Larry W. Macdonald v. Commissioner

T.C. Memo. 2018-138UNITED STATES TAX COURT
LARRY W. MACDONALD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 5503-16, 17660-16. Filed August 27, 2018.
Larry W. Macdonald, pro se.
Brenn C. Bouwhuis, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PUGH, Judge: In notices of deficiency dated February 10, 2016, and May
11, 2016, respectively, respondent determined deficiencies in petitioner’s 2013
and 2014 Federal income tax and penalties as follows:
-2-
[*2] Penalty
Year Deficiency sec. 6662
2013 $21, 966 $3,267
2014 40,315 7,364
The issues for decision are: (1) whether petitioner has unreported wage
income of $102,207 for 2013 and $105,496 for 2014; (2) whether petitioner
received and failed to report retirement income of $7,500 for 2013 and $53,796 for
2014; (3) whether petitioner is liable for a 10% additional tax under section 72(t)
of $750 for 2013 and $5,379 for 2014; (4) whether petitioner is liable for a section
6662(a) accuracy-related penalty for both taxable years; and (5) whether petitioner
is liable for a section 6673 penalty.1
FINDINGS OF FACT
Petitioner refused to stipulate any facts or documents. At the time the
petitions were filed, petitioner resided in the State of Utah. During the years at
issue, petitioner, an engineer, was employed by Wencor LLC (Wencor) and was
paid wages in exchange for his services of $102,207 for 2013 and $105,496 for
1
Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, in effect for the years at issue. Rule references are to
the Tax Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
-3-
[*3] 2014, which were reported on Forms W-2, Wage and Tax Statement.
Petitioner also received distributions from an individual retirement account (IRA)
held by Utah Community Credit Union of $7,500 for 2013 and $53,796 for 2014,
which were reported on Forms 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
For each of 2013 and 2014, petitioner timely filed Form 1040EZ, Income
Tax Return for Single and Joint Filers With No Dependents, reporting zero income
and zero tax liability. Petitioner prepared and filed with each return a substitute
Form W-2 and a corrected Form 1099-R indicating that he had zero in wages and
zero in taxable retirement income. In December 2016 petitioner submitted a Form
1040X, Amended U.S. Individual Income Tax Return, for 2014. On that Form
1040X petitioner reported all of the income listed on the notice of deficiency for
2014, reported the 10% early distribution additional tax under section 72(t), and
claimed various deductions.2
Respondent determined a frivolous return penalty for these years that was
abated after petitioner and his wife submitted the Form 1040X for 2014.
2
This Form 1040X was attached as an exhibit to respondent’s Motion to
Impose Sanctions Under Section 6673(a)(1), filed April 9, 2018, but was not a trial
exhibit.
-4-
[*4] Petitioner then rejected the position he had taken on that Form 1040X and
before us takes the position that he is not subject to tax.
Respondent’s notices of deficiency determined that petitioner was
(1) taxable on the wages he received from Wencor in 2013 and 2014 of $102,207
and $105,496, respectively; (2) taxable on retirement distributions he received
from Utah Community Credit Union in 2013 and 2014 of $7,500 and $53,796,
respectively; (3) liable for a 10% additional tax under section 72(t) for the
retirement distributions in 2013 and 2014 of $750 and $5,379, respectively; and
(4) liable for an accuracy-related penalty under section 6662(a) for 2013 and 2014
of $3,267 and $7,364, respectively.
The examining agent’s immediate supervisor approved the section 6662(a)
penalties in writing by making an entry in the Correspondence Examination
Automation Case Support Notes on April 29, 2015, with respect to 2013, and
March 7, 2016, with respect to 2014.
At the end of trial respondent filed a Motion to Impose Sanctions Under
Section 6673(a)(1), which we took under advisement. Petitioner also renewed his
motion for default judgment (before trial we had denied a written motion for
default and dismissal) and after trial submitted a memorandum in support of that
motion.
-5-
[*5] OPINION
I. Burden of Proof
Ordinarily, the burden of proof in cases before the Court is on the taxpayer.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). However, if the
Commissioner raises a new issue or seeks an increase in the deficiency, the
Commissioner bears the burden of proof as to the new issue or the increased
deficiency. See Rule 142(a)(1).
The record establishes, and petitioner concedes, that he received payments
for services provided to Wencor and retirement distributions from Utah
Community Credit Union. Petitioner does not dispute the amounts he received
either. He disputes only the characterization of these payments as taxable income.
Because petitioner raises only legal issues, we decide whether he is liable for the
deficiencies at issue without regard to the burden of proof.3
II. Taxable Income
Section 61(a) provides that “gross income means all income from whatever
source derived,” including compensation for services. Gross income also includes
distributions from a qualified retirement plan for the year of distribution under the
3
We address the burden with respect to the accuracy-related penalties in
section IV below.
-6-
[*6] provisions of section 72. Secs. 61(a)(10), 408(d); see Sears v. Commissioner,
T.C. Memo. 2010-146. As noted above, petitioner does not dispute that he
received wages in exchange for services he provided to Wencor in 2013 and 2014,
and he does not dispute that he received distributions from his IRA. Rather, he
argues that the payments are not taxable income. He also argues that he has not
engaged in any of the sorts of activities that are subject to tax and is not the type of
taxpayer that is subject to tax. In a previous case before this Court at docket No.
1016-16 petitioner made these same arguments. We dismissed that case for failure
to state a claim and warned petitioner that his arguments were frivolous and have
been rejected by this and other courts.
