Phillips v. Comm'r , 95 T.C.M. 1041 ( 2008 )

T.C. Memo. 2008-9
UNITED STATES TAX COURT
JANET A. PHILLIPS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12442-06. Filed January 24, 2008.
P failed to report certain wage and dividend income
that she received in 2004. R determined a deficiency and
additions to tax pursuant to secs. 6651(a)(1) and (2) and
6654(a), I.R.C.
Held: P is liable for the deficiency and the additions
to tax pursuant to secs. 6651(a)(1) and 6654(a), I.R.C.
Janet A. Phillips, pro se.
Beth A. Nunnink, for respondent.
- 2 -
MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: This case is before the Court on a petition
for redetermination of a $7,944 deficiency in Federal income tax
and additions to tax that respondent determined for petitioner’s
2004 taxable year.1 After concessions,2 the issues for decision
are:
(1) Whether $52,327.73 in wage income and $430.84 (rounded
off by respondent to $430) in dividend income were includable in
petitioner’s 2004 taxable income;3
(2) whether petitioner is liable for an addition to tax of
$983.48 under section 6651(a)(1);4
1
Because $3,573.81 in Federal income tax had been withheld
from petitioner’s wages, her balance due was shown as $4,371, but
should be $4,370 on account of the dividend and withholding
rounding.
2
Respondent concedes that petitioner did not have $34 of
interest income as determined in the notice of deficiency. In
addition, although, in the notice of deficiency, respondent
determined an addition to tax pursuant to sec. 6651(a)(2),
respondent now concedes that petitioner is not liable for an
addition to tax under sec. 6651(a)(2).
3
That $430.84 is comprised of $227.64 in dividends that
petitioner received under a stock purchase plan and $203.20 in
dividends that petitioner concedes she received as a registered
shareholder separate from her participation in the stock purchase
plan.
4
All section references are to the Internal Revenue Code of
1986, as amended and in effect for the taxable year at issue.
The Rule references are to the Tax Court Rules of Practice and
Procedure.
- 3 -
(3) whether petitioner is liable for an addition to tax of
$115.35 under section 6654(a) for failure to pay estimated income
tax; and
(4) whether petitioner is liable for a penalty under section
6673(a)(1) for instituting or maintaining this case primarily for
delay or for taking a frivolous or groundless position in this
proceeding.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts and accompanying exhibits are hereby incorporated by
reference into our findings. At the time she filed her petition,
petitioner resided in Wise, Virginia.
During 2004, petitioner was a truck driver for Tyson Sales
and Distribution, Inc., and received $52,327.73 in wage income.
For that taxable year, Tyson Sales & Distribution, Inc., withheld
$3,573.81 in Federal income tax from petitioner’s wages. During
2004, petitioner also received $227.64 in dividends from Tyson
Foods, Inc., under a stock purchase plan and $203.20 in dividends
from Tyson Foods, Inc., as a registered shareholder separate from
her participation in the stock purchase plan. Petitioner was not
married and had no dependents in 2004.
For the 2004 taxable year, petitioner filed a so-called zero
return, utilizing a Form 1040, U.S. Individual Income Tax Return,
in which she stated that she had zero gross income and owed zero
- 4 -
tax, and requested a refund of the $3,573.81 in Federal income
tax that had been withheld. To that return, petitioner attached
a document teeming with frivolous tax-protester arguments,
including, inter alia, the following: (a) No section of the
Internal Revenue Code makes her liable for income tax; (b) no
section of the Internal Revenue Code requires that income taxes
be paid on the basis of a return; and (c) the “Privacy Act
Notice” contained in the Form 1040 booklet does not require her
to file a return. Respondent did not recognize petitioner’s
“zero return” as a valid Federal income tax return for 2004.
On May 1, 2006, respondent issued the aforementioned notice
of deficiency.5 Petitioner then filed a timely petition with
this Court. A trial was held on March 5, 2007, in Knoxville,
Tennessee.
OPINION
I. Whether Petitioner Had Unreported Income
As a general rule, the Commissioner’s determination of a
taxpayer’s liability for an income tax deficiency is presumed
correct, and the taxpayer bears the burden of proving that the
determination is improper. See Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). Although section 7491(a) may shift the
5
Petitioner was allowed a standard deduction for 2004 in
the notice of deficiency. In addition, for her 2003 taxable
year, petitioner had a tax liability, which is relevant to her
liability for an addition to tax under sec. 6654(a) for the 2004
taxable year.
- 5 -
burden of proof to the Commissioner in specified circumstances,
petitioner did not satisfy the prerequisites under section
7491(a)(1) and (2) for such a shift.
In unreported income cases, the Commissioner in some
circumstances has been required to show a minimal evidentiary
foundation for the determined deficiencies, which may consist of
evidence linking the taxpayer to an income-producing activity.
See Williams v. Commissioner, 999 F.2d 760, 763-764 (4th Cir.
