Opinion
3729-22
06-01-2023
ANN E. DUNLAP, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Elizabeth A. Copeland Judge
A trial in this case occurred on April 17, 2023, before Judge Elizabeth A. Copeland during the Trial Session of the Court in Cleveland, Ohio. Thereafter, on April 19, 2023, she rendered her oral findings of fact and opinion.
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit with this Order to petitioner and to respondent a copy of the pages of the transcript of the April 19, 2023, rendition of Judge Elizabeth A. Copeland's oral findings of fact and opinion, which opinion was rendered during the Court's Trial Session in Cleveland, Ohio.
In accordance with the Oral Findings of Fact and Opinion, the Court will issue an Order and Decision for respondent as to the deficiencies, and additions to tax under I.R.C. Sections 6651(a)(1) and (2) for taxable years 2016 and 2017, and also the I.R.C. Section 6654 addition to tax for taxable year 2017; and for petitioner as to the addition to tax under I.R.C. Section 6654 for taxable year 2016.
April 19, 2023
BENCH OPINION
Elizabeth A. Copeland, Judge
THE COURT: The Court has decided to render oral findings of fact and opinion in this case and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. The oral findings of fact and opinion are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. In this opinion, all section references are to the Internal Revenue Code of 1986 as in effect at all relevant times (I.R.C. or the "Code"); and Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.
This case was tried on April 17, 2023, at the Court's regular trial session in Cleveland, Ohio. Petitioner, Ann Dunlap, appeared on that date pro se. Nancy Klingshirn appeared on behalf of respondent.
In two separate notices of deficiency, both dated October 25, 2021, the Internal Revenue Service (IRS) determined income tax deficiencies of $30,379 for tax year 2016 and $17,320 for tax year 2017 (the years in issue).
It also determined that Ms. Dunlap was liable for the following three additions to tax:
1. A section 6651(a)(1) addition to tax of $2,988 for 2016 and $2,313 for 2017 for failure to timely file her respective income tax returns;
2. A section 6651(a)(2) addition to tax of $3,320 for 2016 and $2,107 for 2017 for failure to timely pay her income taxes in those years; and
3. A section 6654 addition to tax of $272 for 2016 and $227 for 2017 for failure to timely make estimated tax payments for those tax years.
Ms. Dunlap contests all of the above determinations.
On the evidence before us, and using the burden-of-proof principles explained below, the Court finds the following facts:
FINDINGS OF FACT
Ms. Dunlap resided in Ohio at the time she filed her Petition in this case.
During the years in issue, Ms. Dunlap worked for Anesthesiology Management Services LLC (hereinafter AMS) and InSight Surgery & Laser Center LLC (hereinafter InSight). AMS paid her wages of $87,500 for tax year 2016 and $41,561 for 2017, which were reported to the IRS on Forms W-2, Wage and Tax Statement. Out of the wages paid, AMS withheld $17,100 for 2016 and $7,042 for 2017 in federal income tax.
Ms. Dunlap likewise provided services for InSight. It paid her $39,440 in tax year 2016 and $36,855 in 2017, which payments were reported to the IRS as "nonemployee compensation" on Forms 1099-MISC, Miscellaneous Income.
Ms. Dunlap also received two forms of passive income. She received $23 in 2016 and $24 in 2017 in interest, from the Prudential Insurance Company of America (hereinafter Prudential), which were reported to the IRS on Forms 1099-INT, Interest Income. And she received $69 in 2016 and $31 in 2017 in royalty payments, from the NGO Development Corporation, Inc (hereinafter NGO), which were reported to the IRS on Forms 1099-MISC as "royalties."
Ms. Dunlap did not file an income tax return for either tax year 2016 or 2017. The IRS, pursuant to section 6020(b), prepared a substitute for return (sometimes referred to hereafter as an SFR) for each of the years in issue on the basis of the aforementioned third-party information returns. The IRS then sent Ms. Dunlap two Letters 1862, Initial Contact Letter-Substitute for Return (one for 2016 and one for 2017). Both letters had as attachments a Form 13496, IRC Section 6020(b) Certification, a Form 4549, Report of Income Tax Examination Changes, and a Form 886-A, Explanation of Items. The Letters 1862 advised Ms. Dunlap that she failed to file returns for tax years 2016 and 2017 and gave her three options: (1) file returns for those years; (2) review the three documents attached to each letter, sign the Forms 4549, and return them to the IRS with payment for the balance due; or (3) review the three documents and send the IRS a written statement indicating why she disagreed with the Forms 4549. The Letters 1862 also advised Ms. Dunlap that failure to take any one of the above three actions would result in the IRS issuing her a notice of deficiency. Ms. Dunlap responded to the letters, asserting that she was not liable for the proposed tax deficiencies for frivolous reasons similar to those asserted at trial.
