Joseph DeCrescenzo

United States Tax Court
T.C. Memo. 2023-7JOSEPH DECRESCENZO,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 16784-18. Filed January 12, 2023.
—————
P assigned error to the statutory notice of deficiency
(Notice) received from R, but neither P’s assignments nor
his averments address the numerous adjustments that R
made to P’s income for the years at issue. Rather, P’s
assignments concern process failures by R in determining
the alleged deficiencies and additions to tax. By the
Answer, R asserted accuracy-related penalties for the
years at issue. On brief, R asks that we sanction P under
I.R.C. § 6673(a) for instituting a proceeding primarily for
delay or because P’s position is frivolous or groundless.
Held: P’s argument that we lack jurisdiction
because the Notice is invalid in that R lacked authority to
determine deficiencies in P’s tax and send him notice
thereof is without merit.
Held, further, P’s argument that we lack jurisdiction
because the Notice is invalid in that it fails to make a
determination with respect to him is without merit.
Held, further, P’s argument that the Notice is invalid
in that it contains information that does not pertain to him
is without merit.
Served 01/12/23
2
[*2] Held, further, P is liable for an additions to tax for
failure timely to file returns for all years at issue.
Held, further, R bearing the burden of proof for the
accuracy-related penalties, first asserted in the Answer, he
has failed to carry his burden to negate P’s potential
affirmative defenses except with respect to portions of P’s
underpayments for three of the years at issue attributable
to his disregard of DeCrescenzo v. Commissioner, T.C.
Memo. 2012-51, aff’d, 563 F. App’x 858 (2d Cir. 2014), and
we sustain the penalties only with respect to those portions
of the underpayments.
Held, further, P is liable for a penalty under I.R.C.
§ 6673(a)(1) because his claims with respect to the validity
of the Notice are groundless and his arguments with
respect thereto are meritless; moreover, he instituted this
proceeding primarily for delay.
—————
Fritz J. Firman, for petitioner.
Marissa J. Savit and Lyle B. Press, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN, Judge: Respondent sent petitioner a statutory notice
of deficiency in tax (Notice) determining deficiencies in petitioner’s
federal income tax and additions to tax for failure to make timely
returns as follows: 1
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C. (Code), in effect at all relevant times, all regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure. All dollar amounts have been rounded to the nearest dollar.
3
[*3] Addition to Tax
Year Deficiency § 6651(a)(1)
2007 $5,287 $1,322
2008 19,566 4,892
2009 8,765 2,191
2010 12,819 3,205
2011 15,178 3,795
2012 19,577 4,894
2013 17,069 4,267
Petitioner filed a Petition and respondent answered. In the
Answer, respondent asserted section 6662 accuracy-related penalties for
all years at issue. On brief, respondent asks that we sanction petitioner
under section 6673(a) for instituting a proceeding primarily for delay or
because petitioner’s position is frivolous or groundless.
FINDINGS OF FACT
Preliminary Statement
Before making our findings of fact, we pause to address
petitioner’s failure to comply with Rule 151, which addresses briefs. At
the conclusion of the trial we ordered the parties to file briefs, setting a
schedule for simultaneous briefs. Rule 151(e)(3) requires that an
opening brief contain proposed findings of fact in the form of numbered
concise statements of essential fact, each statement supported by
reference to the pages of the transcript or the exhibits or other sources
relied on in support of the proposed finding. The rule directs that
proposed findings precede both the points on which the party relies and
the party’s argument. Petitioner’s Opening Brief violates the rule in
that it contains no numbered statements containing concise statements
of essential facts with references to transcript pages or exhibits.
Instead, petitioner’s brief contains numerous statements of purported
“facts” interwoven into a narrative without citation of any source relied
on to support those statements. Petitioner’s Answering Brief also
violates Rule 151(e)(3), which requires that, in an answering brief, a
party “set forth any objections, together with the reasons therefor, to
any proposed findings of any other party.” Petitioner sets forth,
verbatim, numerous of respondent’s proposed findings but without
making any objection.
4
[*4] Petitioner has not provided us with usable proposed findings of
fact. Moreover, because he failed to object to respondent’s proposed
findings of fact, we must conclude that he accepts respondent’s proposed
findings of fact as correct. See, e.g., Jonson v. Commissioner, 118 T.C.
106, 108 n.4 (2002), aff’d, 353 F.3d 1181 (10th Cir. 2003).
Petitioner bears the burden of proof except that, with respect to
the additions to tax and the accuracy-related penalties, respondent
bears a burden of production, see § 7491(c), and, additionally, with
respect to the accuracy-related penalties, asserted in the answer,
respondent bears the burden of proof, see Rule 142(a).
Stipulation
We have pursuant to Rule 91(f) deemed stipulated certain facts
and the authenticity of certain documents. Those facts are so found, and
the documents deemed stipulated are accepted as authentic.
Petitioner
Petitioner, an accountant, resided in New York when he filed the
Petition.
Returns
Petitioner failed to make timely returns of income for the years at
issue. After beginning the process to prepare substitutes for returns for
petitioner for those years, respondent received petitioner’s delinquent
income tax returns as follows.
Return for Tax Date Received by
(Calendar) Year Internal Revenue Service
2007 November 6, 2014
2008 July 21, 2014
2009 July 25, 2014
2010 February 18, 2015
2011 February 18, 2015
2012 February 18, 2015
2013 February 18, 2015
5
[*5] Respondent made entries in his records upon receiving those
returns, recording the receipt of each as “Amended Return Filed.”
Petitioner made those returns on Internal Revenue Service (IRS) Forms
1040, U.S. Individual Income Tax Return. Although each Form 1040
reports items of income and deduction, all report zero income tax due,
and none of the forms reports any self-employment tax.
