JOSEPH W. NEGA, Judge.
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 petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph W. Nega in San Antonio, Texas containing his oral Findings of Fact and Opinion rendered on October 19, 2022, at the in person hearing at which the case was heard. In accordance with the oral Findings of Fact and Opinion, an appropriate decision will be entered.
The above-entitled matter came on for bench opinion, pursuant to notice at 1:02 p.m.
For the Petitioner:
For the Respondent:
THE CLERK: Calling from the calendar, docket number 22954-21 Peter Michael Budde and Kathryn Marie Budde.
(Whereupon, a bench opinion was rendered.)
Bench Opinion by Judge Joseph W. Nega
October 19, 2022
Peter Michael Budde & Kathryn Marie Budde v. Commissioner of Internal Revenue
Docket No. 22954-21
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. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code, in effect at all relevant times.
Petitioners Peter Michael Budde and Kathryn Marie Budde appeared pro se, and K. Lyn Hillman appeared on behalf of Respondent.
By a notice of deficiency dated March 24, 2021, respondent determined a deficiency of $32,797.00, an addition to tax under section 6651(a)(1) of $5,731.80, and an accuracy-related penalty under section 6662(a) of $5,731.80 in petitioner's federal income tax for the 2017 taxable year. The issue for decision is whether petitioners are liable for the deficiency, addition to tax, and accuracy-related penalty, as determined by respondent.
On the evidence before us, and using the burden-of-proof principles explained below, the Court finds the following facts:
FINDINGS OF FACT
Petitioners resided in Boerne, Texas at the time they filed their Petition in this case. This case was tried on October 17, 2022, in San Antonio, Texas. On or about July 20, 2018, petitioners filed a Form 1040A, U.S. Individual Income Tax Return for tax year 2017, on which they reported $40,421 in pension and annuity income and $6,149 in income tax withholding. Petitioners attached to their Form 1040A three modified, signed Forms 4852, Substitute for Forms W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The Forms 4852 reported: (1) a gross distribution in the amount of $813.55 from Keller Williams Realty Inc.; (2) a gross distribution in the amount of $1,500.00 from South Texas Medical Research Institute, Inc.; and (3) a gross distribution in the amount of $2,345.85 from Rock Pharmacy, LLC. The Forms 4852 reported taxable amounts of $0.00 with respect to each of those distributions. Petitioners included the following statement on each Form 4852: "The payments made to RECIPIENT by this PAYER did not result from any federally privileged activity subject to excise tax and do not constitute any form of taxable income under the relevant statute." Petitioners also included the following statement on each Form 4852: "All facts to my knowledge conclude that this PAYER is not an agency or instrumentality of the United States as defined in Title 26 U.S. Code 7701 which would render payments to me subject to federal excise tax based on gain or profit (income) as if I am an `employee' defined in Title 26 U.S. Code Section 3401(c)." Finally, petitioners also attached to their Form 1040A a document entitled "Notice In Affidavit Form," in which petitioner Kathryn Budde made numerous statements as to why she was not subject to income taxation that included citations to Eisner v. Macomber, 252 U.S. 189 (1920), section 3401(a), and section 7701(4), (9)-(10), and (26). Petitioners claimed a refund of $4,138 on their Form 1040A.
On June 21, 2021, petitioners filed a Petition in this case; on November 5, 2021, respondent filed an Answer. On December 27, 2021, petitioners filed a Reply to Answer, with an accompanying exhibit characterized by petitioners as an affidavit by petitioner Kathryn Budde. In that affidavit, petitioner Kathryn Budde stated that she had "personal first-hand knowledge, records and evidence that KATHRYN MARIE BUDDE is in receipt of payments from KELLER WILLIAMS REALTY INC. & KELLER WILLIAMS SAN ANTONIO INC. for the labor, energy and time spent working." On August 15, 2022, respondent's counsel sent petitioners a Branerton letter in which she warned petitioners that their arguments had been "identified by the IRS and numerous federal courts as frivolous arguments." On October 12, 2022, the Court held a conference call with both parties; during that call, the Court warned petitioners that they were advancing arguments that this Court has previously deemed to be frivolous.
In general, the Commissioner's determinations in a notice of deficiency are presumed correct, and the petitioner bears the burden of proving them erroneous by a preponderance of the evidence. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). For the presumption of correctness to attach to the deficiency determination in an unreported income case, the Commissioner must make a threshold evidentiary showing supporting the determination. See Portillo v. Commissioner, 932 F.2d 1128, 1133-34 (5th Cir. 1991) (declining to sustain a determination consisting of merely a "naked assessment") (internal quotations omitted), rev'g, T.C. Memo. 1990-68.
Section 61(a) provides that "gross income" means "all income from whatever source derived." The scope of section 61(a) is broad, and exclusions from gross income must be narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429 (1955). Taxpayers seeking an exclusion from gross income must demonstrate they are eligible for the exclusion and bring themselves "within the clear scope of the exclusion." Dobra v. Commissioner, 111 T.C. 339, 349 n.16 (1998). Section 61(a)(1) expressly includes in gross income compensation for services rendered.
We are satisfied that respondent has demonstrated that the determination in the notice of deficiency issued to petitioners is entitled to a presumption of correctness. Respondent has produced a copy of petitioner Kathryn Budde's nonemployee earnings report from Keller Willis San Antonio, Inc., which states that petitioner Kathryn Budde received $142,427.42 in compensation in 2017. In addition, petitioners themselves have conceded receipt of additional payments of nonemployee compensation in their three Forms 4852 and in their Reply to Answer. There is a sufficient showing for the presumption of correctness to attach to respondent's determination.
