Stephen W. Williams v. Commissioner

114 T.C. No. 8UNITED STATES TAX COURT
STEPHEN W. WILLIAMS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23179-97. Filed March 1, 2000.
P mailed two Forms 1040, U.S. Individual Income
Tax Return, for 1991 to the IRS. The first Form 1040
included a deduction for “Non Taxable Compensation”
equal to P’s total income, and P failed to sign it. P
stipulated that this Form 1040 is not a valid return.
In the second Form 1040, P reported taxes owed of
$36,621. P however attached a disclaimer statement to
the second Form 1040 stating that he denied all tax
liability and did not admit that the stated amount of
tax was due.
Held: P is liable for the deficiency.
Held, further, P’s second Form 1040 is not a valid
return; therefore, P is not liable for the accuracy-
related penalty pursuant to sec. 6662(a), I.R.C.
Held, further, P is liable for the addition to tax
pursuant to sec. 6651(a)(1), I.R.C.
Held, further, P is liable for a penalty under
sec. 6673, I.R.C.
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Stephen W. Williams, pro se.
M. Kathryn Bellis and Marion S. Friedman, for respondent.
OPINION
VASQUEZ, Judge: Respondent determined a deficiency of
$42,934, an addition to tax pursuant to section 6651(a)(1) of
$9,492, and an accuracy-related penalty pursuant to section
6662(a) of $8,587 in petitioner’s 1991 Federal income tax.1
Pursuant to Rule 122, the parties submitted this case fully
stipulated. The stipulations of fact, the supplemental
stipulations of fact, and the attached exhibits are incorporated
herein by this reference. At the time the petition was filed,
petitioner resided in Spring, Texas.
After concessions,2 the issues for decision are: (1)
Whether petitioner is liable for the deficiency determined by
respondent in petitioner’s 1991 taxes; (2) whether petitioner’s
Form 1040, U.S. Individual Income Tax Return, containing a
disclaimer statement constituted a valid return, and if so,
whether petitioner is liable for a penalty pursuant to section
6662; (3) whether petitioner is liable for an addition to tax
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1991, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
2
Respondent concedes that petitioner is entitled to a head
of household filing status and a dependency exemption deduction
for his son, Steve W. Williams.
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pursuant to section 6651(a)(1); and (4) whether petitioner is
liable for a penalty pursuant to section 6673.
Background
During 1991, petitioner was employed as a veterinarian by
Stephen W. Williams P.C., an S corporation (Williams P.C.).
Petitioner received extensions of time for filing his 1991 income
tax return until October 15, 1992.
On October 1, 1994, petitioner mailed a Form 1040 for 1991
to the Internal Revenue Service (IRS). Petitioner altered the
Form 1040 (altered 1040) by marking through the captions on lines
7 and 18 and typing his own caption, “Non Taxable Compensation”.
Petitioner reported income of $20,500 and $135,861 on lines 7 and
18, respectively. Next, petitioner whited out the captions on
lines 24a and b and typed in “Non Taxable Compensation Eisner v.
Macomber 252 U.S. 189". Petitioner reported a deduction of
$156,861 on line 24a, which brought his adjusted gross income to
$0. Petitioner did not sign the altered 1040.
The IRS treated the altered 1040 as a frivolous return under
section 6702 and fined petitioner $500. Petitioner stipulated
that the altered 1040 was a frivolous return and not a return
within the meaning of section 6501(a).
On November 21, 1996, petitioner mailed another Form 1040
(disclaimer 1040) for 1991 to the IRS. On the disclaimer 1040,
petitioner reported adjusted gross income of $150,852 consisting
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of wages of $20,500, taxable interest income of $14, a capital
loss of ($2,986), and rents and partnership income of $133,324.
Petitioner reported a total tax of $41,586 and an amount owed of
$36,621. Petitioner, this time, did not strike or change any
language on the form. Instead, beside the amount owed reported
on line 64, petitioner placed an asterisk. At the bottom of the
page, petitioner stated that the asterisk denoted “The admitted
liability is zero. See attached Disclaimer Statement.” The
attached disclaimer statement (the disclaimer) read in part:
The above named taxpayer respectfully declines to
volunteer concerning assessment and payment of any tax
balance due on the return or any redetermination of
said tax. Be it known that the above said taxpayer,
therefore, denies tax liability and does not admit that
the stated amount of tax on return is due and
collectable. * * *
Petitioner signed the disclaimer 1040.
Except for the altered 1040 and the disclaimer 1040,
petitioner did not mail to or file with the IRS any other Forms
1040 for 1991.