Examination
Revenue Agent (RA) Edwin Smith was assigned to examine
petitioner’s returns. Respondent had not processed petitioner’s 2007
through 2012 returns before RA Smith began his examination.
Nevertheless, RA Smith used information petitioner reported on those
returns in determining deficiencies in petitioner’s tax for those years.
He determined a deficiency for each year, but, as supporting forms
attached to the Notice show, he computed a deficiency for 2013—for
which respondent had processed petitioner’s return—somewhat
differently from the way he computed deficiencies for 2007 through
2012. Form 5278, Statement–Income Tax Changes, is attached to the
Notice, and, for 2013, it shows the adjustments, positive (for disallowed
deductions) and negative (for additionally allowed deductions), that RA
Smith made to petitioner’s 2013 taxable income as reported on his 2013
return (he made no adjustments for any unreported income). He
summed those adjustments and added the total (a positive number) to
the taxable income that petitioner had reported for 2013 (a negative
number) to compute petitioner’s revised 2013 taxable income and the
tax due on that taxable income. He added unpaid self-employment tax
and, from the sum of the two taxes, subtracted the amount of tax (zero)
that petitioner had shown on his 2013 return, the difference being his
determination of the deficiency in tax for 2013.
For 2007, 2008, and 2010 through 2012, Form 5278 and two sub
forms, Form 4549B, Income Tax Examination Changes, and Form
886–A, Explanation of Items, all attached to the Notice, show how RA
Smith computed the deficiency in tax for each of those years. For each
year, on Form 4549B, under the heading “Adjustments to Income” he
listed the items and amounts from petitioner’s return for the year that
he accepted in full (positive entries for items of income and negative
entries for deductions). His entries on Form 4549B for the items he
accepted in full constitute the bulk of entries on that form and
correspond to petitioner’s entries on the underlying tax returns. He
added to the list items that he only partially accepted, in the amounts
that he accepted. He omitted from the list items that he rejected. He
6
[*6] increased two items of income petitioner reported. He summed his
adjustments (which represented his computation of petitioner’s taxable
income for the year) and carried the total (for each year, a positive
number) to Form 5278 where, for the year, it appears under the heading
“Total adjustments.” He added the number to the taxable income that
petitioner had reported for the year (in all cases, zero) to compute
petitioner’s revised taxable income (equal to the total adjustments) and
the tax due on that amount. He added unpaid self-employment tax and,
from the sum of the two taxes, subtracted the amount of tax (zero) shown
on petitioner’s return for the year, the difference being his
determination of the deficiency in tax for the year.
For 2009, RA Smith appears to have used a hybrid method,
apparently computing petitioner’s taxable income for the year on Form
4549B in the manner he used for 2007, 2008, and 2010 through 2012, 2
but, after carrying that number ($70,081) to Form 5278 as “Total
adjustments,” he added a negative number (−$63,178) for the taxable
income that petitioner had reported for the year. He considered the sum
of petitioner’s revised 2009 taxable income ($6,903) and computed the
tax due on that amount. As with the other years, he added unpaid self-
employment tax and, from the sum of the two taxes, subtracted the
amount of tax (zero) shown on petitioner’s return for the year, the
difference being his determination of the 2009 deficiency in tax. 3
Extension of the Periods of Limitations
Because the result of RA Smith’s examination was adverse to
him, petitioner appealed to the IRS Office of Appeals (Appeals). 4
2 But he entered as an adjusted amount for petitioner’s 2009 itemized
deductions a positive number ($23,047) when, for the other years, he entered a negative
number. On Form 886–A he explains: “For 2009, it is determined that itemized
deductions in the amount of $21,183.00 are allowable instead of the $44,230.00
itemized deductions claimed on your return. . . . Taxable income is increased
$23,047.00 [the difference between $44,230 and $21,183] for tax year ended 2009.”
3 That hybrid method apparently produced a benefit for petitioner by double
counting the deductions giving rise to the negative reported taxable income of $63,178
other than RA Smith’s $23,047 positive adjustment for itemized deductions. See supra
note 2.
4 On July 1, 2019, the IRS Office of Appeals was renamed the IRS Independent
Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981,
983 (2019).
7
[*7] In April 2017 petitioner and Martin D. Fried, an Appeals officer
(AO), both signed an IRS Form 872, Consent to Extend the Time to
Assess Tax, extending the time to assess tax for the years at issue until
March 31, 2018. In November 2017, petitioner, and, in December 2017,
AO Fried signed another Form 872, further extending the time to assess
tax for the years at issue until September 30, 2018.
Notice
Respondent mailed the Notice on May 14, 2018. The Notice,
itself, is a three-page letter (Letter) addressed to petitioner that, on the
first page, sets forth a deficiency in tax and a section 6651(a)(1) addition
to tax for each year at issue as shown in the first paragraph of this
report. That information is followed on the first page by the salutation
“Dear Taxpayer,” and the first three sentences following the salutation
are: “We have determined that you owe additional tax or other amounts,
or both, for the tax year(s) identified above. This letter is your NOTICE
OF DEFICIENCY as required by law. The enclosed statement shows
how we figured the deficiency.” Enclosed with the Letter are the
aforementioned Forms 5278, 4549B, and 886–A plus numerous
schedules and other forms. The Letter and enclosures (sometimes,
without distinction, Notice) consists of 70 pages, and the Letter and
every page of the enclosures show petitioner’s full name and taxpayer
identification number except for the ten pages of Form 886–A, of which
only the first page contains petitioner’s full name.
