                                  T.C. Memo. 2017-5



                         UNITED STATES TAX COURT



                   BRIAN E. HARRISS, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 12528-14, 25358-14.               Filed January 5, 2017.



      Brian E. Harriss, pro se.

      Randall B. Childs and Caroline R. Krivacka, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      VASQUEZ, Judge: In these consolidated cases respondent determined

deficiencies, additions to tax, and penalties with respect to petitioner’s 2010 and

2011 Federal income tax as follows:
                                         -2-

[*2]                                    Additions to tax
                                                                Penalty
       Year        Deficiency sec. 6651(a)(1) sec. 6651(a)(2) sec. 6662(a)

       2010        $49,968            ---            $3,341.33         $3,427
       2011         40,259         $3,211.25            ---             2,569

After concessions,1 the issues for decision are: (1) whether compensation

petitioner received from his employers is includible in income for the 2010 and

2011 tax years; (2) whether a distribution from petitioner’s individual retirement

account (IRA) is includible in income for the 2010 tax year; (3) whether petitioner

is liable for a 10% additional tax on the IRA distribution under section 72(t) for

the 2010 tax year; (4) whether petitioner is liable for an addition to tax under

section 6651(a)(1) for the 2011 tax year; (5) whether petitioner is liable for an

addition to tax under section 6651(a)(2) for the 2010 tax year; (6) whether

petitioner is liable for accuracy-related penalties under section 6662(a) for the

2010 and 2011 tax years; and (7) whether the Court should impose a penalty on

petitioner under section 6673(a)(1).2



       1
        Before trial respondent conceded that he had incorrectly included a $29
dividend in petitioner’s 2010 income and a $1,174 dividend in petitioner’s 2011
income.
       2
        Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
                                         -3-

[*3]                            FINDINGS OF FACT

        Some of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated herein by this reference. Petitioner

resided in Alaska when he timely filed the petitions.

        Petitioner is a licensed engineer with bachelor’s and master’s degrees from

the Georgia Institute of Technology. During 2010 petitioner worked as an

engineer for Bergaila & Associates, Inc. (Bergaila). Bergaila paid petitioner

$26,425 for the services he performed in 2010. That same year petitioner

withdrew $28,250 from an IRA that he held at TD Ameritrade. Petitioner was

below age 59-1/2 in 2010.

        At some point in 2010 not established by the record, petitioner resigned

from Bergaila and began working as an engineer for CH2M Hill Alaska, Inc.

(CH2M). CH2M paid petitioner a salary of $128,970 in 2010 and $161,000.96 in

2011.

        On February 16, 2013, petitioner filed Forms 1040, U.S. Individual Income

Tax Return, for the 2010 and 2011 tax years via certified mail in a single envelope

addressed to respondent. On his 2010 return he reported zero wages. Petitioner

also reported a taxable amount of zero with respect to the above-described IRA

distribution. Petitioner attached to his 2010 return three Forms 4852, Substitute
                                          -4-

[*4] 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. On his Forms 4852 petitioner: (1) claimed that Bergaila had paid

him zero wages and withheld $6,984 in Federal income, Social Security, and

Medicare taxes; (2) claimed that CH2M had paid him zero wages and withheld

$36,429 in Federal income, Social Security, and Medicare taxes, and (3) reported a

distribution of $28,250 from his IRA but claimed the taxable amount was zero.

         Petitioner also reported zero wages on his 2011 return. He attached to his

2011 return one Form 4852 in which he claimed that CH2M had paid him zero

wages and withheld $34,475 in Federal income, Social Security, and Medicare

taxes.

         In a cover letter accompanying his returns, petitioner explained that he was

disputing information returns prepared by Bergaila, CH2M, and TD Ameritrade

because “our non-federally-connected work or business arrangement is an entirely

private agreement, not involving the exercise of any federal privilege.”

         Respondent selected petitioner’s 2010 and 2011 returns for examination.

Following the examination, respondent sent petitioner a timely notice of

deficiency for each tax year. The notice for 2010 included petitioner’s unreported

wages and IRA distribution in income, determined a 10% additional tax on
                                        -5-

[*5] petitioner’s premature IRA distribution, and determined an addition to tax

under section 6651(a)(2) and an accuracy-related penalty under section 6662. The

notice for 2011 included petitioner’s unreported wages in income and determined

an addition to tax under section 6651(a)(1) and an accuracy-related penalty under

section 6662.