Petitioner’s arguments have not changed, and we again reject them. In
general, we do not address frivolous arguments “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); see, e.g., Cabirac v. Commissioner, 120 T.C. 163 (2003), aff’d without
published opinion, 2004 WL 7318960 (3d Cir. 2004); Rowlee v. Commissioner,
80 T.C. 1111, 1120 (1983) (rejecting the taxpayer’s claim that he is not a “person
liable” for tax); Waltner v. Commissioner, T.C. Memo. 2014-35 (laying out and
-7-
[*7] rejecting a litany of frivolous positions), aff’d, 659 F. App’x 440 (9th Cir.
2016). Petitioner is subject to tax under the Internal Revenue Code.
Therefore we find that petitioner received taxable wages from Wencor and
taxable distributions from Utah Community Credit Union, and we sustain
respondent’s determination that those amounts are includable in his gross income
for 2013 and 2014.
III. Additional Tax on Early Retirement Plan Distributions
Section 72(t)(1) imposes a 10% additional tax on early distributions from a
qualified retirement plan, including an IRA. See sec. 4974(c). Petitioner
conceded that he received the distributions and presented no evidence or argument
that the amounts should be excepted from the additional tax under section 72(t)(1)
for either year. We therefore sustain respondent’s determination.
IV. Section 6662(a) Penalty
Section 6662(a) and (b)(2) imposes an accuracy-related penalty equal to
20% of the portion of an underpayment of tax required to be shown on a return
that is attributable to a “substantial understatement of income tax.” An
understatement of income tax is “substantial” if it exceeds the greater of 10% of
the tax required to be shown on the return or $5,000. Sec. 6662(d).
-8-
[*8] The Commissioner bears the burden of production with respect to a
taxpayer’s liability for accuracy-related penalties, requiring the Commissioner to
come forward with sufficient evidence indicating that imposition of the penalties
is appropriate. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446
(2001). In addition, as part of that burden the Commissioner must show that he
complied with the procedural requirements of section 6751(b)(1) for the section
6662(a) accuracy-related penalty imposed. See sec. 7491(c); Graev v.
Commissioner (Graev III), 149 T.C. __, __ (slip op. at 13-14) (Dec. 20, 2017),
supplementing and overruling in part 147 T.C. 460 (2016). Section 6751(b)
requires the Commissioner to show that penalties assessed under section 6662
were “personally approved (in writing) by the immediate supervisor of the
individual making such determination”. See Graev III, 149 T.C. at __ (slip op. at
13-14).
Once the Commissioner satisfies the burden of production, the taxpayer
must come forward with persuasive evidence that the Commissioner’s
determination as to the application of penalties is incorrect or that the taxpayer has
an affirmative defense such as reasonable cause. See Rule 142(a); Higbee v.
Commissioner, 116 T.C. at 446-447.
-9-
[*9] Petitioner reported liabilities of zero on his returns for 2013 and 2014, so
his understatements of income tax equal the deficiencies in tax we found above of
$21,966 for 2013 and $40,315 for 2014 and therefore are 100% of the tax he was
required to show on each return. We hold that respondent has met his burden on
the basis of those computations and the notation in the Correspondence
Examination Automation Case Support Notes regarding approval of those
penalties. Therefore the burden shifts to petitioner to demonstrate that
respondent’s penalty determinations were incorrect, for example, because there
was reasonable cause for any portion of either underpayment and he acted in good
faith. See sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 446-447.
The decision as to whether a taxpayer acted with reasonable cause and in
good faith is made on a case-by-case basis, taking into account all pertinent facts
and circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the
most important factor is the extent of the taxpayer’s efforts to assess the proper tax
liability. Id.; see Halby v. Commissioner, T.C. Memo. 2009-204. We also
consider the taxpayer’s experience, knowledge, and education. Sec. 1.6664-
4(b)(1), Income Tax Regs.
Petitioner has not shown reasonable cause for the underpayments of tax. He
offered only frivolous arguments to justify them. We therefore hold that petitioner
- 10 -
[*10] is liable for the penalty for an underpayment attributable to a substantial
understatement of income tax under section 6662(a) and (b)(2) for each year.
V. Section 6673 Sanction
Respondent moved that the Court impose sanctions against petitioner
pursuant to section 6673(a)(1). Section 6673(a)(1) authorizes the Court to require
a taxpayer to pay a penalty to the United States in an amount not to exceed
$25,000 whenever it appears to the Court that the taxpayer instituted or maintained
the proceeding primarily for delay or that the taxpayer’s position in the proceeding
is frivolous or groundless.
We warned petitioner in several orders prior to trial about the possibility of
this penalty’s being imposed, and we note that petitioner was warned in his prior
case in this Court that his arguments lack merit. We even warned petitioner at trial
that we would take into account everything he said when we considered
respondent’s motion. Notwithstanding that warning, petitioner filed a
memorandum after trial that repeated the same rejected arguments. Therefore, we
will grant respondent’s motion and impose a penalty of $5,000 under section
6673(a)(1) on petitioner. We again warn petitioner that if he does not abandon his
misguided positions--e.g., that his wages received for services and retirement
distributions are not taxable income, even though reported to him as such, and that
- 11 -
[*11] he is not required to file timely and proper tax returns or pay taxes when
due--a greater penalty may be imposed in future cases before this Court.
We have considered petitioner’s remaining arguments, and we conclude that
they also are frivolous and devoid of any basis in law. See Crain v. Commissioner,
737 F.2d at 1417; Wnuck v. Commissioner, 136 T.C. 498 (2011).
To reflect the foregoing,
Appropriate orders and
decisions will be entered.