Mottahedeh v. Comm'r ( 2014 )

T.C. Memo. 2014-258
UNITED STATES TAX COURT
PEYMON MOTTAHEDEH AND APRIL MOTTAHEDEH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22039-11. Filed December 29, 2014.
Peymon Mottahedeh and April Mottahedeh, for themselves.
Miles D. Friedman and Sebastian Voth, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MORRISON, Judge: The petitioners, Peymon Mottahedeh and April
Mottahedeh, a married couple, did not file federal-income-tax returns for the years
2001 through 2006. The respondent (the “IRS”) mailed a separate notice of
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[*2] deficiency to each spouse for these years.1 The notices of deficiency reflected
the following deficiency determinations and additions to tax:2
Additions to tax
Year Petitioner Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
Peymon Mottahedeh $8,203 $1,846 $2,051 $328
2001
April Mottahedeh 4,634 1,043 1,159 185
Peymon Mottahedeh 11,316 2,546 2,829 378
2002
April Mottahedeh 3,331 749 833 111
Peymon Mottahedeh 12,811 2,882 3,203 331
2003
April Mottahedeh 3,704 833 926 -0-
Peymon Mottahedeh 12,215 2,748 3,054 350
2004
April Mottahedeh 3,471 781 868 -0-
Peymon Mottahedeh 10,102 2,273 2,526 405
2005
April Mottahedeh 2,669 601 668 107
Peymon Mottahedeh 15,560 3,501 3,890 736
2006
April Mottahedeh 4,901 1,103 1,225 232
After concessions by the parties,3 the following issues remain to be decided:
1
The notice to April Mottahedeh was issued to “April L. Beatty”, her former
name.
2
All dollar amounts are rounded to the nearest dollar. Unless otherwise
noted, all references to sections are to the Internal Revenue Code in effect for the
years at issue, 2001 through 2006 and all Rule References are to the Tax Court
Rules of Practice and Procedure.
3
The Mottahedehs conceded that April Mottahedeh received wage income
(continued...)
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[*3] (1) Whether the IRS correctly determined that the Mottahedehs earned the
following amounts of income in the aggregate:4
Year Amount
2001 $44,757
2002 61,536
2003 69,653
2004 66,924
2005 56,850
2006 83,629
We hold that the determinations are correct. See infra part 1.
3
(...continued)
of $11,469 during 2001. The IRS conceded that the Mottahedehs are not liable for
additions to tax under sec. 6654 for the tax year 2001.
4
For 2001, the IRS determined that the Mottahedehs’ spending for the year
was $44,757, the number appearing in the table for 2001. The IRS also
determined that the Mottahedehs were required to include this amount in income
for 2001. In addition to this amount, the IRS determined that April Mottahedeh
earned $11,469 in wages for 2001. The Mottahedehs concede that she earned this
amount of wages. The Mottahedehs challenge the IRS’s determination that they
earned $44,757 in income for 2001 on various grounds, but they do not argue that
the IRS erred by combining the $44,757 amount it determined the Mottahedehs
earned on the basis of their spending and the $11,469 that April Mottahedeh
earned in wages, for a total income amount of $56,225. Therefore, it is
appropriate to define the disputed issue for 2001 as whether the IRS correctly
determined that the Mottahedehs were required to include $44,757 in income. For
further explanation, see infra notes 12 and 14.
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[*4] (2) Whether under California community-property law the income is Peymon
Mottahedeh’s sole property or community property. We hold that it is
community property. See infra part 2.
(3) Whether the Mottahedehs are liable for section-6651(a)(1) additions to tax
for failing to file tax returns for the tax years 2001, 2002, 2003, 2004, 2005,
and 2006. We hold that they are liable. See infra part 3.a.
(4) Whether the Mottahedehs are liable for section-6651(a)(2) additions to tax
for failing to pay tax for the tax years 2001, 2002, 2003, 2004, 2005, and
2006. We hold that they are liable. See infra part 3.b.
(5) Whether Peymon Mottahedeh is liable for section-6654 additions to tax for
failing to pay estimated income tax for the tax years 2002, 2003, 2004,
2005, 2006, and whether April Mottahedeh is liable for 2002, 2005, and
2006. We hold that they are liable. See infra part 3.c.
FINDINGS OF FACT
The stipulation of facts, as supplemented, is incorporated herein by this
reference.
At the time they filed their petition, the Mottahedehs resided in California.
Therefore, an appeal of our decision in this case would go to the U.S. Court of
Appeals for the Ninth Circuit unless the parties stipulate venue in another circuit.
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[*5] See sec. 7482(b)(1), (A), (2). In resolving this case, we follow the precedent
of the Ninth Circuit. See Golsen v. Commissioner, 54 T.C. 742, 756-758 (1970),
aff’d, 445 F.2d 985 (10th Cir. 1971).
The Mottahedehs were married during the years 2001 through 2006.
Peymon Mottahedeh operated a business called the “Freedom Law School”.
