                              T.C. Memo. 2019-147



                        UNITED STATES TAX COURT



               FRANCIS STEFFAN HAYES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12037-17.                        Filed October 30, 2019.



      Francis Steffan Hayes, pro se.

      Erik W. Nelson and Janice B. Geier, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      URDA, Judge: Petitioner Francis Steffan Hayes published a newspaper,

“the American Voice”, and ran an internet-based radio station, the American

Voice Radio Network, from 2005 through 2009. Although these media ventures

put money in Mr. Hayes’ pocket, he neither filed Federal income tax returns nor

paid Federal income tax. The Internal Revenue Service (IRS) thereafter prepared
                                         -2-

[*2] substitutes for returns on his behalf and issued a notice of deficiency

determining tax deficiencies and additions to tax under sections 6651(a)(2) and (f)

and 66541 as follows:

                                                  Additions to tax

      Year      Deficiency     Sec. 6651(a)(2)     Sec. 6651(f)        Sec. 6654

      2005         $6,541           $1,635            $4,742             $262

      2006          7,919            1,980             5,741              375

      2007         13,889            3,472            10,070              632

      2008         12,527            3,132             9,082              403

      2009         11,593            2,898             8,405              278

The IRS determined as an alternative to the section 6651(f) additions to tax that

Mr. Hayes was liable for additions to tax under section 6651(a)(1).2

      In this Court Mr. Hayes plays variations on oft-rejected tax-defier themes.

Mr. Hayes also argues that the substitutes for returns prepared on his behalf were



      1
        Unless otherwise indicated, all section references are to the provisions of
the Internal Revenue Code of 1986, as amended, in effect for the years in issue,
and all Rule references are to the Tax Court Rules of Practice and Procedure. All
monetary amounts are rounded to the nearest dollar.
      2
        As we will discuss, see infra pp. 7-8, respondent made a number of
concessions in Mr. Hayes’ favor before and during trial, including the concession
of the sec. 6651(f) additions to tax.
                                          -3-

[*3] invalid and that the additions to tax determined against him were baseless.

We will sustain the IRS’ determinations subject to certain concessions respondent

has made.

                                 FINDINGS OF FACT

A.    Background

      For the last 20 years Francis Steffan Hayes has worked in publishing and

broadcasting in Eagle Point, Oregon.3 Mr. Hayes founded a newspaper, “the

American Voice”, in 1998 and then launched his own internet-based radio station,

the American Voice Radio Network, two years later. He was the sole person in

charge of each, and neither was organized as an entity separate from himself. Mr.

Hayes describes his media work as following in the footsteps of Thomas Jefferson

by evincing skepticism towards Government and opposition to perceived

Government criminality.

      Mr. Hayes’ media operations generated several income streams during 2005

through 2009. First, the people who broadcast programs on the American Voice

Radio Network paid Mr. Hayes for airtime and production services. He also sold

publications, program recordings, and other goods through the network’s website.

Mr. Hayes received money from radio and print advertising, as well as

      3
          Mr. Hayes also lived in Oregon when he timely filed his petition.
                                        -4-

[*4] subscriptions to his newspaper. And he accepted donations, which were

solicited both in his newspaper and through the radio network.

B.    Failure To File Returns and IRS Examination

      Mr. Hayes did not file Federal income tax returns for his 2004 through 2009

tax years. The IRS thereafter commenced an examination into whether Mr. Hayes

was required to file Federal income tax returns and the proper amounts of his

liabilities. He refused to cooperate with the IRS or provide any records.

      The assigned IRS revenue agent accordingly performed a reconstruction of

Mr. Hayes’ income using the specific item method. Specifically, the IRS

(1) summoned accounts in Mr. Hayes’ name at Wells Fargo, PayPal, and e-gold

(an investment website), (2) contacted customers and vendors to try to determine

gross receipts, and (3) attempted to ascertain whether Mr. Hayes had received

income that he had deposited elsewhere.