Pleadings
Petitioner assigns error to the Notice, but neither petitioner’s
assignments nor his averments address the numerous adjustments that
respondent made to petitioner’s income for the years at issue. Rather,
petitioner’s assignments concern process failures by respondent in
determining the alleged deficiencies and additions to tax. Among his
assignments are:
[T]he service did not have jurisdiction “as a matter
of law” to issue an NOD for the year 2007 through
2013, as the Commissioner acted outside of authority
provided by the Internal Revenue Code, more specifically,
The Agent allegedly “RE-Opened” the audit case after
Appeal had been effectuated.
[T]he Notice of Deficiency (NOD) . . . IS DEFICIENT IN
ITSELF, as it does not provide requisite documentation of
8
[*8] the “reported income” upon which the alleged Deficiency is
based, and is violative therefore, of procedural “requisite
adequate notice” to be provided to the taxpayer, in
accordance with the IRC and the basic tenants of “Due
Process”, providing “notice and an opportunity to be
heard”, and for petitioner to defend thereon.
The New York Appeals Office Service Center Campus
issued the Deficiency in violation of “its own training
manuals and procedures”, without any report or
communication to petitioner from that office, of the
alleged returns on appeal, with the caveat: that
assumes that there is even authority in the IRC for said
period in which the Commissioner is to act, which is
disputed by petitioner.
[T]he Notice of Deficiency is “fatally flawed”, and
(assuming arguendo, that the service even had the
authority to issue the same) does not provide the “requisite
notice” and/or even a listing of “reporting documents” upon
which the tax determination is allegedly based.
Petitioner also raises as an additional affirmative defense the
expiration of the period of limitations.
In the Answer, respondent denies he erred as petitioner claims.
In further answering the Petition, he avers that the deficiency for 2010
should be increased because, for that year, respondent erroneously
allowed petitioner duplicate mortgage interest deductions of $954 when
petitioner was entitled to only one such deduction. The Form 4549B
attached to the Notice does contain two entries reading
“Sch C1-Interest-Other . . . ($954).”
And, as previously described, respondent alleges that petitioner
is liable for a section 6662 accuracy-related penalty for each year at
issue. He avers that, after the Petition was filed, Marissa J. Savit, an
attorney for respondent, made an initial determination to assert the
penalties, which was personally approved in writing by Ms. Savit’s
immediate supervisor, Lyle B. Press, by virtue of Mr. Press’s signature
on the Answer.
Petitioner replied, denying his liability for the accuracy-related
penalties.
9
[*9] Trial
We tried this case in New York City on February 11, 2020.
Although petitioner initiated this case pro se, he was represented at trial
by counsel, Fritz J. Firman, Esq. At trial, the Court asked Mr. Firman
whether petitioner claimed error in any of the many adjustments that
respondent had made to the items reported on petitioner’s returns.
Mr. Firman answered that petitioner conceded all adjustments other
than (1) unreported interest income of $110 for 2007, (2) petitioner’s
liability for self-employment tax for each year, (3) the disallowance of
certain charitable contribution deductions petitioner claimed on
Schedules C, Profit or Loss From Business, (4) the disallowance of fees
for legal and professional fees claimed for 2013, and (5) all penalties.
OPINION
I. Issues for Decision
The parties filed briefs as ordered. We have in a preliminary
statement to our Findings of Fact discussed deficiencies in petitioner’s
briefs. In an introduction to his Opening Brief, petitioner claims that,
for one or both of the following reasons, we must dismiss this case.
1. The periods of limitations relevant to the years in
issue provided for in section 6501(a) for the
assessment and collection of tax have run.
2. The Notice is invalid because:
a. It is not based on an action or authority
provided for in the Internal Revenue Code.
b. It fails to make a “determination” with respect
to petitioner.
c. It contains information that is not
attributable to petitioner.
Petitioner does not in either his Opening or Answering Brief
address the adjustments made by RA Smith and resulting in the
deficiencies in tax in question. And while at trial Mr. Firman said that
petitioner conceded all but five items, petitioner does not on brief
address those five items.
10
[*10] In his Answering Brief, respondent argues that we should deem
those items abandoned because petitioner did not address them in his
Opening Brief.
There is ample authority holding that we may conclude that a
taxpayer abandons an issue by failing to raise it on brief. See, e.g., Lapid
v. Commissioner, T.C. Memo. 2004-222, 2004 WL 2244500, at *5
(concluding that the taxpayers abandoned a point they failed to raise in
their briefs (first citing Lunsford v. Commissioner, 117 T.C. 183, 187
(2001); and then citing Nicklaus v. Commissioner, 117 T.C. 117, 120 n.4
(2001))).
Mr. Firman signed both petitioner’s Opening and Answering
Briefs. We assume that Mr. Firman consulted with his client about
limiting petitioner’s arguments on brief. We accept that limitation and
hold that petitioner has abandoned any claim that (1) his 2007 taxable
income should not be increased by $110 on account of interest income
that he failed to report, (2) he is not liable for self-employment taxes as
respondent determined for each year at issue, (3) he be allowed the
Schedule C charitable contribution deductions that respondent
disallowed, and (4) he be allowed a deduction for 2013 for the legal and
professional fees that respondent disallowed. We also accept the
concessions that Mr. Firman made at trial as to the remaining
substantive issues raised by the Notice. Because there is no
disagreement about RA Smith’s duplicate allowance of a $954 deduction
for interest for 2010, we will disallow one of those adjustments. We will
address petitioner’s claims as to the period of limitations and the
validity of the Notice. As to the additions to tax for failure to file timely
returns for the years at issue, respondent must carry his burden of
production. See § 7491(c). Respondent must carry that burden plus the
burden of proof for the accuracy-related penalties.
II. Period of Limitations
Although section 6501(a) requires that “the amount of any tax
imposed . . . shall be assessed within 3 years after the return was filed,”
section 6501(c)(4) provides that the period may be extended by
agreement of the parties.