The IRS subsequently issued Ms. Dunlap the two separate October 25, 2021, notices of deficiency for tax years 2016 and 2017, which led her to timely file a Petition with this Court.
OPINION
I. Burden of Proof
We generally presume that the IRS's determinations in a notice of deficiency are correct and impose upon the taxpayer the burden of proving those determinations erroneous. Rule 142(a); see Welch v. Helvering, 290 U.S. 111, 115 (1933). However, this presumption does not automatically apply here as the deficiency determinations in this case are based on unreported income. The Court of Appeals for the Sixth Circuit (the circuit to which an appeal in this case would normally lie absent a contrary stipulation-see section 7482(b)) has held that a deficiency determination involving unreported income is not entitled to the presumption of correctness unless respondent, the IRS, can provide at least a "minimal" factual predicate or foundation of substantive evidence linking the taxpayer to the income-producing activity or to the receipt of funds. See United States v. Walton, 909 F.2d 915, 918-19 (6th Cir. 1990); Garavaglia v. Commissioner, T.C. Memo. 2011-228, 2011 WL 4448913, at *19, aff'd, 521 Fed.Appx. 476 (6th Cir. 2013). Once the IRS has carried this initial burden, the presumption of correctness attaches to the notice of deficiency and the taxpayer has the burden to rebut that presumption by establishing, by a preponderance of the evidence, that the deficiency determinations are arbitrary or erroneous. See Garavaglia, 2011 WL 4448913, at *19; see also I.R.C. §§ 6201(d), 7491(a).
To satisfy this minimal factual burden, respondent introduced into evidence two transcripts (one for 2016 and one for 2017), which contained data from the multitude of information returns filed by various third parties with respect to Ms. Dunlap for tax years 2016 and 2017. These certified transcripts show in relevant part that, for tax years 2016 and 2017, Ms. Dunlap received wages from AMS, nonemployee compensation from InSight, interest from Prudential, and royalties from NGO. At trial, Ms. Dunlap admitted to working at and providing services to AMS and InSight. As to Prudential, she admitted to receiving interest; as to NGO, she admitted to receiving royalties. On the basis of these transcripts and Ms. Dunlap's testimony, we find that respondent has met the IRS's factual burden. Thus, we presume that the determinations in the two notices of deficiency are correct, and Ms. Dunlap bears the burden of proving those determinations incorrect.
II. Ms. Dunlap's Income Tax Deficiencies
Gross income includes "all income from whatever source derived." I.R.C. § 61(a). The United States Supreme Court has consistently held that this statutory definition "was used by Congress to exert in this field 'the full measure of its taxing power.'" Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429 (1955) (quoting Helvering v. Clifford, 309 U.S. 331, 334 (1940)). Payments that are "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion" are taxable income unless an exclusion applies. Id. at 431.
Section 61 is the operative provision here. It clearly brings into gross income all of the payments Ms. Dunlap received in tax years 2016 and 2017. Her wages and nonemployee compensation fall within the purview of section 61(a)(1), and the interest and royalties she received fall within the purview of section 61(a)(4) and (6), respectively.
We gave Ms. Dunlap an opportunity at trial to show why the monies she received in tax years 2016 and 2017 are not taxable. She advanced only frivolous arguments that we have rejected time and time again. See, e.g., Wnuck v. Commissioner, 136 T.C. 498 (2011); Waltner v. Commissioner, T.C. Memo. 2014-35, aff'd, 659 Fed.Appx. 440 (9th Cir. 2016). She argues she did not authorize third parties to share her information-that it was not "voluntary." We have previously addressed the argument that the phrase "voluntary compliance" means that the tax system is purely voluntary, by stating:
This is nothing but arrogant sophistry. Implicit in the statements relied upon by [the petitioner] to the effect that the system is based upon voluntary compliance is the known fact that, in spite of its extensive
bureaucracy and technical equipment, the manpower and facilities of the IRS for policing compliance by every taxpayer are limited and that the effectiveness of the system depends upon the taxpayer's voluntary obedience to the law. These statements certainly were never intended to suggest that the internal revenue laws were self-destructive. Yet, this is precisely what petitioner's argument comes down to, for if [the petitioner was] correct, Congress has supplied every taxpayer with a facile device for totally avoiding all liability by simply declaring that he does not choose to comply. We cannot find that Congress ever intended any such absurd result.