April Mottahedeh was heavily involved in the business. Since at least 1999, the
Freedom Law School has organized conferences attended by hundreds of people.
The Freedom Law School charged fees to the attendees. The Freedom Law
School also sold books, tapes, CDs, and DVDs. It also sold packages of services,
including:
• the “Simple Freedom Package” (for an initial fee of $4,000);
• the “Royal Freedom Package” (for an initial fee of $6,000).
The Freedom Law School also offered multilevel marketing arrangements,5
including:
• “Freedom Fighter in Training”;
• “Freedom Promoter”;
5
In a multilevel marketing arrangement, a salesperson earns a commission
on sales made by other salespersons who were recruited by the salesperson. See
Elliott v. Commissioner, 90 T.C. 960 (1988), aff’d without published opinion, 899
F.2d 18 (9th Cir. 1990), for a general discussion of multilevel marketing.
-6-
[*6] • “Freedom Leader”; and
• “Master Freedom Leader”.
Through its conferences, materials, and service packages, the Freedom Law
School promoted various techniques for evading the payment of federal income
taxes. The techniques included:
• Minimize financial records.6
• Do not give information to the IRS.7
• Do not file tax returns.8
6
According to the Freedom Law School: “ALL records can and will be used
against you.”
7
According to the Freedom Law School, a taxpayer receiving an IRS
summons should give the IRS no information other than the taxpayer’s name and
address. According to the Freedom Law School:
If the aware citizen did not hang himself by confessing to earnings
from employers or other third parties, the IRS agents would actually
have to work and conduct a full investigation in order to find
witnesses who could testify that he had actually worked or performed
services for the third party payers. Additionally, the IRS would have
to bring to court the original of ALL the cancelled checks that would
back up the IRS’ claims against you. Do you think this is easy for the
IRS to do?
8
According to the Freedom Law School:
Why are filers so EASY to RAPE and ABUSE by the IRS? Because
these misinformed people, by VOLUNTARILY filling out a 1040
(continued...)
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[*7] The Mottahedehs collected the fees paid by the Freedom Law School’s
customers. Peymon Mottahedeh also represented taxpayers before the California
Franchise Tax Board for a fee.
The Mottahedehs applied the tax-evasion techniques advocated by the
Freedom Law School to their own financial affairs (including the operation of the
Freedom Law School and Peymon Mottahedeh’s representation of taxpayers
before the California Franchise Tax Board). They encouraged their customers to
pay them in cash. They tried to avoid banks and other financial institutions. They
did not generally keep financial records. They masked their ownership of two
properties from the IRS through sham trust arrangements.9 They did not file
federal-income-tax returns for the tax years 2001 through 2006.
In January 2008, the IRS began an audit of the Mottahedehs’ federal-
income-tax liabilities for the years 2001 through 2006.10 The IRS revenue agent
8
(...continued)
Income Tax Confession form had given the IRS the full laundry list
of everything they own, so that the IRS knows WHERE to go to steal
their victim’s wealth and assets.
9
The two properties are a house in Phelan, California, in which the
Mottahedehs live and a property in Victorville, California.
10
Before the audit for these years, the IRS had other interactions with
Peymon Mottahedeh. It had attempted to collect delinquent taxes for prior tax
(continued...)
-8-
[*8] assigned to the audit wrote a letter to the Mottahedehs inviting them to meet
with her on March 21, 2008, at an IRS office in San Bernardino.11 The
Mottahedehs did not appear at the March 21, 2008 meeting.
On March 28, 2008, the revenue agent served each of the Mottahedehs with
a summons requesting that they bring information about the so-called Simple
Freedom Package and the so-called Royal Freedom Package (including the names
of anyone who had bought these service packages) to her office in Long Beach,
California, at 9 a.m., Monday, April 28, 2008. On Friday, April 25, 2008, Peymon
Mottahedeh left voicemail messages with the revenue agent asking for her fax
number so that he could fax her a letter about the summonses. A day later, on
Saturday, April 26, 2008, he mailed a letter about the summonses to the revenue
agent by express mail. In the letter the Mottahedehs stated that they would comply
with the summonses only if the revenue agent answered 36 questions set forth in
the letter. In the letter the Mottahedehs also stated that the Long Beach office was
too far from their house in Phelan, at least 1-1/2 half hours away. They suggested
10
(...continued)
years. It had investigated him for promoting abusive tax shelters and for criminal
tax violations.
11
San Bernardino is between the IRS agent’s office in Long Beach and the
Mottahedehs’ house in Phelan.
-9-
[*9] they meet instead in a “library meeting room” in either San Bernardino,
Ontario, or Riverside.
The Mottahedehs did not appear at the meeting scheduled for 9 a.m., April
28, 2008. At 9:22 a.m. that day, the revenue agent sent an email to some other IRS
employees stating that she had listened to Peymon Mottahedeh’s April 25, 2008
voicemails in which he had requested her fax number in order to send her a letter
about the summonses. In her email the revenue agent complained that she did not
want to call Peymon Mottahedeh because he might be playing “another game”.