Petitioner filed his returns for the years at issue on or after July
21, 2014, and respondent mailed the Notice on May 14, 2018. By
agreement with AO Fried, petitioner had extended the time to assess
tax for the years at issue until September 30, 2018. The Notice was
11
[*11] timely on its face. See § 6501(a), (c)(4). Petitioner’s argument that
the Notice was not timely does not question the consequences of those
dates but, rather, questions the “validity” of the Notice on the premise
that, if the Notice is invalid, the period of limitations is beside the point:
“[A]s the [Notice] is invalid, . . . the signing of any extension cannot
confer jurisdiction on the court.”
Because we accept the validity of the Notice, petitioner has no
claim that the Notice was not timely. We will, therefore, not dismiss
this case on the ground that the Notice was untimely.
III. Validity of the Notice
A. Introduction
1. Background
Like all federal courts, the Tax Court is a court of limited
jurisdiction, and it may exercise its jurisdiction only to the extent
authorized by Congress. See § 7442; Menard, Inc. v. Commissioner, 130
T.C. 54, 59 (2008), rev’d on other grounds, 560 F.3d 620 (7th Cir. 2009).
Petitioner invoked our jurisdiction by filing a petition under section
6213(a) for the redetermination of deficiencies. Even without the benefit
of specific statutory authority, we have jurisdiction to consider our own
jurisdiction. E.g., U.S. Auto Sales, Inc. v. Commissioner, 153 T.C. 94, 97
(2019). If the Commissioner fails to issue a valid notice of deficiency, we
will dismiss the case for lack of jurisdiction on that ground. E.g., Keeton
v. Commissioner, 74 T.C. 377, 379 (1980).
Section 6212(a) authorizes the Secretary (i.e., the Commissioner
or his delegate) to send a notice of deficiency when he determines a
deficiency in a taxpayer’s tax. Although the section authorizes the
Secretary to send a notice of deficiency, the Code does not specify the
form of the notice. Section 7522(a) provides that the notice must
“describe the basis for, and identify the amounts (if any) of, the tax due,
interest, additional amounts, additions to the tax, and assessable
penalties included in such notice.” But even an inadequate description
does not invalidate a notice. Dees v. Commissioner, 148 T.C. 1, 4 (2017).
We have described the essential purpose of a deficiency notice as
follows: “The essential purpose of a deficiency notice is to provide a
formal notification that a deficiency in taxes has been determined.”
Pietz v. Commissioner, 59 T.C. 207, 213–14 (1972). Our view of what it
takes to accomplish that purpose has been evolving. Three cases mark
12
[*12] that evolution: Scar v. Commissioner, 81 T.C. 855 (1983), rev’d,
814 F.2d 1363 (9th Cir. 1987); Campbell v. Commissioner, 90 T.C. 110(1988); and Dees.
2. Scar
Scar presented us with the question of whether a notice that sets
forth the amount of the deficiency and the taxable year involved is valid
if the notice otherwise shows that the Commissioner has not, in fact,
determined any deficiency in the taxpayer’s tax for the taxable year
identified. We denied the taxpayers’ motion to dismiss for lack of
jurisdiction on the grounds that the notice was invalid. We held: “The
requirements of section 6212(a) are met if the notice of deficiency sets
forth the amount of the deficiency and the taxable year involved.” Scar,
81 T.C. at 860–61.
3. Campbell
Subsequently, in Campbell, we denied the taxpayers’ motion to
dismiss for lack of jurisdiction on the grounds that the notice was invalid
because, although the first two pages of the notice included the
taxpayers’ names and set forth a deficiency in tax and additions to tax
for a specific year, the remaining seven pages of the notice contained
adjustments to income and explanations of the adjustments for a
taxpayer with a different name. The first two pages of the notice, we
held, “clearly indicate that the taxpayers against whom the deficiency
was determined were the [Campbells].” Campbell, 90 T.C. at 113. The
nine pages, we held, “do[] not reveal on [their] face that the
Commissioner failed to make a determination.” Id. More generally, we
held: “Where the notice of deficiency does not reveal on its face that the
Commissioner failed to make a determination, a presumption arises
that there was a deficiency determination.” Id.
4. Dees
Most recently, in Dees, 148 T.C. 1, we asked whether we should
dismiss the case for lack of jurisdiction because a letter mailed to the
taxpayer, captioned “Notice of Deficiency,” showed the purported
deficiency as: “Deficiency: $.00.” The Commissioner explained that,
because of a clerical error, the letter incorrectly reflected a deficiency of
zero. Despite that error, he continued, an attachment to the letter
disallowed a refundable credit claimed by the taxpayer and determined
a deficiency in his tax “because ‘[t]he computations for the disallowed
13
[*13] credit are attached to the letter portion of the notice . . . in which
the deficiency is the amount of the disallowed credit.’” Id. at 3.
In answering whether we should dismiss the case, we claimed to
distill our prior caselaw into “a two-prong approach to the question of
the validity of [a] notice of deficiency.” Id. at 5–6. In the first step of the
Dees approach, “we look to see whether the notice objectively put a
reasonable taxpayer on notice that the Commissioner determined a
deficiency in tax for a particular year and amount.” Id. at 6. We held
that, if the notice passes that test, “our inquiry ends there; the notice is
valid.” Id. If, instead, the notice is “ambiguous,” we continued, “the
party seeking to establish jurisdiction [must] establish that the
Commissioner made a determination and that the taxpayer was not
misled by the ambiguous notice.” Id.
Applying the two-prong approach to the facts before us, we found
that the notice did state that the Commissioner was disallowing the
taxpayer’s refundable credit, and, although the notice was ambiguous,
the Commissioner had established that he had determined a deficiency.