During 1991, petitioner received income and incurred losses
as follows:
Wages from Williams P.C. $20,500
Interest from Vista Properties 14
(Vista)
Interest from Charles Schwab 3
Net short term capital loss (2,986)
Rents from Williams P.C. 29,000
Nonpassive loss from Vista (1,637)
Nonpassive income from
Williams P.C. 105,961
Rents from Summit Outdoor
Advertising (Summit) 900
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Discussion
I. Deficiency Liability
Petitioner does not challenge either the facts on which
respondent’s determination is based or respondent’s calculation
of tax. In fact, respondent based the computation of the
deficiency on the amounts reported by petitioner on the altered
1040 and the disclaimer 1040. Petitioner, nevertheless, contends
he is not liable for the deficiency. Petitioner claims that (1)
he did not volunteer to self-assess or pay his taxes, and he
therefore cannot be held liable for any deficiency; (2) his
income is not from any of the sources listed in section 1.861-
8(a), Income Tax Regs., and thus is not taxable; and (3) the
notice of deficiency was improperly issued because petitioner
disclaimed the tax liability shown on the return.
Petitioner’s arguments are reminiscent of tax-protester
rhetoric that has been universally rejected by this and other
courts. We shall not painstakingly address petitioner’s
assertions “with somber reasoning and copious citation of
precedent; to do so might suggest that these arguments have some
colorable merit.” Crain v. Commissioner, 737 F.2d 1417, 1417
(5th Cir. 1984). Accordingly, we conclude that petitioner is
liable for the deficiency determined by respondent.
II. Accuracy-related Penalty
Respondent determined that petitioner is liable for an
accuracy-related penalty pursuant to section 6662(a) for his
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underpayment of tax attributable to negligence or disregard of
rules or regulations. The penalty under section 6662(a) applies
only where a return has been filed. See sec. 6664(b). We
therefore must determine whether the disclaimer 1040 constitutes
a valid return.
Generally, pursuant to section 6011(a), taxpayers are
required to file returns that conform to the forms and
regulations prescribed by the Secretary. See sec. 1.6011-1(a),
Income Tax Regs. The Form 1040 is the form prescribed by the
Secretary for use by individual taxpayers in filing returns. See
Steines v. Commissioner, T.C. Memo. 1991-588.
Section 6065 requires returns to contain or be verified by a
written declaration that they are made under the penalties of
perjury. To facilitate a taxpayer’s compliance with this
requirement, the Form 1040 contains a preprinted jurat.3 By
signing the jurat included within the Form 1040, a taxpayer
satisfies the requirement that his return be executed under
penalty of perjury. See Sloan v. Commissioner, 102 T.C. 137,
146-147 (1994), affd. 53 F.3d 799 (7th Cir. 1995); Sochia v.
Commissioner, T.C. Memo. 1998-294.
The U.S. Supreme Court has also held that certain documents
3
The jurat is the portion of the Form 1040 which reads:
“Under penalties of perjury, I declare that I have examined this
return and accompanying schedules and statements, and to the best
of my knowledge and belief, they are true, correct, and
complete.”
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drafted by taxpayers that do not comply with the forms prescribed
by the Secretary will nevertheless be treated as valid returns,
for purposes of the statute of limitations, if they contain
certain elements. See Badaracco v. Commissioner, 464 U.S. 386(1984); Commissioner v. Lane-Wells Co., 321 U.S. 219 (1944);
Zellerbach Pager Co. v. Helvering, 293 U.S. 172 (1934); Lucas v.
Pilliod Lumber Co., 281 U.S. 245 (1930); Florsheim Bros. Drygoods
Co. v. United States, 280 U.S. 453 (1930). In Beard v.
Commissioner, 82 T.C. 766, 777 (1984), affd. 793 F.2d 139 (6th
Cir. 1986), we summarized the Supreme Court’s test for a valid
return as follows:
First, there must be sufficient data to calculate [the]
tax liability; second, the document must purport to be
a return; third, there must be an honest and reasonable
attempt to satisfy the requirements of the tax law; and
fourth, the taxpayer must execute the return under
penalties of perjury.
The fourth requirement is the same requirement found in section
6065 and can be satisfied by signing the jurat on the Form 1040.
In Beard, we applied the Supreme Court’s test in our
analysis of whether the document at issue was a tax return for
purposes of section 6651(a)(1). See id.; see also Martin
Fireproofing Profit Sharing Plan & Trust v. Commissioner, 92 T.C.
1173 (1989) (applying Beard in section 6033 context); Dunham v.