      When performing the income reconstruction the revenue agent factored in

multiple checks and money orders found in the accounts of James Lloyd and Allan

Aisner, two of Mr. Hayes’ friends. Most of these checks had been addressed to

Mr. Hayes (or some version of “the American Voice” or the American Voice

Radio Network) and later endorsed over to Messrs. Lloyd and Aisner. The
                                        -5-

[*5] revenue agent treated these checks as income to Mr. Hayes because he had

unfettered use of the funds when originally received.

      On other checks, the payee line had been left blank, consistent with

instructions featured on the American Voice Radio Network website. The revenue

agent credited these checks to Mr. Hayes where the payments had come from

entities with whom he regularly did business.

      Finally, the revenue agent included certain otherwise unaccounted-for

income items from customers of Mr. Hayes. For example, records subpoenaed

from a customer named Jerry Gentry indicated that Mr. Gentry had sent a check to

Mr. Hayes. The deposit of this check was not reflected in any of the accounts of

Mr. Hayes to which the revenue agent had access, so she included the amount of

that check separate and apart from the amounts in the bank accounts.

C.    Substitutes for Returns

       On the basis of this analysis the revenue agent made determinations as to

Mr. Hayes’ gross income and deficiency amounts. To bring the audit to a close,

however, she handed the baton to a second revenue agent, who prepared

substitutes for returns for Mr. Hayes’ 2005 through 2009 tax years. Each

substitute for return was comprised of (i) a Form 13496, IRC Section 6020(b)

Certification, (ii) a Form 4549-A, Income Tax Examination Changes, (iii) a
                                        -6-

[*6] Form 5278, Statement--Income Tax Changes, (iv) a Form 886-A, Explanation

of Items, and (v) a Workpaper 403, Filing Status Lead Sheet (Lead Sheets).

      As most relevant here, the Forms 4549-A show taxable income during the

years in issue ranging from a low of $18,744 (in 2005) to a high of $40,146

(in 2007). These amounts were derived from Mr. Hayes’ gross receipts,

identifiable business expenses, deductions, and credits for each year.

      The Lead Sheets elaborate on the top-line conclusions set forth in the

Forms 4549-A. In the discussion of gross receipts the Lead Sheets state that the

reconstruction had failed to capture the full scope of Mr. Hayes’ income. The

Lead Sheets reflect that certain checks from one of Mr. Hayes’ customers

(received by the IRS in response to a subpoena) were not found to have been

deposited in any of the accounts that the IRS had examined, which led it to believe

that Mr. Hayes had other accounts into which he was depositing additional income

(particularly from customers who paid him in cash).

      Mr. Hayes’ lack of cooperation hampered the IRS’ ability to recognize his

legitimate business expenses. The Lead Sheets indicate that the IRS reviewed Mr.

Hayes’ bank account records for 2005 through 2009 and attempted to identify (and

give him credit for) business-related expenses. The Lead Sheets state, however,
                                         -7-

[*7] that the withdrawal records for 2005 and 2006 contained no documentation

that could support business expenses for those years.

D.    Notice of Deficiency and Proceedings in This Court

      The IRS thereafter issued a notice of deficiency for Mr. Hayes’ 2005

through 2009 tax years, which asserted the Federal income tax deficiencies and

additions to tax noted above.

      Mr. Hayes filed a timely petition for redetermination in this Court. Before

trial respondent conceded the section 6651(f) additions to tax. This concession

resulted in the application of the additions to tax under section 6651(a)(1) that had

been asserted in the alternative. More concessions followed at trial. Specifically,

respondent acknowledged that the income reconstruction included certain

duplicative income amounts, which the original revenue agent had discovered in

the run-up to trial. After these concessions, recalculating the amounts at issue

resulted in the following deficiencies and additions to tax:
                                        -8-

[*8]                                                Additions to tax

   Year          Deficiency     Sec. 6651(a)(1)     Sec. 6651(a)(2)    Sec. 6654

    2005           $6,509           $1,627              $1,627            $261

    2006            7,753            1,938                1,938            367

    2007            7,836            1,959                1,959            357

    2008            8,475            2,119                2,119            272

    20091           7,293            1,723                1,723            175
       1
       We note that in preparing its calculations for trial respondent failed to
include a $400 “Making Work Pay Credit” that he had previously allowed for
2009. We expect that the computations in this case will reincorporate this credit,
as respondent has not offered any explanation for removing it.