Nonetheless, the revenue agent called Peymon Mottahedeh on April 28. Unable to
reach him, she left him a voicemail message with her telephone number. He did
not return her call. Later on the same day, the revenue agent received the letter
about the summonses that Peymon Mottahedeh had mailed on April 26, 2008.
On June 20, 2008, the revenue agent sent a written request to Peymon
Mottahedeh for the records of his business activities for the years 2001 through
2006. She requested that he mail the records to her by July 7, 2008. Peymon
Mottahedeh did not mail her the requested records.
Besides seeking information from the Mottahedehs, the revenue agent also
sought information from various parties with whom the Mottahedehs did business.
However, she was unable to get enough information to directly determine the
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[*10] amounts of the Mottahedehs’ income. Consequently, she determined their
income by assuming that their annual income was equal to their annual spending.
To estimate some categories of the Mottahedehs’ spending, the agent relied on
average spending statistics from the Bureau of Labor Statistics. For other
categories of spending (categories for which she had specific information), she
estimated directly how much the Mottahedehs spent. Using this combined
approach, the agent made the following estimates of the couple’s spending:
$44,757 for 2001, $61,536 for 2002, $69,653 for 2003, $66,924 for 2004, $56,850
for 2005, and $83,629 for 2006. For income-tax purposes, the revenue agent
assumed that each spouse earned half of each of these annual spending estimates.12
12
For 2001, however, there is a deviation that is best explained after
explaining the other five years, 2002 through 2006. For 2002, the revenue agent
assumed that Peymon Mottahedeh had $30,768 in gross income and that April
Mottahedeh also had $30,768. For 2003, the revenue agent assumed that Peymon
Mottahedeh had $34,826 in gross income and that April Mottahedeh also had
$34,826. For 2004, the revenue agent assumed that Peymon Mottahedeh had
$33,462 in gross income and that April Mottahedeh also had $33,462. For 2005,
the revenue agent assumed that Peymon Mottahedeh had $28,425 in gross income
and that April Mottahedeh also had $28,425. For 2006, the revenue agent
assumed that Peymon Mottahedeh had $41,814 in gross income and that April
Mottahedeh also had $41,814. Thus for each year from 2002 through 2006, the
revenue agent assumed that each spouse earned half of the aggregate spending
estimate. For 2001, however, the revenue agent assumed that April Mottahedeh
earned $11,469 in wages plus $22,378 (half of the aggregate spending estimate), a
total gross income for her of $33,847. The revenue agent assumed Peymon
Mottahedeh earned $22,378 in gross income (half of the aggregate spending
(continued...)
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[*11] For self-employment-tax purposes, the revenue agent assumed that Peymon
Mottahedeh alone earned self-employment income equal to the amount the
revenue agent estimated the couple spent for each year. Using the above-
described determinations, estimates, and assumptions to calculate each spouse’s
tax liability, the IRS prepared a substitute for return for each spouse for each of
the six years. The notice of deficiency sent to each spouse reflected the same tax
calculations used in preparing the substitutes for returns.
OPINION
1. The IRS correctly determined that the Mottahedehs earned in the aggregate
$44,757 for 2001, $61,536 for 2002, $69,653 for 2003, $66,924 for 2004,
$56,850 for 2005, and $83,629 for 2006.
Section 1 imposes an income tax on annual taxable income. Taxable
income is defined as gross income minus deductions. Sec. 63(a). Gross income
includes income from any source, including compensation for services. Sec.
61(a)(1).
The income tax liability of a married couple who file a joint return is
calculated by aggregating the spouses’ income. Sec. 6013(d)(3). The resulting tax
liability is jointly borne by the couple. Id. But for a married couple who, like the
12
(...continued)
amount).
-12-
[*12] Mottahedehs, do not file a joint return, a separate income tax is imposed on
each spouse’s income. Sec. 1(d); see also Ordlock v. Commissioner, 533 F.3d
1136, 1138 (9th Cir. 2008), aff’g 126 T.C. 47 (2006). Thus, the income tax
imposed on the income of each of the Mottahedehs is calculated by determining
the income of each spouse. As a preliminary step the IRS first determined
amounts of income that the Mottahedehs earned in the aggregate. We consider the
correctness of this determination in this part 1 of the opinion. See infra part 2 for
the discussion of the question of how these amounts should be allocated to each
spouse.
In the notices of deficiency, the IRS determined that the Mottahedehs
earned the following amounts of income in the aggregate: $44,757 for 2001,
$61,536 for 2002, $69,653 for 2003, $66,924 for 2004, $56,850 for 2005, and
$83,629 for 2006.