Commissioner, T.C. Memo. 1998-52 (applying Beard in the section
6651(f) context). We see no reason why the same test should not
apply in determining whether a document constitutes a tax return
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for purposes of section 6662(a).
We first determine whether the disclaimer 1040 complies with
the form prescribed by the Secretary. Although petitioner used a
Form 1040, petitioner added the disclaimer to the form.
Respondent contends that the addition of the disclaimer to the
Form 1040 vitiated petitioner’s signature under the jurat.
In the past, we have analyzed the effect of tax protesters’
alterations to the Form 1040, and in particular to the jurat, and
determined whether the altered Form 1040 constituted a valid
return. In the beginning, tax protesters simply crossed out the
entire text of the jurat, and we held that the Forms 1040 were
not valid returns. See Cupp v. Commissioner, 65 T.C. 68, 78-79,
affd. without published opinion 559 F.2d 1207 (3d Cir. 1977); see
also Mosher v. Internal Revenue Service, 775 F.2d 1292, 1294 (5th
Cir. 1985)(per curiam). Next, tax protesters deleted particular
words from the jurat such as “under penalties of perjury” and/or
“true, correct, and complete”. In those cases, we held that the
Forms 1040 did not constitute valid returns. See Sochia v.
Commissioner, supra; Jenkins v. Commissioner, T.C. Memo. 1989-
617.
Recently, tax protesters have begun to add to rather than
strike out the text of the jurat. We have generally found that
the addition of language to the jurat invalidated the Form 1040
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as a return.4 See Andrews v. Commissioner, T.C. Memo. 1999-281;
Hodge v. Commissioner, T.C. Memo. 1998-242; Counts v.
Commissioner, T.C. Memo. 1984-561. For example, in Sloan v.
Commissioner, supra at 141, immediately following the preprinted
text of the jurat and immediately above the taxpayer’s signature
(i.e., within the jurat box), the taxpayer wrote “Denial and
Disclaimer attached as part of this Form.” The following
statement was attached to the Form 1040:
4
We note that some courts have found that the addition of
protest language to the Form 1040 will not invalidate the form as
a return. In McCormick v. Peterson, 73 AFTR 2d 94-597, 94-1 USTC
par. 50,026 (E.D.N.Y. 1993), the court held that the addition of
the words “under protest” to the jurat did not alter the meaning
of the jurat and thus did not invalidate the Form 1040 as a
return; see also Berger v. Commissioner, T.C. Memo. 1996-76(holding the addition of a disclaimer statement which declared
that the return was signed “under duress by court order” did not
alter the jurat in such a way as to invalidate the return); Todd
v. United States, 849 F.2d 365, 367 (9th Cir. 1988) (holding that
the addition of the words “signed involuntarily under penalty of
statutory punishment” below the jurat did not make the Form 1040
a frivolous return under section 6702). But see In re Schmitt v.
United States, 140 Bankr. 571, 572 (Bankr. W.D. Okla. 1992)
(holding the addition of the words “signed under duress see
statement attached” to the jurat invalidated the return).
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DENIAL AND DISCLAIMER
OF LORIN G. SLOAN
FOR THE YEAR
I submit this “Denial and Disclaimer” as an attachment
to the IRS Form 1040 for the year stated above. I deny
that I am liable or made liable for any “1040 income
tax” for the above stated year. I claim all of my
rights and waive none of them merely for exercising my
right to work. I submit the 1040 form to prevent the
further theft of my property and loss of my liberty.
My signature on the form is not an admission of
jurisdiction or submission to subject status. I
“disclaim liability” for any tax shown on the form.
[Id. at 141.]
We stated in Sloan that the above “Denial and Disclaimer”
statement “[raised] serious questions about whether petitioner
[was] ‘denying’ the accuracy of the information contained in the
return, ‘disclaiming’ the jurat altogether, or simply protesting
the tax laws.” Id. at 145. We held that, by adding the
disclaimer to the jurat, the return was invalidated.
In affirming our decision in Sloan, the U.S. Court of
Appeals for the Seventh Circuit stated in part:
It is a close question whether the “Denial &
Disclaimer” should be interpreted in this light–-that
is, as an attempt to retract or qualify the jurat.
* * * But we think that the Internal Revenue Service
should be entitled to construe alterations of the jurat
against the taxpayer, at least when there is any doubt.
* * * The government receives tens of millions of tax
returns and if taxpayers start embellishing the jurat
the staggering task of processing all these returns may
become entirely unmanageable. [Sloan v. Commissioner,
53 F.3d at 800.]
Against the foregoing backdrop, we consider for the first
time whether disclaimer language added outside the jurat box
invalidates the Form 1040 as a return because it fails to comply
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with the form prescribed by the Secretary. Petitioner argues
that his disclaimer is “nowhere near the jurat;” therefore, he
executed a valid return.
