                              T.C. Memo. 2017-202



                        UNITED STATES TAX COURT



          HENRY M. JAGOS AND KATHY A. JAGOS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 476-16.                           Filed October 16, 2017.



      Henry M. Jagos and Kathy A. Jagos, pro sese.

      Alicia A. Mazurek and Robert D. Heitmeyer, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      BUCH, Judge: This case comes before the Tax Court as a result of a

petition filed by Henry M. Jagos and Kathy A. Jagos. The Jagoses are married and

filed their 2012 tax return jointly. In 2012 they received $544,167 in income.
                                       -2-

[*2] They do not dispute receiving the income, but instead they make various

frivolous arguments as to why it is not taxable. We find for the Commissioner.

                               FINDINGS OF FACT

      In 2012 the Jagoses, either directly or through a wholly owned passthrough

entity, received income from the following sources and in the following amounts:

                                Source              Amount
                      Asset Acceptance, LLC          $1,000
                      Zerobase Energy, LLC              616
                      Michigan Switchgear
                       Services, Inc.                18,108
                      Weltman, Weinberg &
                       Reis, Co. LPA                  4,500
                      Fidelity Investments          519,943
                       Total                        544,167

The Jagoses filed a Form 1040, U.S. Individual Income Tax Return, for 2012. On

that return they reported zero taxable income and claimed a refund of $98,387, the

amount withheld by Fidelity Investments from payments it made to them. Along

with their Form 1040 for 2012, the Jagoses also submitted several other

documents:
                                         -3-

[*3] • three Forms 4852, Substitute for Form W-2, Wage and Tax Statement, or

      Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-

      Sharing Plans, IRAs, Insurance Contracts, etc., and

•     two documents each labeled “corrected Form 1099-MISC”.

Each of these documents reported zero taxable income.

      In addition to the Form 1040, the three Forms 4852, and the corrected

Forms 1099-MISC, the Jagoses submitted a letter describing the documents and

explaining the position they took on their return. In the letter they state that they

included the additional forms “due to the fact that the ‘PAYER’S’ [sic] provided

the 1099’s which erroneously alleged payments of Internal Revenue Code (IRC)

sections 3121 & 3401 wages”.1 The letter goes on to state that the income they

received is not taxable because they “are private-sector citizens (non-federal

employee) employed by a private-sector company (non-federal entity) as defined

in 3401(c)(d).”

      The Commissioner froze the Jagoses’ tax refund and selected their 2012

income tax return for audit. The Commissioner issued a notice of deficiency on

October 8, 2015, and adjusted the Jagoses’ taxable income by $544,167. He found

      1
       All section references are to the Internal Revenue Code in effect for the
year in issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure, unless otherwise indicated.
                                        -4-

[*4] that the Jagoses had $1,000 in taxable income from Asset Acceptance, LLC,

$616 in taxable income from Zerobase Energy, LLC, $18,108 in taxable income

from Michigan Switchgear Services, Inc., $4,500 in taxable income from

Weltman, Weinberg & Reis, Co. LPA, and $519,943 in taxable income from

Fidelity Investments. The Commissioner found that the Jagoses were entitled to a

$1,711 self-employment tax adjustment and determined a deficiency of $155,149.

The Commissioner applied against the deficiency the frozen refund attributable to

the amount withheld by Fidelity Investments and determined an accuracy-related

penalty of $11,352 under section 6662(a) and (d) on the remaining underpayment,

leaving a total amount due of $68,114 plus interest. The Commissioner also

assessed a frivolous tax return submission penalty under section 6702.

      The Jagoses filed a petition for redetermination to this Court on January 6,

2016. At the time they filed the petition they resided in Michigan. In their

petition they argue that none of the income they received was taxable and that the

notice of deficiency is invalid because the Commissioner had no firsthand

knowledge of the income giving rise to the deficiency. The Jagoses also argue

that the Commissioner failed to prepare a substitute for return, violating section

6020(b), and that they are not liable for the penalty under section 6702.
                                          -5-

[*5] At trial the Jagoses reiterated the arguments in their petition. They

requested an opportunity to submit written briefs following the trial, which the

Court allowed. The Court also directed them to two cases, Wnuck v.

Commissioner, 136 T.C. 498 (2011), and Waltner v. Commissioner, T.C. Memo.

2014-35, aff’d, 659 F. App’x 440 (9th Cir. 2016), and encouraged them to

abandon arguments that had been repeatedly rejected by this Court and others.

The Jagoses agreed to review both cases and assured the Court that the brief

would be no more than 15 pages. The brief they submitted to the Court was over

70 pages, and they failed to abandon the well-worn tax-protester arguments that

this Court has rejected time and again.

                                     OPINION

      The issues before the Court are whether the income the Jagoses received is

taxable and whether the Jagoses are liable for the accuracy-related penalty under

section 6662. The Jagoses bear the burden of proof and must produce credible

evidence that they are not liable for the tax deficiency determined by the

Commissioner.2

      The Jagoses conceded that they received the income and failed to offer any

credible evidence or meritorious legal arguments that it is not taxable.

