Opinion
Docket No. 6837-20.
04-20-2021
BRIAN DEAN SWANSON, Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER OF SERVICE OF TRANSCRIPT
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit herewith to petitioner and respondent a copy of the pages of the transcript in the above case before Judge Richard T. Morrison, at Columbia, South Carolina, on March 19, 2021, containing his oral findings of fact and opinion rendered at the conclusion of trial.
In accordance with the oral findings of fact and opinion, an appropriate order and decision will be entered.
(Signed) Richard T. Morrison
Judge Pages: 1 through 16 Place: Columbia, South Carolina (Remote Proceeding) Date: March 19, 2021 Strom Thurmond Federal Building
1835 Assembly Street
Room 250, 2nd Floor
Columbia, South Carolina 29201
(Remote Proceeding) March 19, 2021
The above-entitled matter came on for bench opinion, pursuant to notice at 4:00 p.m.
BEFORE: HONORABLE RICHARD T. MORRISON Judge
APPEARANCES:
For the Petitioner:
No Appearance
For the Respondent:
No Appearance
PROCEEDINGS
(4:00 p.m.)
THE CLERK: Calling for bench opinion docket number 6837-20, Brian Dean Swanson.
(Whereupon, a bench opinion was rendered.) Bench Opinion by Judge Richard T. Morrison March 19, 2021 Brian Dean Swanson v. Commissioner Docket No. 6837-20
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 on as precedent in any other case.
This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986 as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure.
Unless otherwise indicated, all references to sections are to the Internal Revenue Code of 1986, as amended and in effect at all relevant times. All Rule references are to the Tax Court Rules of Practice and Procedure. Respondent, the Commissioner of Internal Revenue, is referred to as the IRS. All dollar amounts are rounded to the nearest whole number.
On March 4, 2020, the IRS sent petitioner Brian Dean Swanson a notice of deficiency for the 2017 tax year determining a deficiency of $22,865 and a section 6662(a) accuracy-related penalty of $2,959. He filed a timely petition for redetermination under section 6213(a). We have jurisdiction under section 6214(a).
We hold that (1) petitioner's pay as a school teacher is subject to the federal income tax, (2) the payments of a military pension to petitioner are not subject to the 10% premature-distribution addition to tax of section 72(t), (3) petitioner is not liable for the accuracy-related penalty because he did not file a valid return, and (4) no payment will be required of petitioner under section 6673.
Findings of fact
Petitioner was a resident of Georgia when he filed his petition.
For tax year 2015, petitioner received wages as a school teacher of $38,639 from one job and $73,731 from another job. He also received $1,667 in wages from the federal government, which was a military bonus for veterans who go into the teaching profession. His Form 1040 reported that his wages were only $1,667. He attached to his Form 1040 the Forms W-2 for his teaching jobs, but he also submitted substitutes for the Forms W-2s on which he stated that payments for his "labor" were not wages. His 2015 Form 1040 sought a refund of $14,968.
On July 27, 2016, the IRS sent petitioner a letter asking how he calculated the $1,667 of wages he reported on his Form 1040 for 2015.
On August 5, 2016, petitioner sent a letter in response. His letter stated that he calculated his wage reporting on his Form 1040 for 2015 from a Defense Finance and Accounting Service Form W-2, but added: "Two forms 4852s were sent correcting erroneous reporting because I believe that this compensation does not fit the definition of 'wages' paid to an 'employee' as defined in 26 USC."
On September 12, 2016, the IRS mailed petitioner the refund requested on his 2015 Form 1040.
During 2017, petitioner was employed by the McDuffie County Board of Education.
Petitioner was paid $77,880 during the year 2017 by the McDuffie County Board of Education for his work as a school teacher. Of this amount, $5,979 was withheld for federal income tax.
Petitioner received $32,867 in military pension payments during the year 2017 from the Defense Finance and Accounting Service. Of this amount, $2,092 was withheld for federal income tax. The military pension is not a Thrift Savings Plan. It pays fixed monthly benefits. The amount of the benefits is based on length of service and rank. Petitioner does not request payments from the plan. Payments are automatic.
On February 13, 2017, the IRS sent petitioner a notice that it was asserting a $5,000 penalty for filing a frivolous tax return for 2013.
On February 20, 2017, the IRS sent petitioner notices that it was asserting a $5,000 penalty for filing a frivolous tax return for 2014 and a $5,000 penalty for filing a frivolous tax return for 2015.
On March 26, 2018, the IRS sent petitioner notices that it was no longer asserting a $5,000 penalty for filing a frivolous tax return for 2013 and that it was no longer asserting a $5,000 penalty for filing a frivolous tax return for 2015.
On or before April 15, 2018, petitioner filed a Form 1040 for 2017. The Form 1040 reported $0 in wage income, $5 in taxable interest income, $32,867 in taxable pension income, and $12,471 in federal income tax withheld. The Form 1040 claimed a refund of $12,471. According to the IRS's records, the only federal income tax withholdings for the 2017 tax year were as follows: $5,979 withheld by the McDuffie County Board of Education; and $2,092 withheld by the Defense Finance and Accounting Service. Thus, petitioner overreported his withholdings.