These amounts were unreported, as neither of the Mottahedehs filed income
tax returns for the years 2001 through 2006. In Weimerskirch v. Commissioner,
596 F.2d 358, 360-362 (9th Cir. 1979), rev’g 67 T.C. 672 (1977), the Court of
Appeals for the Ninth Circuit held that for the IRS to prevail in a case involving
unreported income, it must build a minimal evidentiary foundation that links the
taxpayer to the alleged income-producing activities. We find that sufficient
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[*13] evidence links Peymon Mottahedeh to the income-producing activities of (1)
the Freedom Law School, and (2) practice before the California Franchise Tax
Board. We first consider the Freedom Law School. The Mottahedehs stipulated
that “Peymon Mottahedeh is the president and founder of Freedom Law School”
and that “Peymon Mottahedeh was the president of Freedom Law School
continuously during the years at issue.” Furthermore, documentary evidence
connects Peymon Mottahedeh to the Freedom Law School. For example, Peymon
Mottahedeh’s name was mentioned in customer testimonials on the Freedom Law
School’s website. His name and picture were prominently displayed in other
promotional materials of the Freedom Law School. Documentary evidence also
establishes that April Mottahedeh helped operate the Freedom Law School by
arranging conferences and handling its finances. Her name appears on several
checks and money orders received from customers of the Freedom Law School.
Checks and money orders from the customers were deposited into her account at
Arrowhead Credit Union. There are several hundred pages of these documents.
April Mottahedeh’s name appears on various legal documents that the
Mottahedehs used to conceal their ownership of two properties. To better conceal
their ownership, she also apparently wrote letters to lenders under a fake letterhead
falsely claiming that she managed property as a trustee. As to Peymon
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[*14] Mottahedeh’s involvement in practice before the California Franchise Tax
Board, the record contains copies of official announcements of the hearings
involving the board in which he was listed as the representative of several
taxpayers. One of his customers testified that during the years 2003 through 2009
he paid a total of $22,000 to Peymon Mottahedeh to represent him before the
California Franchise Tax Board. The payments were made in cash at Peymon
Mottahedeh’s request. Additionally, April Mottahedeh participated in Peymon
Mottahedeh’s practice before the California Franchise Tax Board. She helped
operate the Freedom Law School, and the record demonstrates that his practice
before the California Franchise Tax Board was linked to the Freedom Law School.
For example, the website for the Freedom Law School offered assistance to
persons involved with disputes with the state taxing authorities such as the
California Franchise Tax Board.
We conclude that the IRS has established the minimal evidentiary
foundation required by Weimerskirch v. Commissioner, 596 F.2d at 360-362. The
IRS has linked both Peymon Mottahedeh and April Mottahedeh to the income-
producing activities of Freedom Law School and the practice before the California
Franchise Tax Board. Technically, it is sufficient for the IRS to prove a link to
Peymon Mottahedeh alone. See Costa v. Commissioner, T.C. Memo. 1990-572,
-15-
[*15] 60 T.C.M. 1178, 1186-1187 (1990). This is because the income
from these activities is community property. See infra part 2.
Next we consider whether the IRS’s determinations are supported by the
preponderance of the evidence.13 The factual question to be resolved for 2001 is
13
A taxpayer generally has the burden of proof regarding determinations in
the notice of deficiency. Tax Ct. R. Pract. & Proc. 142(a); Rockwell v.
Commissioner, 512 F.2d 882, 885 (9th Cir. 1975), aff’g T.C. Memo. 1972-133.
The burden of proof is the burden of persuasion, which requires the taxpayer to
“show the merits of * * * [the] claim by at least a preponderance of the evidence.”
Rockwell v. Commissioner, 512 F.2d at 885; see also Hardy v. Commissioner, 181
F.3d 1002, 1004 (9th Cir. 1999), aff’g T.C. Memo. 1997-97; Rapp v.
Commissioner, 774 F.2d 932, 935 (9th Cir. 1985). Sec. 7491(a) provides an
exception to the general rule that the taxpayer bears the burden of proof. Sec.
7491(a) imposes the burden of proof on the IRS for factual issues for which four
conditions have been met: (1) the taxpayer complied with the substantiation
requirements of the Internal Revenue Code, (2) the taxpayer maintained all records
required under the Internal Revenue Code, (3) the taxpayer cooperated with
reasonable requests by the IRS for witnesses, information, documents, meetings,
and interviews, and (4) the taxpayer introduced credible evidence. Sec. 7491(b)
provides another exception to the general rule that the taxpayer bears the burden of
proof: “In the case of an individual taxpayer, the Secretary shall have the burden
of proof in any court proceeding with respect to any item of income which was
reconstructed by the Secretary solely through the use of statistical information on
unrelated taxpayers.” The term “Secretary” means “the Secretary of the Treasury
or his delegate”, sec. 7701(a)(11)(B), and the term “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). The Mottahedehs contend that sec. 7491(a) and (b) imposes
the burden of proof on the IRS. We resolve all factual issues in this case based on
a preponderance of evidence. Therefore, we need not consider whether the IRS
has the burden of proof. See Estate of Bongard v. Commissioner, 124 T.C. 95,
(continued...)
