                                T.C. Memo. 2015-46



                         UNITED STATES TAX COURT



                    MICHAEL BALICE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 22235-13.                          Filed March 16, 2015.



      Michael Balice, pro se.

      Kathleen K. Raup and Ina Susan Weiner, for respondent.



                           MEMORANDUM OPINION


      LAUBER, Judge: With respect to petitioner’s Federal income tax for 2007

and 2008, the Internal Revenue Service (IRS or respondent) determined defi-

ciencies and additions to tax under section 66511 in the following amounts:


      1
      Unless otherwise indicated, all statutory references are to the Internal
Revenue Code in effect for the tax years at issue, and all Rule references are to the
                                                                       (continued...)
                                        -2-

[*2]                                                Additions to tax

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

       2007     $35,947              $8,088             $8,987            $26,062

       2008       3,810                 857                953               ---

Petitioner marketed during these years products that purported to enable individu-

als to avoid taxation of their income by use of sham “trusts.” Practicing what he

preached, petitioner employed these trusts himself. He reported no income from

sale of his tax evasion products to others, and he did not file a Federal income tax

return for either year. He was convicted of tax crimes and is currently incar-

cerated.

       The IRS reconstructed petitioner’s income on the basis of his bank deposits,

prepared for each year a substitute for return (SFR) that met the requirements of

section 6020(b), and sent petitioner a notice of deficiency determining the defici-

encies and additions to tax set forth above. Respondent has moved for summary

judgment under Rule 121, contending that there are no disputed issues of fact and

that he is entitled to judgment as a matter of law. Petitioner has responded to this

motion by contending (among other things) that he is not subject to IRS deficiency

       1
       (...continued)
Tax Court Rules of Practice and Procedure. We round all monetary amounts to
the nearest dollar.
                                          -3-

[*3] procedures and that wages are not “income” because they result from the

exercise of his “irrefutable right to work.” We will grant the motion for summary

judgment and sustain the tax deficiencies and additions to tax determined by the

IRS. We will also require petitioner to pay under section 6673(a) a penalty to the

United States in the amount of $25,000 for asserting frivolous positions in this

Court.

                                      Background

         There is no dispute concerning the following facts. These facts are derived

from the parties’ pleadings and motion papers, from undenied allegations of re-

spondent’s amended answer that petitioner is deemed to have admitted, and from

the declaration and the attached exhibits that respondent filed in support of his

summary judgment motion. Petitioner resided in a Federal correctional facility in

Fort Dix, New Jersey, when he petitioned this Court.

         During the tax years at issue petitioner was a principal of Mid-Atlantic

Trustees and Administrators (MATA). MATA sold products, including the “Pure

Trust Organization” (PTO), designed to assist individuals in evading their Federal

tax obligations. Income from the sale of MATA’s products was deposited into a

Bank of America account ending in 6819 titled to “MATA Irrevocable Trust” of

which petitioner was a trustee (MATA account).
                                        -4-

[*4] Petitioner maintained and exercised control over two other bank accounts

during these years. One was a Bank of America account ending in 5571 titled to

“Maple Avenue Funding Irrevocable Trust” of which petitioner was a trustee

(Maple Avenue account). The second bank account was a Bank of America ac-

count ending in 4916 titled to Michael Balice (Balice account). Petitioner was a

signatory to both of these accounts.

      Between January 1, 2007, and December 31, 2007, $144,650 in cash was

transferred from the MATA account to the Maple Avenue account and the Balice

account. As shown in the relevant bank statements, this movement of funds into

the Maple Avenue account and the Balice account was effected in 40 separate

transactions by check or inter-account transfer.

      Between January 1, 2008, and December 31, 2008, $37,000 in cash was

transferred from the MATA account to the Maple Avenue account and the Balice

account. As shown in the relevant bank statements, this movement of funds into

the Maple Avenue account and the Balice account was effected in 13 separate

transactions by check or inter-account transfer.

      On the basis of these transfers into bank accounts over which petitioner

exercised control, the IRS determined that petitioner had received income of

$144,650 and $37,000 in 2007 and 2008, respectively. For the 2007 taxable year
                                          -5-

[*5] the IRS received from Chase Bank USA a Form 1099-C, Cancellation of

Debt, reporting that petitioner also had cancellation of indebtedness income of

$3,411 in 2007 from Chase Bank USA.

      On June 10, 2011, a superseding indictment was filed against petitioner in

United States v. Balice, No. 2:10-CR-00485-02, in the U.S. District Court for the

District of New Jersey. Count 13 of this indictment described petitioner’s use of

the PTO tax evasion scheme and charged him with criminal tax evasion for 2007

in violation of section 7201. On June 20, 2011, a jury found petitioner guilty of

(among other things) violating section 7201 for the 2007 taxable year. On January

9, 2013, the District Court entered its amended judgment pursuant to the verdict.