      2
          See Rule 142(a)(1).
                                         -6-

[*6] Accordingly, we sustain the determined deficiency and accuracy-related

penalty. Most of the arguments that the Jagoses presented in their petition, at trial,

and in their briefs are familiar tax-protester arguments that we have rejected

repeatedly. The other arguments that they have raised are either irrelevant or

involve issues outside the Tax Court’s jurisdiction.

I.    Receipt of Taxable Income Under Section 61

      Section 61(a) provides that “gross income means all income from whatever

source derived”. That includes the payments that the Jagoses received in 2012.

The Jagoses have not advanced any credible arguments or offered any credible

evidence showing that the payments they received were not taxable income. As a

general matter we do not refute frivolous arguments “with somber reasoning and

copious citation of precedent; to do so might suggest that these arguments have

some colorable merit.”3 The Jagoses offered only “tax protester” or “tax defier”

arguments. Consequently, we choose not to address them here.4

II.   Accuracy-Related Penalty

      Section 6662(a) and (b)(2) imposes a 20% accuracy-related penalty on any

portion of an underpayment of tax that is due to any substantial understatement of


      3
          Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984).
      4
          See Wnuck v. Commissioner, 136 T.C. 498 (2011).
                                        -7-

[*7] income tax. This penalty does not apply to any portion of an underpayment

for which a taxpayer establishes that he or she had reasonable cause and acted in

good faith.5 The Commissioner bears the burden of production for this penalty

before the burden shifts to taxpayers to prove that the penalty should not apply.6

When an understatement of income tax is substantial, as defined in section

6662(d), we routinely hold that the Commissioner has met his burden as to the

substantial understatement penalty.7 An understatement is substantial if it exceeds

the greater of 10% of the tax required to be shown on the return or $5,000.8 The

Jagoses’ understatement of tax is $155,149, clearly meeting the statutory

threshold. The Jagoses have not offered any evidence indicating reasonable cause

or showing that they acted in good faith. Consequently, they are liable for the

accuracy-related penalty.




      5
          Sec. 6664(c)(1).
      6
          Sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).
      7
      See, e.g., Mudrich v. Commissioner, T.C. Memo. 2017-101, at *14-*15;
Johnson v. Commissioner, T.C. Memo. 2014-67, at *9-*10.
      8
          Sec. 6662(d)(1)(A).
                                         -8-

[*8] III.       Frivolous Tax Return Submission Penalty Under Section 6702

       The Jagoses seek to challenge the frivolous tax return submission penalty

that the Commissioner assessed against them. Under section 6702 the

Commissioner can impose a $5,000 penalty for a frivolous return. This civil

penalty is immediately assessable, and deficiency procedures do not apply to its

assessment or collection.9 As a result, this civil penalty is outside the jurisdiction

of the Tax Court and is not properly before us in this case.

IV.    Section 6020 Substitute for Return

       The Jagoses also argue that the Commissioner is required to prepare a

substitute for return under section 6020. Section 6020 gives the Commissioner the

authority to prepare a return for a taxpayer when that taxpayer fails to file a return.

The Jagoses filed a return for 2012. Consequently, the Commissioner was not

required to prepare a substitute for return under section 6020.

V.     Sanctions Under Section 6673

       Under section 6673 the Court is permitted to impose a penalty of up to

$25,000 if a taxpayer takes a frivolous or groundless position or maintains a

proceeding primarily for delay. A position is frivolous if it is “contrary to

established law and unsupported by a reasoned, colorable argument for change in

       9
           Sec. 6703(b).
                                        -9-

[*9] the law.”10 Frivolous claims waste judicial resources, divert resources away

from serious claims, and delay the collection of tax.11 At trial the Court

encouraged the Jagoses to abandon their frivolous arguments and cited specific

authorities for them to consider. The arguments raised in their 70-page brief were

a rehash of the very same arguments that were dispatched in those cases. And the

Jagoses have raised frivolous arguments at every stage of this process from their

2012 income tax return to their closing brief. For disregarding the cases cited to

them and wasting the Court’s resources with their frivolous arguments, we impose

a sanction under section 6673 of $1,000.

VI.   Conclusion

      The Jagoses received $544,167 of taxable income in 2012. They have not

offered any credible evidence or meritorious legal arguments that the income they

received is not taxable. The Jagoses are also liable for an accuracy-related penalty

under section 6662. They have not offered any defense to the penalty. Although

the Jagoses were encouraged to abandon their frivolous arguments and directed to




      10
     Takaba v. Commissioner, 119 T.C. 285, 287 (2002) (quoting Coleman v.
Commissioner, 791 F.2d 68, 71 (7th Cir. 1986)).
      11
           Wnuck v. Commissioner, 136 T.C. at 510-512.
                                      - 10 -

[*10] cases that clearly refute the arguments they made, they continued to pursue

them. Consequently, the Court is imposing a $1,000 penalty under section 6673.

      To reflect the foregoing,


                                               An appropriate order and decision

                                      will be entered for respondent.