                                     OPINION

I.    Preliminary Matters

      Petitioner argues that respondent bears the burden of proof with respect to

his unreported income for both tax years. For the reasons below, we disagree.

      Generally, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and the taxpayer bears the burden of proving that the

Commissioner’s determinations are erroneous. See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).3 Under section 6201(d), if a taxpayer asserts

a reasonable dispute with respect to an item of income reported on an information

return filed by a third party and the taxpayer meets certain other requirements, the

Commissioner bears the burden of producing reasonable and probative evidence,




      3
       Petitioner has not shown entitlement to any shift in the burden of proof to
respondent pursuant to sec. 7491(a). See Higbee v. Commissioner, 116 T.C. 438,
440-441 (2001).
                                        -6-

[*6] in addition to the information return, concerning the deficiency attributable to

the income item.

      Petitioner argues that we should set aside the notices of deficiency because

respondent failed to satisfy the requirements of section 6201(d) when he relied

only on third-party information returns. However, section 6201(d) is not

applicable here because petitioner’s frivolous position that his wages are not

taxable does not constitute a “reasonable dispute” with respect to an item of

income. See, e.g., Nelson v. Commissioner, T.C. Memo. 2012-232, aff’d, 540 F.

App’x 924 (11th Cir. 2013).

      Petitioner also argues that the presumption of correctness does not apply to

the notices of deficiency because respondent failed to establish an evidentiary

foundation linking him to income-producing activity. In the Court of Appeals for

the Ninth Circuit, to which an appeal of these cases presumably would lie absent a

stipulation to the contrary, see sec. 7482(b)(1)(A), (2), the presumption of

correctness does not attach in cases involving unreported income unless the

Commissioner first establishes an evidentiary foundation linking the taxpayer to

the alleged income-producing activity, see Weimerskirch v. Commissioner, 596

F.2d 358, 361-362 (9th Cir. 1979), rev’g 67 T.C. 672 (1977). The requisite

evidentiary foundation is minimal and need not include direct evidence. See
                                        -7-

[*7] Banister v. Commissioner, T.C. Memo. 2008-201, aff’d, 418 F. App’x 637

(9th Cir. 2011). Once the Commissioner produces evidence linking the taxpayer

to an income-producing activity, the burden shifts to the taxpayer “to rebut the

presumption of correctness of * * * [the Commissioner’s] deficiency

determination by establishing by a preponderance of the evidence that the

deficiency determination is arbitrary or erroneous.” Petzoldt v. Commissioner, 92

T.C. 661, 689 (1989); see also Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th

Cir. 1999), aff’g T.C. Memo. 1997-97.

      Respondent has adequately established an evidentiary foundation linking

petitioner to his employment activity and the IRA withdrawal. Petitioner

stipulated that he was compensated by Bergaila and CH2M for his work as an

engineer during the years in issue. Petitioner also stipulated that he withdrew

funds from a TD Ameritrade retirement account. In his response to respondent’s

first request for admissions, petitioner admitted that TD Ameritrade had

characterized this account as an IRA. Accordingly, respondent’s determinations

that petitioner had unreported income and is liable for deficiencies for 2010 and

2011 are presumed correct, and petitioner bears the burden of proving that

respondent’s determinations are erroneous. See Rule 142(a)(1); Welch v.

Helvering, 290 U.S. at 115.
                                         -8-

[*8] II.     Unreported Wage Income

       Petitioner concedes that he received the amounts of compensation set out in

the notices of deficiency. However, petitioner argues that the compensation he

received in 2010 and 2011 was not taxable income within the meaning of the law.

       Section 61(a) defines gross income to include “income from whatever

source derived”. More specifically, section 61(a)(1) includes in an individual’s

gross income any compensation for services, interest payments, dividend

payments, and gains derived from dealings in property. Clearly, petitioner’s

compensation from Bergaila and CH2M is gross income for Federal income tax

purposes. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955)

(stating that gross income includes all accessions to wealth that are clearly realized

and under the control of the taxpayer); McNair v. Eggers, 788 F.2d 1509, 1510

(11th Cir. 1986) (describing the taxpayer’s argument that his wages were not

income as “patently frivolous”); Grimes v. Commissioner, 82 T.C. 235, 237

(1984); Reiff v. Commissioner, 77 T.C. 1169, 1173 (1981).

       Petitioner’s assertion to the contrary, that is, that the payments made to him

for his services are not gross income, is frivolous and characteristic of rhetoric that
                                         -9-

[*9] has been universally rejected by this and other courts.4 See Wilcox v.