For tax year 2018, petitioner filed a Form 1040 reporting $0 in wage income. He reported $0 of tax due, federal income tax withholding of $7,611, and a refund due of $7,611. He attached a substitute Form W-2 reporting that the McDuffie County Board of Education paid him $0 in wages and withheld federal income tax of $4,747.
On April 1, 2019, the IRS applied the refund petitioner requested for 2018 to his 2015 tax liability. The IRS sent a notice to petitioner explaining this application and stating that petitioner's outstanding 2015 tax liability was now $4,333 and that he should pay the balance immediately.
On May 3, 2019, the U.S. District Court dismissed a tax-refund lawsuit by petitioner regarding his 2016 and 2017 tax liabilities. Swanson v. United States, 2019 U.S. Dist. LEXIS 226872 (S.D. Ga.). The District Court held that the arguments in petitioner's complaint were frivolous and that the complaint failed to state a claim upon which relief can be granted. Id. at *3. The District Court stated that petitioner had argued in his complaint that labor is a capital asset and therefore payment for labor is not income; and that the income tax is unconstitutional as an unapportioned direct tax on capital. Id. at *2-*3. The District Court also held that it lacked subject-matter jurisdiction over the suit because petitioner's Forms 1040 did not constitute properly executed refund claims. Id. at *3 n.3.
On January 7, 2020, the U.S. Court of Appeals for the Eleventh Circuit affirmed the judgment of the District Court in the tax-refund suit. Swanson v. United States, 799 Fed. Appx. 668. The Eleventh Circuit addressed the matter of subject-matter jurisdiction. It held that petitioner's Forms 1040 for 2016 and 2017 took the frivolous position that wages were not income and that therefore the forms were not valid refund claims. Id. at *671.
On January 21, 2020, petitioner filed a Form 1040 for tax year 2019 stating that he had pension income of $32,663. He reported wages of $0. He reported a tax liability of $0 and requested a refund of $7,921. He attached to the Form 1040 a substitute Form W-2 stating that he received $0 in wages from the McDuffie County Board of Education.
On March 9, 2020, the IRS sent petitioner a letter stating that it had applied his $7,921.23 refund for the 2019 tax year to his 2014 and 2016 tax liabilities.
Procedural history of this case
On March 4, 2020, the IRS mailed petitioner the notice of deficiency for tax year 2017. The amount of the deficiency determined in the notice resulted from two noncomputational adjustments. First, the notice of deficiency determined that petitioner had failed to report $77,880 of wage income. Second, the notice of deficiency determined that petitioner was liable for a $3,287 addition to tax under section 72(t) for a premature distribution from an "individual retirement account". The notice of deficiency also determined an accuracy-related penalty under section 6662(a).
On September 3, 2020, petitioner filed a motion for summary judgment. On October 6, 2020, we denied petitioner's motion for summary judgment. We stated that the constitutional argument petitioner made was frivolous and groundless. We warned petitioner that we may impose a penalty under section 6673 if he continued to advance frivolous and groundless arguments.
We held a trial on March 15, 2021.
Discussion
We divide our discussion into four parts: (1) the taxability of petitioner's teaching income, (2) the 10% premature-distribution addition to tax, (3) the accuracy-related penalty, and (4) the section 6673 penalty.
1. Taxability of teaching income
Petitioner contends that income tax is unconstitutional and that therefore he is not liable for the income tax on his compensation as a school teacher.
The Constitution authorizes Congress to impose direct taxes if apportioned and indirect taxes if uniform. However, the Sixteenth Amendment provides that income taxes do not need to be apportioned. Thus, even if an income tax is a direct tax, it is not subject to the apportionment requirement.
To be apportioned, the tax collected from each state must be proportionate to each state's population. To be uniform, the tax must be geographically uniform across the country.
Petitioner's argument, as it is formulated in his pretrial memorandum, is that the income tax is not apportioned; and that the income tax is not an indirect tax.
Petitioner therefore concludes that the income tax on his teaching income is not authorized as either a direct tax or an indirect tax.
Petitioner's argument fails to account for the Sixteenth Amendment, which abolished "any need for apportionment of any income tax." Roberts v. Commissioner, 62 T.C. 834, 839 (1974). If the income tax is not an indirect tax, that means that the income tax is a direct tax, in which case it need not be apportioned.
Petitioner claims that the IRS has endorsed his constitutional argument by granting the refunds he requested. As a factual matter, petitioner has presented nothing to indicate that the IRS specifically agreed with petitioner's constitutional argument. And making a refund does not in any way bind the IRS. See Meridian Mut. Ins. Co. v. Commissioner, 44 T.C. 375, 379 (1965), aff'd, 369 F.2d 508 (7th Cir. 1966).
We sustain the determination of the notice of deficiency that petitioner's teaching income is includable in his gross income and is subject to federal income tax.