Moreover, as evidenced by the content of his timely petition, the record
established that the taxpayer had not been misled. Accordingly, we
concluded, the notice was valid and we would not dismiss for lack of
jurisdiction. Id. at 9. 5
5. Conclusion
We will discuss petitioner’s three arguments with those three
cases in mind.
B. Analysis
1. The Notice Is Not Based on Any Action or Authority
Provided by the Code.
Petitioner’s first argument is directed not at the content of the
Notice but, more fundamentally, at respondent’s authority to determine
5 In U.S. Auto Sales, Inc., 153 T.C. 94, we dismissed for lack of jurisdiction an
ambiguous notice—identifying two taxpayers as potentially liable for the deficiencies
identified therein—because the party seeking to establish jurisdiction—the taxpayer
to whom the notice was sent—was unable to show that, in fact, the Commissioner had
determined deficiencies in its tax for the years identified in the notice.
14
[*14] deficiencies in petitioner’s income tax for the years at issue and
send him notice thereof.
The authority for the Commissioner to determine a deficiency in
income tax and send notice thereof to a taxpayer is beyond dispute.
Section 6301 provides: “The Secretary shall collect the taxes imposed by
the internal revenue laws.” As discussed supra Part III.A.1, section
6212(a) authorizes the Commissioner to send a notice of deficiency but
does not specify the form of the notice. A deficiency is defined generally
as the excess of tax owed over tax shown by the taxpayer on a return.
See § 6211(a).
Petitioner apparently believes that the Commissioner lacked
authority to send him the Notice because it “is not based either on an
SFR [substitute for return], or any filed tax return.” In answering
petitioner, we start from the firmly established understanding that
section 6211(a) does not require the Commissioner to prepare an SFR
before determining a deficiency in tax for a nonfiler and sending notice
thereof. Brenner v. Commissioner, T.C. Memo. 2004-202, 2004 WL
1946366, at *5, aff’d, 164 F. App’x 848 (11th Cir. 2006); see also Roat v.
Commissioner, 847 F.2d 1379, 1382 (9th Cir. 1988) (holding that, even
when a substitute for return is prepared for a taxpayer, the
Commissioner need not use that “return” in determining the taxpayer’s
deficiency under section 6211(a)). Moreover, respondent was in
possession of petitioner’s returns for the years at issue before
determining deficiencies in tax. And while petitioner may quibble about
the validity of the Notice, we see no lack of authority in the Code for
respondent to have sent it to him.
2. The Notice Fails to Make a “Determination” with
Respect to Petitioner.
a. Scar
The Letter is addressed to petitioner and sets forth the amounts
of the deficiencies in tax and the taxable years involved. The Notice thus
satisfies the requirements of section 6212(a) as interpreted in Scar and
passes muster under Scar.
b. Campbell
Campbell created a presumption that the Commissioner made a
deficiency determination if a notice does not show on its face that he did
not. See Campbell, 90 T.C. at 113. Considered alone, the Letter
15
[*15] (addressed to petitioner and setting forth the amounts and years
of the deficiencies) does not show that respondent failed to determine
deficiencies in petitioner’s tax. Moreover, nothing in the remaining 67
pages of the Notice shows anything to the contrary. Petitioner’s name
appears on nearly every one of those pages. Nowhere in those pages is
another taxpayer listed, nor does anything in those pages indicate that
adjustments were being made to any taxpayer’s income other than
petitioner’s. And while RA Smith’s adjustments for 2007 through 2012
may have been unorthodox—in essence, he started from scratch to
compute petitioner’s adjusted taxable income for each year—there is
nothing in that methodology to suggest that he failed to consider
information that related to petitioner. We therefore presume from the
Notice that respondent determined deficiencies with respect to
petitioner for the years at issue. The Notice passes muster under
Campbell.
c. Dees
Under the first prong of the two-prong test we set forth in Dees,
there is no doubt that, considered objectively, the Letter would put a
hypothetical reasonable taxpayer 6 on notice that respondent had
determined deficiencies in petitioner’s tax for particular years and in
particular amounts. The Letter is addressed to petitioner and, on the
first page, following a list of deficiencies in, and additions to, tax for the
years at issue, and after addressing petitioner as “Dear Taxpayer,” it
continues: “We have determined that you owe additional tax or other
amounts, or both, for the tax year(s) identified above. This letter is your
NOTICE OF DEFICIENCY as required by law.” There is nothing in the
additional 67 pages of the Notice that makes that claim ambiguous.
There is, therefore, nothing more to consider: “[I]f the notice is sufficient
to inform a reasonable taxpayer that the Commissioner has determined
a deficiency, our inquiry ends there; the notice is valid.” Dees, 148 T.C.
at 6. The Notice passes muster under Dees.
3. The Notice Contains Information that Does Not
Pertain to Petitioner.
Petitioner argues that the Notice is invalid because it contains
“information” that does not pertain to him. Petitioner is unclear on what
6 Kin, no doubt, to that “ubiquitous character well known to lay jurors,” “the
law’s ‘reasonable person.’” First Sav. Bank, FSB v. Am. Cas. Co. of Reading, Pa., 985
F.2d 553, 1993 WL 27403, at *4 n.4 (4th Cir. 1993) (unpublished table decision).
16
[*16] information that is, but respondent surmises that petitioner is
referring to $100 of a positive adjustment of $112 for unreported interest
income that RA Smith made to petitioner’s 2007 taxable income.