The result would be absurd, and the very argument is absurd.Waltner, T.C. Memo. 2014-35, at *56-57 (footnote omitted). Ms. Dunlap also argues that the IRS was not permitted to prepare SFRs under section 6020 because Internal Revenue Manual (IRM) part 5.1.11.7.7 (Apr. 23, 2014) does not list Form 1040, U.S. Individual Income Tax Return, as one of the returns that the IRS may prepare under section 6020, and therefore that statute is inapplicable. This argument is faulty because the IRM does not have the force of law and, thus, cannot affect the applicability and scope of section 6020. See Griswold v. United States, 59 F.3d 1571, 1576 n.8 (11th Cir. 1995); Marks v. Commissioner, 947 F.2d 983, 986 n.1 (D.C. Cir. 1991), aff'g T.C. Memo. 1989-575; Vallone v. Commissioner, 88 T.C. 794, 807 (1987); Estate of Washington v. Commissioner, T.C. Memo. 2022-4, at *13 n.8. Further, the IRM's requirements are "merely directory and not mandatory and noncompliance does not render the [IRS's action invalid] . . . Courts have generally said that the [IRM] is not for the protection of taxpayers." Vallone, 88 T.C. at 807-808 (citations omitted). Section 6020, by its clear terms, allows the IRS to prepare an SFR, including a substitute for an individual income tax return, when the taxpayer does not file such a return. See Holloway v. Commissioner, T.C. Memo. 2012-137, 2012 WL 1727685, at *2 ("When a taxpayer does not file a tax return, the IRS may create a substitute for return . . . This means, contrary to petitioner's assertion, that the IRS has authority to prepare a substitute for return for anyone who fails to file a return." (citations omitted)).
We will not refute Ms. Dunlap's other arguments with somber reasoning and copious citations of precedent because to do so might suggest that these arguments have some colorable merit. See Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984).
We hold that the wages, nonemployee compensation, interest, and royalties Ms. Dunlap received in tax years 2016 and 2017 are all taxable under section 61.
III. Additions to Tax
We now turn to the additions to tax. Respondent determined that Ms. Dunlap is liable for additions to tax under sections 6651(a)(1) and (2) and 6654 for the years in issue. Section 7491(c) imposes upon the IRS the burden of producing sufficient evidence, showing that it is appropriate to impose each addition to tax. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001) (holding that respondent bears the initial burden of production for additions to tax under section 6651); Wheeler v. Commissioner, 127 T.C. 200, 207 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008) (same holding as to the section 6654 addition to tax). Once the IRS meets this burden, the burden of proof is on Ms. Dunlap to show that it is inappropriate to impose these additions to tax.
A. Section 6651(a)(1) Addition to Tax
Section 6651(a)(1) provides for an addition to tax for failure to file a timely return unless the taxpayer proves that such failure is due to reasonable cause and is not due to willful neglect. See United States v. Boyle, 469 U.S. 241, 245 (1985); Wheeler, 127 T.C. at 207 (2006); Harris v. Commissioner, T.C. Memo. 1998-332, 1998 WL 646480, at *5. For purposes of the addition to tax under section 6651(a)(1), a substitute for return is not treated as the filing of a return by the taxpayer. See I.R.C. § 6651(g)(1) (disregarding an SFR prepared under section 6020(b) for purposes of section 6651(a)(1)).
Respondent introduced evidence showing that Ms. Dunlap did not file an income tax return for either tax year 2016 or 2017, despite having an obligation to do so for both years, see I.R.C. § 6012(a). He has therefore met his initial burden of production.
Ms. Dunlap agreed that she had not filed returns and did not make any plausible argument for why she should not be held liable for the section 6651(a)(1) addition to tax. We thus find that she is so liable.
B. Section 6651(a)(2) Addition to Tax
Section 6651(a)(2) provides for an addition to tax for failure to timely pay the amount of tax shown on a return. The addition to tax under section 6651(a)(2) applies only when an amount of tax is shown as due on a return. Cabirac v. Commissioner, 120 T.C. 163, 170 (2003). Although Ms. Dunlap did not file a tax return for either of the years in issue, a substitute for return made under section 6020(b) can be treated as "the return filed by the taxpayer for purposes of determining the amount of the addition [to tax under section 6651(a)(2)]." I.R.C. § 6651(g)(2). To constitute a valid substitute for return under section 6020(b), "the return must be subscribed [by the Secretary of the Treasury or her delegate], it must contain sufficient information from which to compute the taxpayer's liability, and the form and any attachments must purport to be a 'return'." Rader v. Commissioner, 143 T.C. 376, 382 (2014) (quoting Spurlock v. Commissioner, T.C. Memo. 2003-124, 2003 WL 1987156, at *10), aff'd in part and dismissed in part on jurisdictional grounds, 616 Fed.Appx. 391 (10th Cir. 2015).