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[*16] this: Did the Mottahedehs earn $44,757 of income?14 For each of the
13
(...continued)
111 (2005).
14
Both parties assume that $44,757 is the relevant amount for 2001. Thus,
the IRS’s opening brief contains this statement: “RA Thai correctly determined
that petitioners had $44,757.00 of income during 2001 based on respondent’s BLS
analysis, as modified by petitioners’ actual expenses and records.” The
Mottahedehs’ response is that this statement and similar statements about other
years “are all wrong since they all erroneously claim that THAI used BLS numbers
to assess taxes against PETITIONERS.”
The Court observes that for 2001 the notice of deficiency determined that
the Mottahedehs earned the following amounts of income:
Taxpayer Explanation Amount
April Mottahedeh Wage income $11,469
April Mottahedeh April Mottahedeh’s one-half share 22,378
of $44,757 (the IRS’s estimate of
the Mottahedehs’ spending for
2001)
Peymon Mottahedeh Peymon Mottahedeh’s one-half 22,378
share of $44,757 (the IRS’s
estimate of the Mottahedehs’
spending for 2001)
Total 56,225
Therefore, it appears that (1) $44,757 was the IRS’s determination of the
Mottahedehs’ nonwage income and (2) $56,225 was IRS’s determination of the
Mottahedehs’ wage and nonwage income. The Mottahedehs might have argued
that the question to be resolved should be instead: Did the Mottahedehs earn
$56,225 of income? Our answer to that question would be--yes. In our view the
preponderance of the evidence supports the proposition that the Mottahedehs’
aggregate income for the year is at least $56,225. Our view is informed by the
(continued...)
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[*17] other years, 2002 through 2006, we must resolve similar questions with
different income thresholds: $61,536 for 2002, $69,653 for 2003, $66,924 for
2004, $56,850 for 2005, and $83,629 for 2006. We find that the answers are yes
for all of the years 2001 through 2006. Our findings are supported by three types
of evidence. First, there is direct evidence that the Mottahedehs received
payments of income in specific amounts. For example, there are copies of checks
and money orders from customers of the Freedom Law School that were deposited
into April Mottahedeh’s credit-union account. And one of Peymon Mottahedeh’s
customers testified that he paid Peymon Mottahedeh $22,000 in cash for
representing him before the California Franchise Tax Board. Second, the record
suggests that the specific amounts of income are but a fraction of the total income
earned by the Mottahedehs. The Mottahedehs tried to avoid banks and records.
Much of their income was therefore hidden from the IRS--and from the Court.
14
(...continued)
considerations outlined in the text, i.e., (1) direct evidence shows that the
Mottahedehs received some payments of income, (2) these proven payments are
but a small fraction of their actual income (because the Mottahedehs hid their
income), and (3) the Mottahedehs must have paid their living expenses from some
source. In any event, the Mottahedehs do not argue that the correct figure for the
Court to review is $56,225, not $44,757. We are therefore not required to
consider the effects of this methodological aspect of the notice of deficiency.
-18-
[*18] Third, the Mottahedehs had personal living expenses that must have been
paid from some source.
The Mottahedehs counter that in reconstructing their income the revenue
agent should have considered only the income reflected in their bank and credit-
union records. But the Mottahedehs tried to avoid the use of banks. Their bank
records would not provide sufficient information about their income.
Furthermore, even the bank records that the revenue agent obtained were
incomplete. The revenue agent was unable to obtain records of all of the deposits
to the Mottahedehs’ accounts. For these reasons, focusing exclusively on the
income reflected in their bank records would underestimate the Mottahedehs’
income. The revenue agent had to find other methods of estimating their income.15
The revenue agent chose to use average spending statistics supplemented by
estimates of actual spending amounts. The courts have permitted the IRS to rely
on the use of average spending statistics when, as here, the taxpayer fails to
15
The limited bank records led the revenue agent to reject the use of the
bank-deposits method for reconstructing income. Under the bank-deposits
method, a taxpayer’s income for a year is generally calculated by: (1) determining
the total amount of deposits into the taxpayer’s bank account during the year,
Calhoun v. United States, 591 F.2d 1243, 1245 (9th Cir. 1978); and (2) subtracting
deposits that are not taxable, id., such as gifts received, loan proceeds, and
transfers between accounts.
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[*19] cooperate with the IRS. In Palmer v. United States, 116 F.3d 1309, 1312
(9th Cir. 1997), the Court of Appeals for the Ninth Circuit stated:
Courts have long held that the IRS may rationally use statistics
to reconstruct income where taxpayers fail to offer accurate records.
Reasonable methods include the use of cost-of-living statistics for a
particular locale, Wheeling v. Commissioner, * * * [T.C. Memo.
1982-246], or average local income statistics for a particular
profession.” [All other citations omitted.]