Petitioner may believe that $100 of that adjustment is attributable to
interest from an account belonging to a client of his with respect to which
he had signature authority and not to an account of his. The $112
adjustment is shown in the Notice on Form 4549B without explanation
and is explained on the Form 866–A only as follows: “It is determined
that taxable interest in the amount[] of $112.00 . . . [is] includible in
income for taxable year[] 2007 . . . . Accordingly, taxable income is
increased $112.00 for tax year ended 2007 . . . .” And while that is not
much of an explanation, it is more than is necessary because, as we said
in Campbell, 90 T.C. at 115, the Commissioner “need not explain how
. . . deficiencies were determined.” More pertinently, the explanation
does not indicate that, in adjusting petitioner’s 2007 taxable income on
account of unreported interest, respondent failed to consider
information that related to petitioner or did not make an adjustment
resulting in an increased deficiency for 2007. We thus have no cause to
question our conclusion in the immediately preceding subdivision of this
report that the Notice both qualifies for the Campbell presumption and
satisfied the first prong of the Dees test.
4. Conclusion
We will not dismiss this case for lack of jurisdiction on the
grounds that the Notice is invalid.
IV. Additions to Tax and Penalties
A. Failure to File Timely Tax Return
Respondent determined in the Notice that petitioner was liable
for additions to tax for failure to file timely returns for all years at issue.
Section 6651(a)(1) imposes an addition to tax for failure to file a
timely tax return. The addition equals 5% of the amount required to be
shown as tax on the delinquent return for each month or fraction thereof
during which the return remains delinquent, up to a maximum addition
of 25% for returns more than four months delinquent. Id. The addition
to tax does not apply if the failure to file timely is due to reasonable
cause and not to willful neglect. Id.When the taxpayer is an individual, the Commissioner has the
initial burden of production as to additions to tax, penalties, and other
17
[*17] additional amounts, meaning he must make a prima facie case
that imposing liability is appropriate. See § 7491(c); Higbee v.
Commissioner, 116 T.C. 438, 446–47 (2001); Fabian v. Commissioner,
T.C. Memo. 2022-94, at *38. If the Commissioner carries his burden,
normally the taxpayer has the burden of proving that any affirmative
defenses apply, such as that the taxpayer acted with reasonable cause
and in good faith. See, e.g., Fabian, T.C. Memo. 2022-94, at *38.
The parties have stipulated that petitioner failed timely to file
income tax returns for the years at issue. Respondent has carried his
burden of production. Because petitioner does not raise any defense to
the section 6651(a)(1) additions to tax, we will sustain the additions.
B. Section 6662(a) Accuracy-Related Penalties
1. Introduction
By the Answer, respondent asserts that petitioner is liable for
accuracy-related penalties for all years at issue.
Section 6662(a) and (b)(1) provides for an accuracy-related
penalty of 20% of the portion of an underpayment of tax required to be
shown on a return attributable to negligence or disregard of rules and
regulations (without distinction, negligence). Section 6662(a) and (b)(2)
provides for the same penalty on the portion of an underpayment of tax
attributable to any substantial understatement of income tax. In the
case of an individual, there is a substantial understatement of income
tax for a year if the amount of the understatement exceeds the greater
of (1) 10% of the tax required to be shown on the return for the tax year
or (2) $5,000. § 6662(d)(1)(A). The amount of an understatement is
reduced if there is substantial authority for the taxpayer’s treatment of
an item on his return. See § 6662(d)(2)(B)(i). Also, the amount of the
understatement is reduced for any item that is adequately disclosed in
the taxpayer’s return, or in an attached statement, if there is reasonable
basis for the taxpayer’s treatment of the item. See § 6662(d)(2)(B)(ii).
Finally, section 6664(c)(1) provides a reasonable cause exception to
imposition of the section 6662(a) accuracy-related penalty on that
portion of an underpayment for which it is shown that there was
reasonable cause for the underpayment and the taxpayer acted in good
faith.
Only one accuracy-related penalty may be applied with respect to
any given portion of an underpayment even if that portion is subject to
18
[*18] the penalty on more than one of the grounds set out in section
6662(b). Treas. Reg. § 1.6662-2(c).
2. Burden of Production
a. Introduction
The Commissioner’s burden of production with respect to the
accuracy-related penalty includes making a prima facie case that the
section 6751(b)(1) requirement for written supervisory approval has
been met. E.g., Ball v. Commissioner, T.C. Memo. 2020-152, at *12.
Section 6751(b)(1) provides: “No penalty under this title shall be
assessed unless the initial determination of such assessment is
personally approved (in writing) by the immediate supervisor of the
individual making such determination or such higher-level official as
the Secretary may designate.”
b. Penalty Approval
Respondent has carried his burden with respect to the penalty
approval required by section 6751(b)(1). Respondent’s counsel,
Ms. Savit, asserted accuracy-related penalties under section 6662(a)
and (b)(1) and (2) in this case for the first time in the Answer. Mr. Press,
her immediate supervisor, approved the penalties in writing by signing
the Answer. That satisfied section 6751(b). See, e.g., Roth v.
Commissioner, T.C. Memo. 2017-248, at *10, aff’d, 922 F.3d 1126 (10th
Cir. 2019).
c. Grounds for the Penalties
Respondent has also made a prima facie case for the accuracy-
related penalties on the grounds that, for each year at issue, petitioner
underpaid his income tax because he substantially understated the tax
he was required to show on his return. The amount of tax petitioner
was required to show was, with a minor increase for 2010, the amount
of the deficiency in tax shown in the first paragraph of this report. For
each year at issue, petitioner reported zero tax liability on the return he
filed for that year. Thus, for each year, his understatement of income
tax was both equal to (100% of) the tax required to be shown on the
19
[*19] return and more than $5,000. In other words, a substantial
understatement of income tax. 7 See § 6662(d)(1)(A).