                                     OPINION

       In general, a taxpayer bears the burden of proof to show that the IRS’

deficiency determination was arbitrary or erroneous, see Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933), which he must carry by a preponderance of

the evidence, see, e.g., Merkel v. Commissioner, 192 F.3d 844, 852 (9th

Cir. 1999), aff’g 109 T.C. 463 (1997). In cases involving failure to report income,

the Court of Appeals for the Ninth Circuit, to which an appeal in this case would

ordinarily lie, see sec. 7482(b)(1)(A), has held that the Commissioner must

establish “some evidentiary foundation” linking the taxpayer to an alleged
                                        -9-

[*9] income-producing activity before the presumption of correctness attaches to

the deficiency determination, Weimerskirch v. Commissioner, 596 F.2d 358, 361-

362 (9th Cir. 1979), rev’g 67 T.C. 672 (1977). Once the Commissioner has

established such a foundation, the burden of proof shifts to the taxpayer to prove

by a preponderance of the evidence that the IRS’ determinations are arbitrary or

erroneous. Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), aff’g

T.C. Memo. 1997-97.

I.    Mr. Hayes’ Income

      Gross income generally includes all income from whatever source derived.

Sec. 61(a). Taxpayers must keep adequate books and records from which their

correct tax liabilities can be determined. Sec. 6001. When a taxpayer fails to keep

records, the IRS has discretion to reconstruct the taxpayer’s income by any

reasonable means. Sec. 446(b); Webb v. Commissioner, 394 F.2d 366, 371-372

(5th Cir. 1968), aff’g T.C. Memo. 1966-81; Factor v. Commissioner, 281 F.2d

100, 117 (9th Cir. 1960), aff’g T.C. Memo. 1958-94.

      In this case Mr. Hayes testified that he did not “keep records” and that he

did not “have anything to go back on” regarding his earnings during the years in

issue. The IRS thus employed the specific item method to reconstruct Mr. Hayes’

income, pursuant to which a taxpayer’s income is reconstructed on the basis of the
                                        -10-

[*10] evidence showing specific amounts received by the taxpayer. See White v.

Commissioner, T.C. Memo. 2018-102, at *14-*15; see also United States v.

Marabelles, 724 F.2d 1374, 1377 n.1 (9th Cir. 1984).

      We find that respondent has established a sufficient evidentiary foundation

to satisfy any threshold burden as relates to his determinations of Mr. Hayes’

unreported income. The IRS introduced reams of bank account statements,

checks, and money orders showing that in the years in issue Mr. Hayes received

income both directly and through the media ventures he alone controlled. We

draw further support from the testimony of the revenue agent who laid the

groundwork for the IRS’ reconstruction of Mr. Hayes’ income. The revenue agent

persuasively testified as to Mr. Hayes’ connections to various bank and investment

accounts and convincingly explained why the IRS attributed the specific items of

income to him.4 The evidence before us also shows that the IRS gave Mr. Hayes

the benefit of identifiable business expenses (as well as various deductions and

credits), lending credence to the IRS’ analysis. Respondent plainly met his initial

burden in this case.


      4
       For example, certain checks and money orders deposited into the bank
accounts of Messrs. Lloyd and Aisner were treated as income to Mr. Hayes on the
ground that he had unfettered use of these funds before transferring them to his
friends. We find this explanation convincing.
                                         -11-

[*11] The burden of proof accordingly shifts to Mr. Hayes to prove (by a

preponderance of the evidence) that the IRS’ determinations are arbitrary or

erroneous. Mr. Hayes, however, expressly admits to receiving income in each of

the years in issue. And although he disagreed at trial with some of the IRS’

income calculations, he emphasized that he was “not quibbling about the amounts”

and introduced no evidence showing any error by the IRS. In short, Mr. Hayes

fails to take up, much less carry, his burden of proof.