In particular, the courts have permitted the use of spending statistics from the
Bureau of Labor Statistics. See Hanel v. Commissioner, 6 Fed. Appx. 452, 453
(7th Cir. 2001) (permitting use of Bureau of Labor Statistics living-expense
statistics with modifications for expense categories for which IRS had
information); Pollard v. Commissioner, 786 F.2d 1063, 1066 (11th Cir. 1984)
(permitting use of regional living-expense statistics from Bureau of Labor
statistics), aff’g T.C. Memo. 1984-536, 48 T.C.M. 1303, 1326 (1984);
Giddio v. Commissioner, 54 T.C. 1530, 1532-1533 (1970) (permitting use of
living-expense statistics from Bureau of Labor Statistics). The Mottahedehs
contend that the spending statistics used by the revenue agent did not actually
come from the Bureau of Labor Statistics but from some other source. The
Mottahedehs note that the revenue agent’s estimates of their annual spending
-20-
[*20] increased 37% from 2001 to 2002.16 They argue that statistics from the
Bureau of Labor Statistics could not have shown that average household spending
increased 37% in one year. Their argument rests on a misconception. The
revenue agent did not rely exclusively on average household spending to estimate
the Mottahedehs’ spending. She also estimated their actual spending on the basis
of information she had collected. The year-to-year changes in the estimates of the
Mottahedehs’ actual spending caused most of the increase in the revenue agent’s
spending estimates from 2001 to 2002. Furthermore, the revenue agent credibly
testified that the Bureau of Labor Statistics was the source of the average-spending
statistics that she relied on. Notations in her workpapers corroborate her
testimony. We conclude that the revenue agent relied partly on average-spending
statistics from the Bureau of Labor Statistics and partly on direct estimates of the
Mottahedehs’ spending, that this combined approach was a permissible method of
estimating the Mottahedehs’ spending under the circumstances, and that
estimating the Mottahedehs’ spending was a permissible method of reconstructing
their income under the circumstances.17
16
The revenue agent determined that the couple’s spending was $44,757 in
2001 and $61,536 in 2002, an increase of 37%.
17
In calculating self-employment tax, see sec. 1401(a) and (b) (imposing
(continued...)
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[*21] 2. Under California community-property law the income is community
property, not Peymon Mottahedeh’s sole property.
After determining that the Mottahedehs earned $44,757 for 2001, $61,536
for 2002, $69,653 for 2003, $66,924 for 2004, $56,850 for 2005, and $83,629 for
2006, the IRS determined that half of each of these amounts was attributable to
Peymon Mottahedeh and half was attributable to April Mottahedeh in computing
17
(...continued)
self-employment tax on the self-employment income of every person); sec.
1402(b) (defining self-employment income as the net earnings from self-
employment derived by a person); sec. 1402(a) (defining net earnings from self-
employment as the gross income derived by a person from any business carried on
by such person minus the deductions attributable to the business), the IRS
determined that for each year Peymon Mottahedeh earned the amount of self-
employment income that it determined was earned by the Mottahedehs in the
aggregate for purposes of their income tax. For the reasons explained in this part,
we sustain these determinations as to the aggregate amounts of self-employment
income. As for the IRS’s determination that for each year the aggregate amount of
self-employment income was earned entirely by Peymon Mottahedeh, the
Mottahedehs do not contest this determination. See sec. 1402(a)(5) (effective
Mar. 2, 2004) (if income derived from a business jointly operated by a married
couple is community property, the gross income and deductions attributable to the
business are treated as the gross income and deductions of each spouse on the
basis of their respective distributive share of the gross income and deductions);
sec. 1402(a)(5) (effective before Mar. 2004) (if income derived from a business is
community property, all of the gross income and deductions attributable to the
business is treated as the gross income and deductions of the husband unless the
wife exercised substantially all of the management and control of the business, in
which case all of the gross income and deductions is treated as the gross income
and deductions of the wife). Therefore, we need not reach the question of whether
the aggregate self-employment income is attributable to Peymon Mottahedeh or
April Mottahedeh.
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[*22] the income tax imposed on each of the Mottahedehs.18 For federal-income-
tax purposes, income that is community property under state law is generally
treated as if half the income was earned by one spouse and half by the other.
United States v. Mitchell, 403 U.S. 190, 196-197 (1971); sec. 1.66-1(a), Income
Tax Regs. (effective July 10, 2003). Under the laws of California, property
acquired by a married person is generally community property. Cal. Fam. Code
sec. 760 (West 2004); see also id. sec. 770 (defining separate property of a married
person); Hanf v. Summers (In re Summers), 332 F.3d 1240, 1242-1243 (9th Cir.
2003) (noting the general presumption that property acquired during the marriage
is marital property and identifying exceptions). However, the married couple can
by agreement have community property treated as separately owned property. Cal.