Respondent claims as an alternative basis for the accuracy-
related penalties that petitioner’s underpayments of tax for the years at
issue were due to negligence. Respondent proposes that we find that
“petitioner has not substantiated any items disallowed by respondent in
the [Notice].” Petitioner has made no objection to respondent’s proposed
finding, and we so find. Respondent directs us to Treasury Regulation
§ 1.6662-3(b)(1), which, in pertinent part, provides that negligence
“includes any failure by the taxpayer to keep adequate books and records
or to substantiate items properly.” In Megibow v. Commissioner, T.C.
Memo. 2004-41, 2004 WL 309153, at *13, we concluded that the
Commissioner met his section 7491(c) burden of production where the
record showed that the taxpayer failed to keep adequate books and
records and properly to substantiate reported items. We reach a similar
conclusion here on the basis of petitioner’s failures to substantiate the
items disallowed.
In support of his claims of negligent underpayments for 2010,
2011, and 2012, respondent also argues that petitioner failed to report
and pay self-employment tax because he reduced his net earnings from
self-employment (from his accounting and bookkeeping business) by net
operating loss carryforwards. That, respondent continues, was in
contradiction to our holding in petitioner’s prior Tax Court case
involving his 2006 taxable year, DeCrescenzo v. Commissioner, T.C.
Memo. 2012-51, 2012 WL 612493, at *3 (“We repeatedly have held that
section 1402(a)(4) prohibits a taxpayer from offsetting net earnings from
self-employment with an NOL carryforward or carryback.” (Footnote
omitted.)), aff’d, 563 F. App’x 858 (2d Cir. 2014). The Court of Appeals
7 We have found that, before RA Smith began his examination of petitioner’s
returns, respondent had not processed those returns. That finding is based on a
statement in the Answer in support of respondent’s claim for a 2010 deficiency greater
than that set forth in the Notice. Respondent states: “Because respondent did not
process the delinquent federal income tax returns filed by petitioner for the Tax Years
at Issue, the Notice of Deficiency reflects respondent’s allowances of expenses and
deductions for all Tax Years at Issue in addition to his disallowances.” Respondent
does not further explain what the fact that he did not process the returns signifies. We
have found that RA Smith used information petitioner reported on those returns in
determining deficiencies in petitioner’s tax for those years and that the bulk of RA
Smith’s adjustments for 2007 through 2012 correspond to entries on petitioner’s
returns. Those facts convince us that, in determining the understatements of income
tax in question (and petitioner’s negligence), respondent relied on petitioner’s returns.
See Stevens v. Commissioner, T.C. Memo. 2020-118, at *46–48.
20
[*20] decision is dated April 30, 2014, which was before the dates on
which petitioner filed his returns for the years at issue. We agree that
petitioner was negligent in failing to report and pay self-employment
tax.
3. Burden of Proof
In the usual case, the Commissioner having carried his burden of
production with respect to a penalty, the burden of proof (viz, the risk of
nonpersuasion) is with the taxpayer, which includes the burden to prove
any affirmative defense. See, e.g., Fabian, T.C. Memo. 2022-94, at *38.
That is not the case here because the accuracy-related penalties are a
new matter and respondent has the burden of proving not only grounds
for the penalties but also the absence of any affirmative defenses. See
Rule 142(a); Sanderling, Inc. v. Commissioner, 66 T.C. 743, 757 (1976),
aff’d in part, rev’d in part, 571 F.2d 174 (3d Cir. 1978); McMillan v.
Commissioner, T.C. Memo. 2019-108, at *48. We have accepted
respondent’s prima facie case for the accuracy-related penalties and
turn to the question of defenses.
As stated, section 6664(c)(1) excepts from imposition of the
accuracy-related penalty that portion of an underpayment for which the
taxpayer both had reasonable cause and acted in good faith. The
determination of reasonable cause and good faith is made considering
all relevant facts and circumstances. See Higbee, 116 T.C. at 448; Treas.
Reg. § 1.6664-4(b)(1). A taxpayer has reasonable cause for a portion of
an underpayment if the taxpayer exercised ordinary business care and
prudence with respect to the portion. See, e.g., United States v. Boyle,
469 U.S. 241, 246 (1985); Pankratz v. Commissioner, T.C. Memo. 2021-
26, at *22. The inquiry is fact intensive and requires examination of all
the facts and circumstances. See, e.g., Pankratz, T.C. Memo. 2021-26,
at *22. “Good faith” is not expressly defined; however, an honest
misunderstanding of fact or law that is reasonable considering the
taxpayer’s experience, knowledge, and education may indicate
reasonable cause and good faith. See Higbee, 116 T.C. at 449; Barnes v.
Commissioner, T.C. Memo. 2016-79, at *11–12.
Respondent has perhaps overlooked that it is his burden to negate
petitioner’s potential affirmative defenses. We say so because, with
respect to petitioner’s understatements of income tax for the years at
issue, respondent argues: “[P]etitioner cannot establish that he ha[d]
reasonable cause and acted in good faith.” (Emphasis added.)
21
[*21] In support of his argument that petitioner has not established any
affirmative defense, respondent proposes the following five findings of
fact.
1. Citing the Notice, respondent proposes that we find that
he determined substantial understatements of income tax for the
years at issue.
2. Citing the “[e]ntire record,” he proposes that we find
that for all years at issue, petitioner’s “understatements of tax
resulted from . . . [his] incorrect reporting of deductions, expenses,
and losses, and/or his failure to substantiate his claimed expenses
at issue.”
3. Also citing the entire record, he proposes that we find
that “[p]etitioner has not substantiated any items disallowed . . .
in the [Notice].”
4. And citing petitioner’s returns for the years at issue, he
proposes that we find that petitioner disregarded our
Memorandum Opinion in DeCrescenzo, T.C. Memo. 2012-51.