In attempting to rebut this presumption, petitioners raise all-too-familiar tax protester contentions as to why they are not subject to income taxation. Petitioners' arguments are frivolous. See, e.g., Parker v. Commissioner, 724 F.2d 469, 471 (5th Cir. 1984) (rejecting taxpayer's contention "that the income tax is an excise tax applicable only against special privileges"), aff'g, T.C. Memo. 1983-75; Briggs v. Commissioner, T.C. Memo. 2016-86, at *8 (rejecting taxpayer's contention that compensation from private-sector payor is not taxable income). We will not "refute these arguments with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have colorable merit." Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984); see Wnuck v. Commissioner, 136 T.C. 498, 501-13 (2011) (debunking common tax protester arguments at length and detailing how addressing such arguments unnecessarily wastes judicial resources). The record establishes that petitioners received taxable income in the form of nonemployee compensation for services. See § 61(a)(1). Petitioners have not demonstrated that they fall within the clear scope of any exclusion from gross income.
Petitioners also raise a similarly frivolous procedural argument: that the notice of deficiency issued to them is invalid because it is not signed by an Internal Revenue Service (IRS) employee with delegated authority to do so. That argument is also meritless. See Selgas v. Commissioner, 475 F.3d 697, 700 (5th Cir. 2007) ("[N]o signature is required to render a deficiency notice valid."); Lashua v. Commissioner, T.C. Memo. 2020-151, at *5 (rejecting identical argument by taxpayer as "without merit"). We conclude that the notice of deficiency was valid. Petitioners have failed to rebut the presumption of correctness afforded to the determination, and we thus conclude that petitioners are liable for the deficiency as determined by respondent.
Additions to Tax & Penalties
Generally, the Commissioner bears the initial burden of production of establishing via sufficient evidence that a taxpayer is liable for penalties and additions to tax; once this burden is met, the taxpayer must carry the burden of proof with regard to defenses, such as reasonable cause. See § 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-47 (2001). Typically, respondent's burden of production includes establishing compliance with section 6751(b)(1), which requires a penalty may not be assessed "unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination." However, section 6751(b)(1) is expressly inapplicable to additions to tax under section 6651 and to "any other penalty automatically calculated through electronic means."
Section 6651(a)(1) imposes an addition to tax for a failure to file a required return on or before the specified filing date, including extensions. The addition to tax is inapplicable if the taxpayer establishes that the failure to file was due to reasonable cause and not due to willful neglect. § 6651(a)(1).
Here, the record establishes that the petitioners did not timely file their 2017 return: the return was not signed by petitioners until July 16, 2018, and not received by the IRS until July 20, 2018. The addition to tax, as determined in the notice of deficiency, represents 20% of the net amount due (i.e., 5% multiplied by the four months of delinquency). § 6651(b)(1). Respondent has thus satisfied his initial burden of establishing that a section 6651(a)(1) addition to tax is appropriate. See Higbee, 116 T.C. at 447. Petitioners have not argued that their failure to file was due to reasonable cause and not willful neglect. We conclude that petitioners are liable for an addition to tax under section 6651(a)(1).
Section 6662 imposes a 20% penalty on any underpayment of tax required to be shown on a return that is attributable to negligence, disregard of rules or regulations, or a substantial understatement of an income tax. Negligence includes "any failure to make a reasonable attempt to comply" with the Code, disregard includes "any careless, reckless, or intentional disregard." See § 6662(c). Treas. Reg. § 1.6662-3(b)(1). An understatement of income is "substantial" if it exceeds the greater of 10% of the tax required to be shown on the return or $5,000. § 6662(d)(1)(A). Section 6664(c)(1) provides that a section 6662 penalty will not be imposed for any portion of an underpayment if the taxpayer shows that (1) they had reasonable cause and (2) acted in good faith with respect to the underpayment.
On the record before us, we find that the section 6662(a) penalty determined against petitioners was "automatically calculated under electronic means" within the meaning of section 6751(b). 6751(b)(2)(B); see Walquist v. Commissioner, 152 T.C. 61, 71-73 (2019) (holding that penalties determined by the IRS's Automated Correspondence Exam system are exempted from the written supervisory approval requirement by section 6751(b)(2)(B)). In addition, we conclude that respondent has carried his burden of establishing that petitioners' understatement for tax year 2017 (i.e., $32,797) exceeded both $5,000 and 10% of the tax required to be shown on the return (i.e., $3,490.80). See Walquist, 152 T.C. at 74. Alternatively, we would conclude that respondent has demonstrated that petitioners' underpayment is attributable to negligence. See § 6662(b)(1). Petitioners have not argued that their underpayment was due to reasonable cause and not willful neglect; in any event, such an argument would be futile given petitioners' willfully frivolous tax positions. We thus conclude that petitioners are liable for an accuracy-related penalty under section 6662(a).
Section 6673(a)(1) authorizes this Court to impose a penalty not in excess of $25,000 whenever it appears (1) that proceedings have been instituted or maintained primarily for delay or (2) that the taxpayer's position in such proceeding is frivolous or groundless. 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).
We find that petitioners have advanced frivolous and groundless arguments in this proceeding. The Court warned petitioners during the October 12th conference call and during the October 17th, 2022, calendar call that they were making frivolous arguments in this case. Despite those warnings, petitioners continued to advance such arguments at trial. Under these circumstances, we believe that the imposition of a penalty under section 6673(a)(1) in the amount of $5,000.00 is warranted.
Accordingly, a decision will be entered for respondent. In reaching our holdings herein, we have considered all arguments made by the parties and, to the extent not mentioned above, find those arguments moot, irrelevant, or without merit. This concludes the Court's oral findings of fact and opinion in this case.
(Whereupon, at 1:20 p.m., the above-entitled matter was concluded.)
We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 14 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Donna Boardman on October 19, 2022 before the United States Tax Court at its session in San Antonio, TX, 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.