Fam. Code sec. 850 (West 2004); id. sec. 852(a). The Mottahedehs have
stipulated that they were married during all the years at issue.19 Therefore, all
18
For 2001, the IRS divided the $44,757 between the Mottahedehs (under
community-property principles) but attributed the $11,469 in wages earned by
April Mottahedeh entirely to her. The Mottahedehs contend that none of the
income should be attributed to April Mottahedeh except the $11,469 in wages.
19
The Mottahedehs stipulated: “Petitioners were married during the years at
issue.” The most sensible interpretation of this statement is that the Mottahedehs
were married throughout the entire period January 1, 2001, through December 31,
2006. Otherwise, one would suppose the parties would have stipulated that the
Mottahedehs were married during only part of the years at issue.
(continued...)
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[*23] property acquired by them during the years at issue is community property
unless they have agreed otherwise. In October 2001, the Mottahedehs entered into
an agreement that contained the following provision:
That Mrs. April Love Mottahedeh hereby, voluntarily and without
reservation, conveys to her husband as the personal and separate
property of Mr. Peymon Mottahedeh and thereby divests from herself
any right, interest or claim to, or in, the community property as set
forth herein, effective from the date of this agreement and forward;
and that all interest income, stocks, bonds, dividends, wages, income,
rental income or other earnings, and realty and personal vehicles
which Mr. Peymon Mottahedeh acquired by and through his own
labor and/or initiative, or acquires in the future, is now and forever
hereafter transmuted from the status of community property to the
separate and distinct personal property of Mr. Peymon Mottahedeh,
disposable by Mr. Peymon Mottahedeh, with respect to California
Family Code Section 770, without the consent of and recourse to the
adverse spouse.
19
(...continued)
The trial record suggests that the Mottahedehs were not married until the
middle of the year 2001. The state court judgment that dissolved the marriage
between April Mottahedeh and her previous husband was not filed until June 13,
2001. A community-property agreement between the Mottahedehs, signed in
October 2001, states that the Mottahedehs had “executed vows of matrimony” on
June 24, 2001. If the Mottahedehs were married for only part of 2001, as these
documents suggest, the Mottahedehs might have argued that community-property
principles, i.e., that a spouse owns one half of the other spouse’s earnings, could
not affect Peymon Mottahedeh’s ownership of income he earned during the part of
2001 for which he was unmarried. Therefore, they might have argued, none of his
income for this period could be attributed to April Mottahedeh under community-
property principles. However, they did not make this argument. Furthermore,
they stipulated that they were married during the years at issue. Under the
circumstances, they have waived any such argument.
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[*24] Under the quoted provision, April Mottahedeh disclaimed any community-
property right to income earned by Peymon Mottahedeh through his “own labor
and/or initiative.” But the agreement contained no provision regarding ownership
of income generated by the couple’s joint efforts. And the record establishes that
the couple’s businesses were joint efforts of both spouses. See supra pp. 12-14.
Accordingly, we hold that the income from the couple’s businesses was
community property and sustain the IRS’s determination with regard to this issue.
3. The Mottahedehs are liable for additions to tax.
The IRS has the burden of production with respect to additions to tax. Sec.
7491(c). The IRS satisfies this burden by producing sufficient evidence that it is
appropriate to impose the relevant addition to tax. Higbee v. Commissioner, 116
T.C. 438, 446 (2001). Once the IRS satisfies its burden of production, the
taxpayer has the burden of persuading the Court that he or she is not liable for the
addition to tax or penalty. Id. at 446-447. If the taxpayer wishes to raise an
exception (or defense) to an addition to tax, the taxpayer bears the burden of
producing evidence for the exception and persuading the Court that the exception
applies. See id. at 446 (stating that the IRS “need not introduce evidence
regarding reasonable cause, substantial authority, or similar provisions”).
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[*25] a. Section-6651(a)(1) failure-to-file additions to tax
The IRS determined that the Mottahedehs are liable for section 6651(a)(1)
additions to tax for failing to timely file tax returns for the six tax years from 2001
through 2006. Section 6651(a)(1) imposes an “addition to the tax” for failing to
file a return by the filing deadline (taking account of any extensions), unless the
failure is due to reasonable cause and not due to willful neglect. The late-filing
addition to tax is 5% of the net amount of tax due on the date prescribed for
payment for each month the failure to file continues for up to five months. Sec.
6651(a)(1), (b)(1). Substitutes for returns made by the IRS under section 6020(b)
are disregarded. Sec. 6651(g)(1).
The Mottahedehs stipulated that they did not file returns for the tax years
2001 through 2006. This satisfies the IRS’s burden of producing evidence that the
failure-to-file addition to tax should be imposed for each of the six tax years at
issue. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 447. The IRS’s
burden of producing evidence does not require it to prove that the taxpayer did not
have reasonable cause for failing to file the return. Higbee v. Commissioner, 116
T.C. 446. The Mottahedehs do not argue, nor does the record show, that they
had reasonable cause for failing to file their tax returns. We conclude that the
Mottahedehs are liable for the section-6651(a)(1) failure-to-file additions to tax.