      On May 30, 2012, the IRS prepared SFRs for petitioner for 2007 and 2008

and executed for each year the certification required by section 6020(b). These

returns constituted valid Federal income tax returns of petitioner for 2007 and

2008. On July 2, 2013, the IRS timely mailed petitioner a notice of deficiency

based on these SFRs, determining tax deficiencies for each year and additions to

tax for fraudulent failure to file (for 2007), for failure to file timely (for 2008), and

for failure to pay timely (for both years).2


      2
       Respondent asserted an addition to tax under section 6651(a)(1) for 2007 in
the event we do not sustain the fraudulent failure-to-file penalty.
                                         -6-

[*6] On September 23, 2013, petitioner timely petitioned this Court for review of

the notice of deficiency. As the basis for his disagreement with respondent’s de-

terminations, petitioner stated as follows:

      Petitioner is not the person made liable by law under IRC §§1461 &
      1463 for the payment of the tax, or the penalty. The deficiency
      violates IRC §§ 6211 and 6212 because it has been based on Subtitle
      C wages, not Subtitle A. Per IRC §§ 6001 and 6011, Petitioner is not
      a person required by law to file a tax return because he has no statu-
      tory liability for the payment of any tax. IRC § 6020(b) has been
      violated as there is no subscribed SFR. IRM 5291 has been violated
      as Form 1040 is not authorized for use as an SFR document under
      IRC § 6020(b). Petitioner did not earn the wages defined under IRC
      § 1441(b) that are subject to the Subtitle A based deficiency
      calculated under IRC § 6211. Petitioner disputes the application of
      the deficiency authority, and the income tax law, as a direct tax
      without apportionment, which is still controlled and prohibited by
      Article I of the U.S. Constitution.

      On July 16, 2014, the Court granted respondent’s motion for leave to file an

amendment to answer, which sets forth the details of petitioner’s tax evasion

scheme and criminal conviction and makes (among others) the following affirma-

tive allegation:

      The prior criminal conviction of petitioner under I.R.C. § 7201 for the
      taxable year 2007 is conclusive and binding on petitioner, and by
      reason thereof petitioner is estopped in the instant case, under the
      doctrine of collateral estoppel (estoppel by judgment), from denying
      herein that he fraudulently failed to file an income tax return for the
      taxable year 2007 under I.R.C. § 6651(f) and that, therefore, peti-
      tioner is liable for the addition to tax imposed by I.R.C. § 6651(f).
                                         -7-

[*7] Respondent’s amendment to answer also alleges affirmatively that

“[p]etitioner received income of $148,061 in 2007.” This represents the sum of

the income petitioner received from MATA ($144,650) and the income he realized

from cancellation of indebtedness ($3,411).

      Our order granting respondent leave to amend his answer also ordered peti-

tioner to file, by August 29, 2014, a reply to the first amendment to answer. This

order warned petitioner that if he “fails to file a reply, every affirmative allegation

set out in the First Amendment to Answer may be deemed admitted under Tax

Court Rule 37(c).” Petitioner did not file a reply to the first amendment to answer;

instead, he filed a 129-page “Memorandum at Law on Federal Income Taxation

and the Personal Federal Income Tax.” This document contains the usual

gibberish embraced by tax protesters. On September 12, 2014, respondent moved

for entry of an order under Rule 37(c) that petitioner be deemed to have admitted

the undenied affirmative allegations of the first amendment to answer. We granted

that motion on September 17, 2014.

      On October 9, 2014, respondent filed a motion for summary judgment, to

which petitioner responded on November 10, 2014. His response asserts that there

exist “many factual disputes” but makes no reference whatever to the actual facts

of this case. Rather, the “factual disputes” he alleges are said to concern (for ex-
                                         -8-

[*8] ample) whether “the original income tax legislation was enacted under a tariff

act, as a tariff, or not”; whether “section 1461 identifies the persons who are

actually made liable” for payment of income tax; whether sections 6001 and 6011

“require a liability for a tax to be determined to exist as a prerequisite to a person

being required to file returns or keep records”; whether “wages” constitute

“income”; and whether “the improper creation and unauthorized substitute for

return documents in this case by the IRS employees constitutes evidence of a

crime.”