It is true that petitioner has carefully avoided adding
language within the jurat box. We, however, believe that this is
just another attempt by a taxpayer to alter the essence of the
jurat and the Form 1040 without actually tampering with the
preprinted form. While not physically deleting, altering, or
adding words to the jurat, the disclaimer negated the meaning of
the jurat. The jurat states that the signatory declares, under
penalties of perjury, that the return is true, correct, and
complete. The disclaimer at a minimum calls into question the
veracity, accuracy, and completeness of the disclaimer 1040 and
can be construed as a denial of the jurat altogether. Although
petitioner physically signed the return below the jurat, his
disclaimer, in effect, vitiated his verification of the
truthfulness of the return as required by the regulations
prescribed by the Secretary and by section 6065.
We have previously stated that the acceptance of documents
which vary from the form prescribed by the Secretary
adversely affects the form’s useability by respondent.
The tampered form, * * *, must be handled by special
procedures and must be withdrawn from normal processing
channels. * * *, it substantially impedes the
Commissioner’s physical task of handling and verifying
tax returns. * * * [Beard v. Commissioner, 82 T.C. at
776-777.]
See also Reiff v. Commissioner, 77 T.C. 1169, 1177 (1981). We
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refuse to require respondent to engage in guessing games to
determine what disclaimers like this one mean. To require such
would drastically hinder the Commissioner’s ability to process
returns effectively and efficiently. We find that the disclaimer
1040 does not comport with the form prescribed by the Secretary.
The disclaimer 1040 may, nevertheless, be treated as a valid
return if it contains the four elements outlined in the Supreme
Court’s test. Under the Supreme Court’s test, in order for a
document to be a valid return, a taxpayer must execute the
document under penalties of perjury. As we found above, by his
disclaimer, petitioner altered the meaning of the jurat to the
extent that it cannot be said that petitioner executed the
document under penalties of perjury.
Additionally, under the Supreme Court’s test, there must be
an honest and reasonable attempt to satisfy the requirements of
the tax laws. The disclaimer contained tax protester legal
gibberish that has been consistently rejected by courts.
Petitioner’s denial of tax liability and refusal to self-assess
does not evidence a reasonable attempt to satisfy his obligation
to file a return under the tax laws. We find that petitioner has
not filed a valid return under the Supreme Court’s test.
We conclude that the disclaimer 1040 does not constitute a
valid return; therefore, petitioner is not liable for the penalty
pursuant to section 6662(a).
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III. Addition to Tax
Respondent determined that petitioner is liable for an
addition to tax pursuant to section 6651(a)(1). Section
6651(a)(1) imposes an addition to tax for failure to file a
return on the date prescribed (determined with regard to any
extension of time for filing), unless the taxpayer can establish
that such failure is due to reasonable cause and not due to
willful neglect. The taxpayer has the burden of proving the
addition is improper. See Rule 142(a); United States v. Boyle,
469 U.S. 241, 245 (1985). The amount added to the tax under this
section is 5 percent for each month or faction thereof during
which the return is late, up to a maximum of 25 percent. See
sec. 6651(a)(1).
The due date for petitioner’s 1991 return, as extended, was
October 15, 1992. Petitioner stipulated that the altered 1040
was mailed on October 1, 1994, almost 2 years late. Petitioner
mailed the disclaimer 1040 on November 21, 1996. Regardless of
whether either of these forms was a valid return, neither was
filed within 5 months of the extended due date. Petitioner
offered no evidence showing that his failure to file timely was
due to reasonable cause and not due to willful neglect.
Accordingly, we hold petitioner is liable for the maximum
addition to tax under section 6651(a)(1).
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IV. Frivolous Suit
Under section 6673, this Court may require a taxpayer to pay
a penalty not to exceed $25,000 if the taxpayer takes a frivolous
position in the proceeding or institutes the proceeding primarily
for delay. A position maintained by the taxpayer is “frivolous”
where 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). Petitioner’s
arguments concerning the underlying deficiency amount to tax
protester rhetoric and are manifestly frivolous and groundless.
He has wasted the time and resources of this Court. Accordingly,
we shall impose a penalty of $5,000 pursuant to section 6673.
To the extent not herein discussed, we have considered the
parties’ other arguments and found them to be meritless.
To reflect the foregoing,
Decision will be entered
under Rule 155.