-26-
[*26] b. Section-6651(a)(2) failure-to-pay additions to tax
The IRS determined that the Mottahedehs are liable for section-6651(a)(2)
additions to tax for failing to timely pay tax shown on a return for the tax years
from 2001 through 2006. Section 6651(a)(2) imposes an “addition to tax” for
failure to timely pay the amount of tax shown on a return unless the failure is due
to reasonable cause and not willful neglect. The addition to tax under section
6651(a)(2) is imposed only if an amount of tax is shown on a return, Cabirac v.
Commissioner, 120 T.C. 163, 170 (2003), and the IRS has the burden of
production to show a return was filed. A substitute for return is treated as a return
“for purposes of determining the amount of the addition” under section 6651(a)(2).
Sec. 6651(g)(2). The trial record shows that the IRS prepared substitutes for
returns for the Mottahedehs in compliance with section 6020(b). Cf. Wheeler v.
Commissioner, 127 T.C. 200, 210 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008).
The Mottahedehs do not contend otherwise.20 The IRS has thus carried its burden
of production under section 7491(c) to show that the Mottahedehs are liable for
the addition to tax under section 6651(a)(2). The Mottahedehs have not made any
defense, and they are liable for the additions to tax.
20
Nor do they dispute that they failed to pay the tax shown on the substitutes
for returns.
-27-
[*27] c. Section-6654 failure-to-pay-estimated-tax additions to tax
The IRS determined in its notices of deficiency that the Mottahedehs are
liable for section-6654 additions to tax for failing to pay estimated income tax for
the tax years 2001, 2002, 2003, 2004, 2005, and 2006, except that the IRS did not
determine (nor does it now assert) a section-6654 addition to tax against April
Mottahedeh for the tax years 2003 and 2004. The IRS has since conceded that
neither of the Mottahedehs is liable for the addition for 2001.
Under section 6654, an “addition to tax” is imposed on a taxpayer who does
not make quarterly payments of estimated income tax. Sec. 6654(a), (b)(1), (c).
Each quarterly payment is 25% of the “required annual payment.” Sec.
6654(d)(1). To satisfy its burden of producing evidence that the Mottahedehs are
liable for the section-6654 addition to tax, the IRS must at a minimum establish
that they had a “required annual payment”. See sec. 6654(d)(1)(A); Wheeler v.
Commissioner, 127 T.C. 211-212. The “required annual payment” for a taxable
year is defined in section 6654(d)(1)(B) as--
the lesser of--
(i) 90 percent of the tax shown on the return for the
taxable year (or, if no return is filed, 90 percent of the tax for
such year), or
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[*28] (ii) 100 percent of the tax shown on the return of the
individual for the preceding taxable year.
Clause (ii) shall not apply if * * * the individual did not
file a return for such preceding taxable year.
For each of the taxable years for which the IRS seeks to impose the section-6654
addition to tax (years 2002, 2003, 2004, 2005, and 2006), and for each of
respective taxable years preceding these respective years, the Mottahedehs did not
file a return and the IRS filed a substitute for return. Substitutes for returns have
not been considered to be returns for the purpose of section 6654(d)(1)(B). See
Duma v. Commissioner, T.C. Memo. 2009-304, 98 T.C.M. 661, 665 n.6
(2009); Nino v. Commissioner, T.C. Memo. 2009-293, 98 T.C.M. 621, 624
(2009). The Mottahedehs do not contend that the substitutes for returns should be
considered returns. Therefore, clause (ii) does not apply and the required annual
payment for each of the years for which the IRS seeks to impose the section-6654
addition to tax is 90% of tax for each of the years. The IRS has carried the burden
of production under section 7491(c) with respect to the section-6654 additions to
tax.
There are exceptions, set forth in section 6654(e), under which the taxpayer
is relieved of the section-6654 addition to tax. The Mottahedehs do not contend,
nor does the record show, that any of the exceptions applies. Therefore, Peymon
-29-
[*29] Mottahedeh is liable for the section-6654 additions to tax for 2002, 2003,
2004, 2005, and 2006, and April Mottahedeh is liable for the section-6654
additions to tax for 2002, 2005, and 2006.
4. We reject the Mottahedehs’ other arguments.
The Mottahedehs contend that the IRS audit was unconstitutional because it
was motivated by their public criticism of the IRS. The record does not
demonstrate that the audit was motivated by criticism of the IRS. Therefore, we
reject this contention.
In reaching our holdings, we have considered all arguments made by the
Mottahedehs and find them without merit.
At trial the IRS objected on relevancy grounds to the admission of Exhibits
45-P, 46-P, 47-P, 48-P, and 49-P. The Court reserved its rulings. The IRS has
withdrawn its objections. The Court will order the exhibits admitted.
To reflect the foregoing,
An appropriate order and
decision will be entered.