                                      Discussion

A.    Summary Judgment Standard

      The purpose of summary judgment is to expedite litigation and avoid costly,

time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90

T.C. 678, 681 (1988). Under Rule 121(b) the Court may grant summary judgment

when there is no genuine dispute as to any material fact and a decision may be

rendered as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), aff’d, 17 F.3d 965 (7th Cir. 1994). Rule 121(d) provides that where the

moving party properly makes and supports a motion for summary judgment, “an

adverse party may not rest upon the mere allegations or denials of such party’s

pleading” but rather must set forth specific facts, by affidavits or otherwise,
                                        -9-

[*9] “showing that there is a genuine dispute for trial.” In light of respondent’s

motion, his supporting declaration and exhibits, the deemed admission by

petitioner of the undenied affirmative allegations of the first amendment to

answer, and petitioner’s response to the summary judgment motion, which alleges

no colorable dispute as to any material fact, we conclude that this case may be

adjudicated summarily.

B.    Unreported Income

      The IRS’ determinations in a notice of deficiency are generally presumed

correct, and the taxpayer bears the burden of proving those determinations errone-

ous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). For this pre-

sumption to adhere in cases involving receipt of unreported income, respondent

must provide some predicate evidence connecting the taxpayer to the income-

producing activity. See, e.g., De Cavalcante v. Commissioner, 620 F.2d 23 (3d

Cir. 1980), aff’g T.C. Memo. 1978-432; Tucker v. Commissioner, T.C. Memo.

2014-51, at *12. Once respondent has produced evidence linking the taxpayer to

an income-producing activity, the burden of proof shifts to the taxpayer to prove

by a preponderance of the evidence that respondent’s determinations are arbitrary

or erroneous. Helvering v. Taylor, 293 U.S. 507, 515 (1935); Tokarski v.

Commissioner, 87 T.C. 74 (1986).
                                        - 10 -

[*10] Respondent has supplied bank records demonstrating that cash of $144,650

for 2007 and $37,000 for 2008 was transferred from the MATA account into the

Maple Avenue account and the Balice account, over which petitioner had signa-

tory authority and exercised control. Respondent has supplied evidence that the

IRS received from Chase Bank USA a Form 1099-C for 2007 reporting that

petitioner realized cancellation of indebtedness income of $3,411 in 2007. These

records establish that petitioner received, but did not report, income of $148,061

for 2007 and $37,000 for 2008.

      On the basis of this credible evidence, we are satisfied that the IRS’ deter-

minations set forth in the notice of deficiency are entitled to the general presump-

tion of correctness. See Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir.

1999), aff’g T.C. Memo. 1997-97; Powerstein v. Commissioner, T.C. Memo.

2011-271. Petitioner’s response to the motion for summary judgment does not

allege any dispute as to the correctness of the IRS’ determinations. Indeed, for

2007, petitioner is deemed to have admitted the allegation in the first amendment

to answer that he “received income of $148,061 in 2007,” representing the sum of

his cancellation of indebtedness income ($3,411) and the income he received from

MATA ($144,650). We will accordingly sustain respondent’s determination of

unreported income for each year.
                                        - 11 -

[*11] C.     Additions to Tax

      1.     Failure To File

      Section 6651(a)(1) provides for an addition to tax when a taxpayer fails to

file a return timely, unless the taxpayer proves that the failure was due to reason-

able cause and not due to willful neglect. Late filing of a return is due to reason-

able cause “[i]f the taxpayer exercised ordinary business care and prudence and

was nevertheless unable to file the return within the prescribed time.” Sec.

301.6651-1(c)(1), Proced. & Admin. Regs. For each month or fraction thereof for

which such failure continues, section 6651(a)(1) adds 5% of the tax required to be

shown on such return, up to a maximum addition of 25%. “If any failure to file

any return is fraudulent,” however, the monthly addition to tax rises from 5% to

15%, and the maximum aggregate addition to tax is increased to 75%. Sec.

6651(f)(1) and (2). Respondent bears the burden of proving fraud by “clear and

convincing evidence.” Reedy v. Commissioner, T.C. Memo. 2008-100.

      Respondent has shown, and petitioner does not dispute, that he failed to file

Federal income tax returns for 2007 and 2008. Petitioner does not contend, and he

could not plausibly contend, that he exercised “ordinary business care and pru-

dence” in the discharge of his Federal tax obligation for either year. For 2007

petitioner was convicted under section 7201 of wilfully attempting to evade or
                                        - 12 -

[*12] defeat his Federal income tax obligation, and he is thus collaterally estopped

from denying that his failure to file for that year was fraudulent. See DiLeo v.

Commissioner, 96 T.C. 858, 885 (1991), aff’d, 959 F.2d 16 (2d Cir.1992). In any

event, petitioner is bound by his deemed admission of the affirmative allegations

in respondent’s first amendment to answer that “petitioner is liable for the addition

to tax imposed by I.R.C. § 6651(f).” See Doncaster v. Commissioner, 77 T.C.