Commissioner, 848 F.2d 1007 (9th Cir. 1988), aff’g T.C. Memo. 1987-225. The

Court need not address petitioner’s assertions “with somber reasoning and copious

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

colorable merit.” See Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir.

1984); Wnuck v. Commissioner, 136 T.C. 498 (2011). Consequently, we uphold

respondent’s determinations with respect to petitioner’s wage income for 2010 and

2011.

III.    IRA Distribution

        Petitioner argues that the $28,250 distribution he received from his IRA is

not taxable income. We disagree.

        Subject to certain exceptions, amounts distributed from an IRA are

includible in a taxpayer’s gross income as provided in section 72. Sec. 408(d)(1).

Petitioner, who has not established that an exception applies, argues that his

retirement account was not an IRA. However, petitioner has offered no evidence

        4
        Petitioner acknowledges that “wages” are taxable but argues that the term
does not encompass the compensation he received from his employers. This
position has been previously rejected by this Court as baseless and subject to the
imposition of sec. 6673 penalties. See Waltner v. Commissioner, T.C. Memo.
2014-35, aff’d, __ F. App’x __, 2016 WL 5800492 (9th Cir. Oct. 5, 2016); Nelson
v. Commissioner, T.C. Memo. 2012-232, aff’d, 540 F. App’x 924 (11th Cir.
2013).
                                         - 10 -

[*10] supporting this contention. Accordingly, the distribution is includible in

petitioner’s gross income.

IV.   Section 72(t) Tax

      IRA distributions made before the taxpayer’s attaining the age of 59-1/2 that

are includible in income are generally subject to a 10% additional tax unless an

exception applies. See sec. 72(t)(1), (2)(A)(i). Because the section 72(t)

additional tax is a “tax” and not a “penalty, addition to tax, or additional amount”

within the meaning of section 7491(c), the burden of production with respect to

the additional tax remains on petitioner. See El v. Commissioner, 144 T.C. 140,

148 (2015). Petitioner, who was under 59-1/2 years of age in 2010, has neither

argued nor established that any of the statutory exceptions applies. See sec.

72(t)(2). Accordingly, the distribution is subject to the 10% additional tax under

section 72(t).

V.    Additions to Tax

      A.     Section 6651(a)(1)

      Respondent determined that petitioner is liable for the section 6651(a)(1)

late-filing addition to tax for the 2011 tax year. Section 6651(a)(1) imposes an

addition to tax for failing to file a return by the filing deadline (as extended) unless

such failure is due to reasonable cause and not due to willful neglect. Pursuant to
                                        - 11 -

[*11] section 7491(c), respondent has the burden of production with respect to this

addition to tax. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

      Petitioner stipulated that he filed his 2011 return on February 16, 2013,

several months after the extended filing deadline of October 15, 2012.

Consequently, respondent has met his burden of producing evidence that the

late-filing addition to tax should be imposed for 2011. Petitioner has not

demonstrated that he had reasonable cause for his failure to file a timely return.

He is therefore liable for the section 6651(a)(1) addition to tax for 2011.

      B.     Section 6651(a)(2)

      Respondent also determined that petitioner is liable for the section

6651(a)(2) late-payment addition to tax for the 2010 tax year. Section 6651(a)(2)

imposes an addition to tax for failure to pay the amount of tax shown on a

taxpayer’s Federal income tax return on or before the payment due date unless

such failure is due to reasonable cause and not due to willful neglect. The section

6651(a)(2) addition to tax applies only when an amount of tax is shown on a return

filed by the taxpayer or prepared by the Secretary. Sec. 6651(a)(2), (g)(2); Cabirac

v. Commissioner, 120 T.C. 163, 170 (2003), aff’d without published opinion, 94

A.F.T.R. 2d (RIA) 2004-5490 (3d Cir. 2004). Pursuant to section 7491(c),
                                         - 12 -

[*12] respondent has the burden of production with respect to this addition to tax.

See Higbee v. Commissioner, 116 T.C. at 446.

      Respondent has not carried his burden here. Petitioner’s 2010 return, which

respondent received and processed, shows a tax of zero. There is nothing in the

record to indicate that a substitute for return (SFR) meeting the requirements of

section 6020(b) was ever prepared for the 2010 tax year.5 We therefore hold that

petitioner is not liable for the section 6651(a)(2) addition to tax.