      Mr. Hayes instead reserves his energy for laying out assorted tax-defier

chestnuts about the scope of the Sixteenth Amendment, the purportedly

unworkable definition of income under the Internal Revenue Code, and the effect

of regulations relating to the Alcohol and Tobacco Tax and Trade Bureau on the

administration of the income tax regime. The shopworn arguments he offers in

support of his position are incomplete, misleading, and misguided, and have been

rejected more times than we care to count. See, e.g., Wnuck v. Commissioner, 136

T.C. 498, 506-510 (2011); Hatfield v. Commissioner, 68 T.C. 895, 897 (1977);

Klir v. Commissioner, T.C. Memo. 1979-259, 38 T.C.M. (CCH) 1028, 1030

(1979). We will not dignify them with further analysis. See, e.g., Crain v.

Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984) (“We perceive no need to

refute these arguments with somber reasoning and copious citation of precedent;
                                        -12-

[*12] to do so might suggest that these arguments have some colorable merit.”);

see also Wnuck v. Commissioner, 136 T.C. at 510-512 (explaining that addressing

frivolous arguments wastes time and resources and delays the assessment of tax).

      In conclusion, we find that respondent met his initial burden to show

sufficient evidence that Mr. Hayes received income during the years in issue.

Rather than attempting to demonstrate that respondent’s determinations were

arbitrary or wrong, Mr. Hayes advances meritless tax-defier arguments. We

accordingly sustain respondent’s deficiency determinations.

II.   Substitutes for Returns

      Mr. Hayes further contends that the substitutes for returns the IRS prepared

on his behalf were invalid. Mr. Hayes is flat wrong. Congress granted the IRS

authority to prepare substitutes for returns where taxpayers like Mr. Hayes fail to

comply with their obligation to file their required returns. Sec. 6020(b). “A

Form 13496, ‘IRC Section 6020(b) Certification,’ or any other form that an

authorized Internal Revenue Officer or employee signs and uses to identify a set of

documents containing the information set forth in this paragraph as a

section 6020(b) return, and the documents identified, constitute a return under

section 6020(b).” Sec. 301.6020-1(b)(2), Proced. & Admin. Regs.; see also Rader

v. Commissioner, 143 T.C. 376, 382 (2014), aff’d, 616 F. App’x 391 (10th
                                        -13-

[*13] Cir. 2015). The combination of documents assembled by the IRS for each

year, including Form 13496, Form 4549-A, and Form 886-A, is “sufficient to

constitute a valid * * * [substitute for return] under section 6020(b).” Rader v.

Commissioner, 143 T.C. at 382; see also Gleason v. Commissioner, T.C. Memo.

2011-154, 101 T.C.M. (CCH) 1743, 1752 (2011).5

III.   Additions to Tax

       A.    Introduction

       The IRS determined that Mr. Hayes is liable for additions to tax pursuant to

sections 6651(a)(1) and (2) and 6654. Respondent has the burden of production

with respect to those additions to tax. See sec. 7491(c).6 To meet that burden, the



       5
        Mr. Hayes also argues that respondent violated discovery rules by failing to
comply with his informal discovery requests for certain internal IRS materials
regarding his account, including the “Individual Master File”. Respondent replies
that he complied with the requests as fully as possible and that Mr. Hayes
misunderstands the nature of the Individual Master File. We see no violation of
our Rules. And this material is not relevant to our determination of the existence
and amounts of Mr. Hayes’ tax liabilities. See Wnuck v. Commissioner, 136
T.C. 498, 509-510 (2011); Davenport v. Commissioner, T.C. Memo. 2013-41,
at *4-*5.
       6
       The Commissioner’s burden of production under sec. 7491(c) normally
requires a showing of his compliance with the procedural requirements found in
sec. 6751(b)(1). See Graev v. Commissioner, 149 T.C. 485, 492-493 (2017),
supplementing and overruling in part 147 T.C. 460 (2016). Those procedural
requirements, however, do not apply to the additions to tax under secs. 6651
and 6654 at issue in this case. See sec. 6751(b)(2)(A).
                                        -14-

