We have considered all arguments raised by petitioner, and

to the extent not discussed herein we conclude that they are

irrelevant, moot, or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.