VI.   Accuracy-Related Penalty

      Respondent also determined that petitioner is liable for accuracy-related

penalties under section 6662(a) for the 2010 and 2011 tax years.6 Pursuant to

section 6662(a) and (b)(1) and (2), a taxpayer may be liable for a penalty of 20%


      5
        Over petitioner’s objection respondent introduced a literal transcript of
account for petitioner’s 2010 tax year. The literal transcript contains no reference
to any SFRs. Even if it did, the literal transcript does not establish that the
requirements of sec. 6020(b) were satisfied. See Wheeler v. Commissioner, 127
T.C. 200, 210 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008); Gardner v.
Commissioner, T.C. Memo. 2013-67, at *24.
      6
         For 2010 respondent determined in the notice of deficiency that the
underpayment was attributable to one or more of the following: (1) negligence or
disregard of rules or regulations, (2) a substantial understatement of income tax,
(3) a substantial valuation misstatement, or (4) a transaction lacking economic
substance. For 2011 respondent determined in the notice of deficiency that
petitioner’s underpayment was attributable to a substantial understatement of
income tax. In his answer respondent raised the issue of negligence or disregard
of rules or regulations as another basis for the accuracy-related penalty for 2011.
                                       - 13 -

[*13] on the portion of an underpayment of tax attributable to: (1) negligence or

disregard of rules or regulations or (2) a substantial understatement of income tax.

Whether applied because of a substantial understatement of income tax or

negligence or disregard of rules or regulations, the accuracy-related penalty is not

imposed with respect to any portion of the underpayment as to which the taxpayer

acted with reasonable cause and in good faith. Sec. 6664(c)(1). The decision as to

whether the taxpayer acted with reasonable cause and in good faith depends upon

all the pertinent facts and circumstances. See sec. 1.6664-4(b)(1), Income Tax

Regs. Generally, the most important factor is the extent of the taxpayer’s effort to

assess his or her proper tax liability. Humphrey, Farrington & McClain, P.C. v.

Commissioner, T.C. Memo. 2013-23; sec. 1.6664-4(b)(1), Income Tax Regs.

      The term “negligence” in section 6662(b)(1) includes any failure to make a

reasonable attempt to comply with the Code and any failure to keep adequate

books and records or to substantiate items properly. Sec. 6662(c); sec. 1.6662-

3(b)(1), Income Tax Regs. Negligence has also been defined as the failure to

exercise due care or the failure to do what a reasonable person would do under the

circumstances. See Allen v. Commissioner, 92 T.C. 1, 12 (1989), aff’d, 925 F.2d

348, 353 (9th Cir. 1991); see also Neely v. Commissioner, 85 T.C. 934, 947
                                        - 14 -

[*14] (1985). The term “disregard” includes any careless, reckless, or intentional

disregard. Sec. 6662(c).

      Petitioner reported zero tax liabilities on his 2010 and 2011 returns.

However, petitioner received taxable wage income in both years and, as discussed

above, was liable for Federal income tax on his wages. Petitioner therefore had an

underpayment for each year within the meaning of section 6662(a). Petitioner

does not dispute that he worked during 2010 and 2011 and that he received

payments from his employers in the amounts set forth in the notices of deficiency.

In fact, petitioner acknowledges that he received information statements from his

employers reporting these payments, but, instead of relying on these statements, he

attached to his returns Forms 4852 that reported zero wages.

      As discussed above, it is well settled that wages are taxable income and

should be reported as such. See, e.g., Wilcox v. Commissioner, 848 F.2d at 1008-

1009. Petitioner’s position to the contrary demonstrates not only a failure to

comply reasonably with the Code, but also negligence and a clear disregard of

rules or regulations. Petitioner did not act with reasonable cause and in good faith.

Accordingly, the Court holds that petitioner is liable for accuracy-related penalties

under section 6662(a) for the 2010 and 2011 tax years.
                                       - 15 -

[*15] VII.    Section 6673

      Section 6673(a) authorizes the Tax Court to impose a penalty not in excess

of $25,000 on a taxpayer for proceedings instituted primarily for delay or in which

the taxpayer’s position is frivolous or groundless. While petitioner advanced

frivolous arguments in this proceeding, we decline to impose a section 6673

penalty against him at this time. However, we warn petitioner that continuing to

advance frivolous or groundless arguments may result in substantial penalties in

the future.

      We have considered the parties’ arguments and, to the extent not addressed

herein, conclude that they are moot, irrelevant, or without merit.

      To reflect the foregoing,


                                                      Appropriate orders will be

                                                issued, and decisions will be entered

                                                under Rule 155.