[*14] Commissioner must produce evidence showing that the additions to tax are

appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the

Commissioner carries the burden of production, the taxpayer must come forward

with persuasive evidence that the Commissioner’s determination is incorrect or

that the taxpayer has an affirmative defense. See id. at 446-447.

      B.     Respondent’s Sections 6651(a)(1) and (2) and 6654 Determinations

      Section 6651(a)(1) provides for an addition to tax in the event a taxpayer

fails to file a timely return (determined with regard to any extension of time for

filing), unless it is shown that such failure is due to reasonable cause and not due

to willful neglect. The addition is equal to 5% of the amount required to be shown

as tax on the delinquent return for each month or fraction thereof during which the

return remains delinquent, up to a maximum addition of 25% for returns more than

four months delinquent. Sec. 6651(a)(1).

      Section 6651(a)(2) provides for an addition to tax for failure to timely pay

“the amount shown as tax on any return specified in paragraph (1)” unless the

taxpayer establishes that the failure was due to reasonable cause and not willful

neglect. The addition is calculated as 0.5% of the amount shown as tax on the

return but not paid, with an additional 0.5% for each month or fraction thereof

during which the failure to pay continues, up to a maximum of 25%.
                                          -15-

[*15] Sec. 6651(a)(2). The amount of the addition to tax under section 6651(a)(2)

reduces the addition to tax under section 6651(a)(1) for any month for which both

additions to tax apply. See sec. 6651(c)(1). Pursuant to section 6651(g)(2),

substitutes for returns prepared by the IRS under section 6020(b) are treated as

taxpayer returns for purposes of determining the addition to tax under

section 6651(a)(2).

      Section 6654(a) and (b) provides for an addition to tax in the event of an

underpayment of a required installment of individual estimated tax. Each required

installment of estimated tax is equal to 25% of the “required annual payment”,

which, in turn, is equal to the lesser of (1) “90 percent of the tax shown on the

return for the taxable year (or, if no return is filed, 90 percent of the tax for such

year)” or (2) if the individual filed a return for the immediately preceding year,

100% of the tax shown on that return. Sec. 6654(d)(1)(A) and (B). Except in very

limited circumstances not applicable herein, see sec. 6654(e)(3), section 6654

provides no exception for reasonable cause or lack of willful neglect.

      It is undisputed that Mr. Hayes failed to (1) file returns, (2) discharge his tax

liabilities, and (3) pay any estimated tax for the years pertinent to the additions to

tax. Thus respondent has satisfied his burden of production under section 7491(c)

with respect to his imposition of additions to tax under sections 6651(a)(1) and (2)
                                        -16-

[*16] and 6654. Mr. Hayes offers only meritless arguments against the IRS’

imposition of additions to tax and fails to show any hint of reasonable cause.

      We will sustain respondent’s determinations of additions to tax under

sections 6651(a)(1) and (2) and 6654 for the appropriate years. Given

respondent’s concessions at trial regarding the proper amounts of Mr. Hayes’

liabilities, however, Rule 155 computations are necessary.

      Lastly, we draw Mr. Hayes’ attention to section 6673, which authorizes us

to impose a penalty of up to $25,000 where, among other things, a taxpayer’s

position is frivolous or groundless. We have chosen not to impose such a penalty

against Mr. Hayes, who has no previous history of making frivolous arguments in

this Court. He now does. We accordingly warn him that the section 6673 penalty

looms should he advance similar tax-defier arguments in the future.

      To reflect the foregoing,


                                               Decision will be entered under

                                       Rule 155.