1993), affg. T.C. Memo. 1992-153. If the Commissioner introduces
some evidence that the taxpayer received unreported income, then
the burden shifts to the taxpayer to show by a preponderance of
the evidence that the deficiency was arbitrary or erroneous.
Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), affg.
T.C. Memo. 1997-97.
Section 61(a) specifies that, “Except as otherwise
provided”, gross income includes “all income from whatever source
derived”. Wages and dividends are both listed among the forms of
income within the definition of section 61(a). Sec. 61(a)(1),
(7).6
Respondent has shown an evidentiary foundation with respect
to the $52,327.73 in unreported wage income and $430 in
unreported dividend income determined in the attachment to the
notice of deficiency. In that regard, the parties have
6
Wages are referred to in sec. 61(a)(1) as “Compensation
for services”.
- 6 -
stipulated the $203 petitioner received as a registered
shareholder of Tyson Foods, Inc., separate from her participation
in that corporation’s stock purchase plan. Certified business
records admitted into evidence by the Court substantiate the
$52,327.73 in unreported wage income paid to petitioner by Tyson
Sales and Distribution, Inc., and $227.64 in dividends paid to
petitioner by Tyson Foods, Inc, under a stock purchase plan.
II. Petitioner’s Entitlement to Deductions
At trial, and in her brief, petitioner asserts, without
providing any detail, that she should be allowed deductions.
Respondent concedes that petitioner is allowed to claim the
standard deduction in conjunction with single filing status but
asserts that petitioner has provided no evidence to support
itemized deductions or any other deductions.
Deductions are a matter of legislative grace, INDOPCO Inc.
v. Commissioner, 503 U.S. 79, 84 (1992), and the taxpayer must
maintain adequate records to substantiate the amounts of any
deductions, sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
Because petitioner has provided no evidence to substantiate any
itemized deductions that exceed the standard deduction allowed by
respondent in the notice of deficiency, petitioner is allowed the
standard deduction for her 2004 taxable year.
- 7 -
III. Additions to Tax
A. Commissioner’s Burden of Production
Under section 7491(c), the Commissioner bears the burden of
production with respect to a taxpayer’s liability for penalties
or additions to tax. This means that the Commissioner must “come
forward with sufficient evidence indicating that it is
appropriate to impose the relevant penalty.” Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). In instances where an
exception to the penalty or addition to tax is afforded upon a
showing of reasonable cause, the taxpayer bears the burden of
demonstrating such cause. Id. at 446-447.
B. Section 6651(a)(1) Addition to Tax
Section 6651(a)(1) imposes an addition to tax for failure to
file a timely return unless it is shown that such failure is due
to reasonable cause and not to willful neglect. “[R]easonable
cause” is described by the applicable regulations as the exercise
of “ordinary business care and prudence”. Sec. 301.6651-1(c)(1),
Proced. & Admin. Regs.; see also United States v. Boyle, 469 U.S.
241, 246 (1985). “[W]illful neglect” is interpreted as a
“conscious, intentional failure or reckless indifference.”
United States v. Boyle, supra at 245.
Here, respondent has met the burden of production because
the “zero return” filed by petitioner with respect to her 2004
taxable year is not a valid return. See Cabirac v. Commissioner,
- 8 -
120 T.C. 163, 169 (2003) (“The majority of courts, including this
Court, have held that, generally, a return that contains only
zeros is not a valid return.”);7 see also Rev. Rul. 2004-34,
2004-1 C.B. 619.
Petitioner has not presented any evidence to suggest that
her filing of a “zero return” was due to reasonable cause. In
that regard, we note that petitioner filed her “zero return”
after purchasing and reading the works of Irwin Schiff, a known
tax protester. Petitioner’s reliance on the frivolous arguments
of a known tax protester, which have been rejected repeatedly by
this Court and others, was not reasonable and will not shield her
from the imposition of an addition to tax under section
6651(a)(1). See Lopez v. Commissioner, T.C. Memo. 2001-211
(rejecting an argument in reliance on Irwin Schiff’s works in an
attempt to avoid the imposition of additions to tax and
7
An appeal in this case would normally lie in the Court of
Appeals for the Fourth Circuit, absent a stipulation to the
contrary. Although we are not aware of any ruling by the Court
of Appeals for the Fourth Circuit on this issue, a majority of
Courts of Appeals have held that a return devoid of financial
information is not a valid return. See United States v. Mosel,
738 F.2d 157, 158 (6th Cir. 1984); United States v. Grabinski,
727 F.2d 681, 687 (8th Cir. 1984); United States v. Rickman, 638
F.2d 182, 184 (10th Cir. 1980); United States v. Moore, 627 F.2d
830, 834 (7th Cir. 1980); United States v. Smith, 618 F.2d 280,
281 (5th Cir. 1980). The decision of the Court of Appeals for
the Ninth Circuit in United States v. Long, 618 F.2d 74, 75-76
(9th Cir. 1980), insofar as it is to the contrary, represents a
minority view that we need not follow in this case.
- 9 -
penalties). Consequently, the Court sustains respondent’s
imposition of an addition to tax pursuant to section 6651(a)(1).