2. 10% premature-distribution addition to tax
Section 72(t) imposes an additional tax of 10% on premature distributions received from a qualified retirement plan as defined by section 4974(c). Section 4974(c) defines a qualified retirement plan as "(1) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), (2) an annuity plan described in section 403(a), (3) an annuity contract described in section 403(b), (4) an individual retirement account described in section 408(a), or (5) an individual retirement annuity described in section 408(b)." Neither party cites authority relating to qualified retirement plans. Based on petitioner's testimony that he did not participate in a Thrift Savings Plan, his testimony that his pension plan had the characteristics of a standard military pension plan (i.e., fixed nondiscretionary payments based on length of service and rank), and the explanation in Newell v. Commissioner, Tax Court Summary Opinion 2003-1, at page 5, footnote 2, that military pension plans are not section 401(a) trusts, we conclude on a preponderance of evidence that petitioner's military pension was not a qualified retirement plan. Therefore, petitioner is not subject to the 10% premature-distribution addition to tax.
3. Accuracy-related penalty
There is no liability for the accuracy-related penalty under section 6662(a) unless the taxpayer filed a valid return. Sec. 6664(b); Williams v. Commissioner, 114 T.C. 136, 140 (2000). To be a valid return, a document must meet the following requirements: First, it must show sufficient data to calculate the tax liability; second, it must purport to be a return; third, it must represent an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, it must be executed by the taxpayer under penalties of perjury. Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986). These requirements are referred to as the Beard test. The Beard test is the proper test for determining whether a document is a return for purposes of the accuracy- related penalty. Williams v. Commissioner, 114 T.C. 136, 140 (2000).
The petition in this case contended that the Form 1040 for 2017 was not a valid return because the Eleventh Circuit had held that it was not a valid return. We need not determine whether the Eleventh Circuit decision requires that the Form 1040 be considered not to be a valid return for purposes of the accuracy-related penalty. On the preponderance of evidence in the trial record we independently conclude that petitioner's Form 1040 for 2017 was not a valid return because it does not meet parts one and three of the Beard test.
The first part of the test is whether the form shows sufficient data to calculate the tax liability. The Form 1040 filed by petitioner for 2017 does not contain sufficient data to calculate a tax liability because it shows that $12,471 in federal income tax was withheld, but it does not fully disclose the sources of income from which withholding was made. The only source of income reflected on the Form 1040 is $32,867 in military pension payments. From those payments, only $2,092 was withheld. The Form 1040 filed by petitioner for 2017 fails part one of the Beard test. See Oman v. Commissioner, T.C. Memo. 2010-276, at *30.
Part three of the Beard test is whether the form represents an honest and reasonable attempt to satisfy the requirements of the tax law. On the Form 1040 for 2017, petitioner refused to report his wage income because of his frivolous legal positions. We hold that petitioner's Form 1040 for 2017 is not an honest and reasonable attempt to comply with the requirements of the tax law. See Oman v. Commissioner, T.C. Memo. 2010-276, at *31-*34. Therefore, part three of the Beard test is not met. Our view that the Form 1040 for 2017 was not an honest and reasonable attempt to comply with the requirements of the tax law is consistent with petitioner's long history of taking frivolous positions regarding his tax liability. However, in forming our view we are not required to defer to the IRS's determinations of whether to assert the $5,000 penalty for filing frivolous tax returns for tax years 2013, 2014, or 2015.
Because petitioner did not file a valid return for 2017, he is not liable for the accuracy-related penalty.
4. Section 6673 penalty
Under section 6673, the Tax Court may require a taxpayer to pay up to $25,000 to the United States if the taxpayer's position in the proceeding is frivolous or groundless.
At trial, the IRS made an oral motion that the Court impose a section 6673 penalty in the full amount of $25,000. Although petitioner has continued to advance his frivolous constitutional argument, or some variation of it, even after being warned in our Order denying his motion for summary judgment that a section 6673 penalty could be imposed, he has successfully challenged in this proceeding the imposition of the 10% premature-distribution addition to tax. We decline to impose a section 6673 penalty.
An order and decision will be entered to the effect that (1) the deficiency amount for 2017 is equal to (a) the amount of the deficiency determined in the notice of deficiency minus (b) the $3,287 amount of the premature-distribution penalty under section 72(t); (2) petitioner is not liable for the accuracy-related penalty under section 6662(a); and (3) the IRS's oral motion for a penalty under section 6673 is denied.
This concludes the Court's Oral Findings of Fact and Opinion in this case.
(Whereupon, at 4:21 p.m., the above-entitled matter was concluded.)
CERTIFICATE OF TRANSCRIBER AND PROOFREADER
CASE NAME: Brian Dean Swanson v. Commissioner DOCKET NO.: 6837-20
We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 16 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Donna Boardman on March 19, 2021 before the United States Tax Court at its remote session in Columbia, SC, in accordance with the applicable provisions of the current verbatim reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording.
/s/_________
Meribeth Ashley, CET-507
Transcriber
__________
4/12/21
Date
/s/_________
Lori Rahtes, CDLT-108
Proofreader
__________
4/12/21
Date