At trial, we admitted into evidence the two Letters 1862 that the IRS sent Ms. Dunlap. The three documents attached to each of those letters (i.e., the Form 13496, the Form 4549, and the Form 886-A) show how the IRS calculated the tax she owed for the years in issue, using data from third-party information returns. Respondent also submitted into evidence transcripts that showed data from the various third-party information returns filed with the IRS for the years in issue. The information contained in those transcripts matches the amounts shown on the Forms 4549. We find that the combination of the three documents attached to each of the two Letters 1862 plus the transcripts constitute substitutes for returns that satisfy the requirements of section 6020(b). Respondent has therefore met his initial burden of production.
Ms. Dunlap did not make any plausible argument for why she should not be held liable for the section 6651(a)(2) addition to tax. We thus find that she is so liable.
C. Section 6654 Addition to Tax
Section 6654 provides for an addition to tax if the taxpayer had an obligation to make estimated tax payments and failed to do so. An individual taxpayer generally has an obligation to pay estimated tax for a particular year only if she has a non-zero "required annual payment" for that year. I.R.C. § 6654(d). A "required annual payment" is equal to the lesser of (1) 90 percent of the tax shown on the individual's return for that year (or if no return is filed, 90 percent of her tax for such year), or (2) if the individual filed a return for the immediately preceding year, 100 percent of the tax shown on that return. I.R.C. § 6654(d)(1) (emphasis ours). If a prior year return is not filed, as here; the second test is inapplicable. I.R.C. § 6654(d)(1)(B). There are also three additional exceptions: (1) the tax due for a particular year is less than $1,000, I.R.C. § 6654(e)(1); (2) the taxpayer had no tax liability in the preceding 12-month tax year and was a citizen or resident of the United States, I.R.C. § 6654(e)(2); or (3) the taxpayer qualifies for an equitable waiver under section 6654(e)(3).
The IRS's burden of production under section 7491(c) requires it to produce evidence that Ms. Dunlap had a required annual payment for tax years 2016 and 2017 under section 6654(d) and that she falls outside the three exceptions enumerated in section 6654(e). See Wheeler, 127 T.C. at 207.
The 2016 and 2017 SFRs reflect a total balance due of $30,379 and $17,320, respectively. Ms. Dunlap did not file a return for either 2016 or 2017; thus, focusing on the applicable first test (section 6654(d)(1)(B)(i)), her required annual payment was 90% of the tax due for each of the years in issue. For 2016, the required annual payment was $27,341, and for 2017, it was $15,588. The only tax payments Ms. Dunlap made in 2016 and 2017 were the $17,100 and $7,042 that AMS withheld from her wages for those respective years. Both payments fell well below the required annual payment for the years in issue.
Further, Ms. Dunlap's 2016 and 2017 tax liabilities both exceed $1,000, and nothing in the record suggests that she qualifies for an equitable waiver. Respondent has thus shown that the "small tax" and "equitable waiver" exceptions in section 6654(e)(1) and (3), respectively, are inapplicable here.
However, section 6654(e)(2) exempts a taxpayer from the section 6654 addition to tax if the taxpayer did not have a tax liability in the preceding 12-month tax year and was a citizen or resident of the United States. For this case, we will focus on subparagraph (B) of this exception, which requires Ms. Dunlap to not have a tax liability in tax years 2015 and 2016 (the preceding tax years for the years in issue).
The record is devoid of any evidence showing that Ms. Dunlap had a tax liability in 2015. She does have a tax liability for 2016. Thus, respondent has met his burden of production as to tax year 2017, but not as to tax year 2016. We accordingly hold that Ms. Dunlap is not liable for the section 6654 addition to tax for tax year 2016, but is liable for such addition to tax for tax year 2017.
IV. Section 6673 Penalty
Section 6673(a)(1) allows the Court to impose the penalty not to exceed $25,000 when it appears that the taxpayer's position is frivolous or groundless. We will not exercise our discretion and impose upon Ms. Dunlap a penalty at this time, but we warn her that if she continues to advance the same positions in the future it is likely that a section 6673 penalty may be imposed.
V. Conclusion
In conclusion, Ms. Dunlap received wages, nonemployee compensation, interest, and royalties in tax years 2016 and 2017, all of which are taxable. She had a statutory obligation to file an income tax return for those years and did not do so. She also did not timely pay all of the tax due for those years and did not make some of the required estimated tax payments. She is therefore liable for the deficiencies and the additions to tax determined in the notices of deficiency for tax years 2016 and 2017, except as to the addition to tax under section 6654 for 2016.
We have considered all of the arguments made by the parties, and to the extent that we have not addressed them, we find them to be moot, irrelevant, or without merit.
To reflect the foregoing, an appropriate decision will be entered.
This concludes the Court's oral findings of fact and opinion in this case.
(Whereupon, at 4:36 p.m., the above-entitled matter was concluded.)