C. Section 6654(a) Addition to Tax
Section 6654(a) imposes an addition to tax for underpayment
of estimated income tax by an individual taxpayer. That addition
to tax is computed by reference to four required installment
payments of the taxpayer’s estimated tax liability, each
constituting 25 percent of the “required annual payment.” Sec.
6654(d)(1)(A). For taxpayers whose adjusted gross income for the
preceding year was $150,000 or less, the “required annual
payment” is equal to the lesser of (1) 90 percent of the tax
shown on the individual’s return for the year or, if no return is
filed, 90 percent of his or her tax for such year, or (2) if the
individual filed a return for the immediately preceding taxable
year, 100 percent of the tax shown on that return. Sec.
6654(d)(1)(A), (B)(i) and (ii).
Here, petitioner failed to file a 2004 Federal income tax
return and made no estimated tax payments for 2004 except for the
amount withheld from her wages.8 Petitioner had a tax liability
8
Again, because petitioner’s “zero return” is deemed
invalid, it is as though she filed no return for her 2004 taxable
year. In addition, the $3,573.81 in Federal income tax withheld
from petitioner’s wages is creditable under sec. 31 and is
treated as a payment of estimated tax pursuant to sec.
6654(g)(1). See Mendes v. Commissioner, 121 T.C. 308, 323 n.12
(2003). However, in light of her unreported income, petitioner
underpaid her estimated tax for 2004 and respondent has
(continued...)
- 10 -
for her 2003 taxable year. Because petitioner had a tax
liability for the preceding taxable year, see supra note 5,
respondent has met his burden of producing evidence that
petitioner had a required annual payment of estimated tax for
2004.9
The Court also concludes that petitioner does not fit
within any of the exceptions listed in section 6654(e).10 As a
consequence, the Court sustains respondent’s determination of the
addition to tax pursuant to section 6654(a).
IV. Section 6673 Penalty
Section 6673 allows this Court to award a penalty to the
United States in an amount not in excess of $25,000 for
8
(...continued)
calculated the addition to tax under sec. 6654(a) after
accounting for the $3,573.81 in Federal income tax withholding.
9
Because the tax shown on petitioner’s 2003 Federal income
tax return was more than $3,573.81, she has not made the required
annual payment of estimated tax. See sec. 6654(d)(1)(B)(ii),
(g)(1).
10
Sec. 6654(e) provides two exceptions to the sec. 6654(a)
addition to tax. First, the addition is not applicable if the
tax shown on the taxpayer’s return for the year in question (or,
if no return is filed, the taxpayer’s tax for that year), reduced
for these purposes by any allowable credit for wage withholding,
is less than $1,000. Sec. 6654(e)(1). Second, the addition is
not applicable if the taxpayer’s tax for the full 12-month
preceding taxable year was zero and the taxpayer was a citizen or
resident of the United States. Sec. 6654(e)(2). In light of our
earlier conclusion regarding petitioner’s unreported income,
petitioner is liable for a deficiency for 2004 that, net of
withholding, exceeds $1,000. And, it has been shown that
petitioner had a tax liability in 2003.
- 11 -
proceedings instituted by the taxpayer primarily for delay or for
proceedings in which the taxpayer’s position is frivolous or
groundless. “A petition to the Tax Court, or a tax return, is
frivolous if it is contrary to established law and unsupported by
a reasoned, colorable argument for change in the law.” Coleman
v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986) (imposing
penalties on taxpayers who made frivolous constitutional
arguments in opposition to the income tax).
Groundless litigation diverts the time and energies of
judges from more serious claims; it imposes needless
costs on other litigants. Once the legal system has
resolved a claim, judges and lawyers must move on to
other things. They cannot endlessly rehear stale
arguments. Both appellants say that the penalties
stifle their right to petition for redress of
grievances. But there is no constitutional right to
bring frivolous suits, see Bill Johnson’s Restaurants,
Inc. v. NLRB, 461 U.S. 731, 743, 103 S. Ct. 2161, 2170,
76 L. Ed. 2d 277 (1983). People who wish to express
displeasure with taxes must choose other forums, and
there are many available. * * * [Id. at 72.]
Respondent has not sought a section 6673 penalty in this
case. Petitioner indicates she relied on Irwin Schiff and was
naive about certain of her tax obligations. In this context and
where, as here, the petitioner does not appear to have been
warned about the possibility of a section 6673 penalty, the Court
concludes, giving petitioner the benefit of the doubt, that it is
not appropriate to impose a penalty in the instant case.
However, the Court explicitly admonishes petitioner that she may,
in the future, be subject to a penalty under section 6673 for any
- 12 -
proceedings instituted or maintained primarily for delay or for
any proceedings which are frivolous or groundless.
The Court has considered all of petitioner’s contentions,
arguments, requests, and statements. To the extent not discussed
herein, we conclude that they are meritless, moot, or irrelevant.
To reflect the foregoing and concessions made by the
parties,
Decision will be entered
under Rule 155.