334, 336-340 (1981) (noting that deemed admissions under Rule 37(c) are

sufficient to satisfy respondent’s burden of proving fraud). We accordingly

sustain respondent’s determination that petitioner is liable for additions to tax of

$26,062 for 2007 under section 6651(f) and $857 for 2008 under section

6651(a)(1).

      2.      Failure To Pay

      Section 6651(a)(2) provides for an addition to tax when a taxpayer fails to

pay timely the tax shown on a return, unless the taxpayer proves that the failure

was due to reasonable cause and not due to willful neglect. A substitute for return

prepared by the IRS pursuant to section 6020(b) is treated as the “return” filed by

the taxpayer for purposes of section 6651(a)(2). See sec. 6651(g). For each month

or fraction thereof for which a failure to pay continues, section 6651(a)(2) adds
                                        - 13 -

[*13] 0.5% of the tax required to be shown on such return, up to a maximum

addition of 25%.

      Respondent has shown, and petitioner does not dispute, that he failed to pay

his Federal income obligations for 2007 and 2008. Respondent has established

that the IRS prepared for each year an SFR that met the requirements of section

6020(b). Petitioner does not contend, and he could not plausibly contend, that his

failure was due to “reasonable cause.” We accordingly sustain the section

6651(a)(2) additions to tax.

D.    Section 6673 Penalty

      Section 6673(a)(1) authorizes this Court to require a taxpayer to pay to the

United States a penalty not in excess of $25,000 if it appears that he has instituted

or maintained proceedings primarily for delay or the taxpayer’s position “is frivo-

lous or groundless.” The purpose of section 6673 is to compel taxpayers to con-

form their conduct to settled tax principles and to deter the waste of judicial re-

sources. See Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986); Salzer v.

Commissioner, T.C. Memo. 2014-188.

      Petitioner was previously before this Court in Balice v. Commissioner, T.C.

Memo. 2005-161, 90 T.C.M. (CCH) 1, where he challenged a notice of Federal tax

lien. In granting the Commissioner’s motion for summary judgment, the Court
                                        - 14 -

[*14] noted that petitioner advanced contentions “that the Court finds to be

frivolous and/or groundless.” 90 T.C.M. (CCH) at 3. We then considered sua

sponte whether to impose on petitioner a penalty under section 6673(a)(1).

Although we decided not to impose a penalty in that case, we warned petitioner

“that he may be subject to such a penalty if in the future he institutes or maintains

a proceeding in this Court primarily for delay and/or his position in any such

proceeding is frivolous or groundless.” Ibid.

      On July 9, 2014, respondent filed in the instant case a motion for protective

order. This motion represented that petitioner had served a request for answers to

interrogatories demanding that respondent admit or deny propositions that inclu-

ded multiple variations on the following themes: (1) section 61 does not contain

the word “wages” or “liable”; (2) petitioner is not a “person” who is liable for tax;

(3) petitioner’s wages are not “wages” subject to tax under subtitle A; and (4)

petitioner’s wages are not subject to statutory deficiency procedures. Contentions

like these are a familiar refrain of the tax-protest movement. See, e.g., Bonaccorso

v. Commissioner, T.C. Memo. 2005-278; Copeland v. Commissioner, T.C. Memo.

2003-46; Guerrier v. Commissioner, T.C. Memo. 2002-3; Smith v. Commissioner,

T.C. Memo. 2000-290; Rev. Rul. 2007-20, 2007-1 C.B. 863. Respondent submit-
                                         - 15 -

[*15] ted that he should not be required to answer these interrogatories because

they were designed to burden the IRS and constituted abuse of the judicial system.

      On July 16, 2014, we granted respondent’s motion for a protective order and

advised petitioner that “[t]he Court will also consider, as part of its ultimate deci-

sion in this case, whether petitioner should be required to pay a penalty under sec-

tion 6673(a)(1) for the frivolous positions he has maintained in this case to date.”

We warned petitioner that, “if he continues to maintain such frivolous positions,

the magnitude of the penalty considered by this Court will increase.”

      Despite these warnings petitioner has continued to make submissions to this

Court--including the documents he filed on July 31, August 4, August 11, Septem-

ber 26, and November 11, 2014--that contain numerous arguments that are utterly

frivolous. We will accordingly require him to pay under section 6673(a)(1) a pen-

alty to the United States in the amount of $25,000.

      To reflect the foregoing,


                                                  An appropriate order and decision

                                        will be entered.