5. Finally, quoting petitioner, respondent asks that we find
that petitioner is “the best at anything having to do with finance
and accounting.”
We have already found respondent’s third proposed finding, and
petitioner does not object to the remaining four, and we so find. None of
those facts, however, except perhaps the fourth, directly addresses
petitioner’s care and prudence in preparing his returns nor, except
perhaps the fifth, his understanding of fact or law (i.e., elements of
reasonable cause and good faith). And the findings are wholesale, not
attentive to the fact that applying the criteria for reasonable cause and
good faith may result in different results for different portions of an
underpayment. While it is difficult to prove a negative (e.g., the absence
of either reasonable cause or good faith), respondent’s counsel might
have attempted to resolve that difficulty by interrogating petitioner
during trial and proposing facts based on his testimony that would give
us reason find petitioner acted either without reasonable cause or not in
good faith.
Other than the portions of petitioner’s underpayments for 2010,
2011, and 2012 attributable to his disregard of DeCrescenzo and his
failures to report self-employment tax, respondent has failed to provide
22
[*22] evidence sufficient for us to find that any of petitioner’s
underpayments of tax resulted from a lack of reasonable cause or good
faith. As a result, with that one exception, respondent has failed to
prove petitioner liable for any accuracy-related penalty, and we will not
sustain those penalties.
With respect to the one exception, petitioner’s understatements
of tax resulting from his disregard of DeCrescenzo, petitioner had (or
has) no substantial authority for his failure to report self-employment
tax nor any reasonable basis for his treatment of those items. See
§ 6662(d)(2)(B). We do not reduce petitioner’s understatements of tax
on account of his failures to report self-employment tax and sustain
section 6662(a) accuracy-related penalties attributable to the resulting
underpayments of tax.
C. Section 6673(a)(1) Sanction for Instituting a Proceeding
Primarily for Delay or Where the Taxpayer’s Position Is
Frivolous or Groundless
Respondent asks that we sanction petitioner under section
6673(a)(1) for instituting this proceeding primarily for delay, for making
frivolous arguments, and for taking groundless positions.
In pertinent part, section 6673(a)(1) allows us to impose a penalty
of up to $25,000 if (1) the taxpayer has instituted or maintained
proceedings before the Tax Court primarily for delay or (2) the
taxpayer’s position in the proceeding is frivolous or groundless.
“Groundless” means “lacking a basis or a rationale.” Groundless, Black’s
Law Dictionary (11th ed. 2019). Further, “[t]he purpose of section 6673
is to compel taxpayers to think and to conform their conduct to settled
principles before they file returns and litigate.” Takaba v.
Commissioner, 119 T.C. 285, 295 (2002). Given the public policy interest
in deterring the abuse and waste of judicial resources, the authority of
the Court to impose a penalty and decide in what amount is broad. See,
e.g., Kaebel v. Commissioner, T.C. Memo. 2021-109, at *17–18. We may
impose the penalty even where taxpayers have raised some issues that
were neither frivolous nor groundless, along with issues that were
frivolous or groundless. See, e.g., id. at *18.
23
[*23] In support of a sanction, respondent reports difficulties in
working with petitioner during the trial preparation phase of this case
culminating with respondent’s unsuccessful attempt to engage
petitioner in stipulating facts and exhibits not fairly in dispute. See Rule
91(a). Because of petitioner’s noncooperation, respondent moved
pursuant to Rule 91(f) for us to order petitioner to show cause why we
should not accept as established the facts and documents respondent
proposed to stipulate. We so ordered and, on receipt of petitioner’s
response, made our Order absolute, saying of petitioner’s response that
it “fail[ed] to meaningfully explain why the facts and evidence should
not be established.” Respondent characterizes petitioner’s failures to
cooperate in trial preparation as indictive of his motive to delay
collection of the tax owing.
Respondent also claims that, for purposes of delay, petitioner has
groundlessly challenged the validity of the Notice. Respondent avers
that this is not the first Tax Court case in which, on the same meritless
grounds, petitioner has challenged the validity of a notice. Respondent
directs us to the petition in DeCrescenzo v. Commissioner, No. 17318-11
(T.C. Nov. 20, 2012), aff’d, 563 F. App’x 858 (2d Cir. 2014), a case
involving the Commissioner’s determination of a deficiency on account
of Mr. DeCrescenzo’s failure to file timely a return for 2005.
Mr. DeCrescenzo’s assignments of error in that case include claims of
process failures by the Commissioner that, if true, would bring into
question the validity of the notice he sent. The assignments are in text
substantially identical to that set out supra pp. 7–8, under the heading
Pleadings. On the basis of those assignments, Mr. DeCrescenzo, in the
2005-year case, moved to dismiss the case for lack of jurisdiction, a
motion that, after receiving the Commissioner’s response and
Mr. DeCrescenzo’s reply, we denied summarily on June 6, 2012.
As our discussion supra Part III.B makes clear, petitioner lacks
grounds for challenging our jurisdiction to redetermine deficiencies in
petitioner’s tax for the years at issue. Petitioner’s arguments about the
validity of the Notice are meritless, and petitioner should have been on
notice of that fact because of our summary rejection of his same
arguments in DeCrescenzo, No. 17318-11. A taxpayer who ignores
warnings that an argument is meritless is deserving of a greater
penalty. See Leyshon v. Commissioner, T.C. Memo. 2015-104, at *25,
aff’d, 649 F. App’x 299 (4th Cir. 2016).
Petitioner’s claims with respect to the validity of the Notice are
groundless, and his arguments with respect thereto are meritless. We
24
[*24] also find that he instituted this proceeding primarily for delay. We
hold that petitioner is liable for a $5,000 penalty pursuant to section
6673(a)(1).
To reflect the foregoing,
Decision will be entered under Rule 155.