                       T.C. Memo. 2002-18



                     UNITED STATES TAX COURT



   MARK CHRISTOPHER AND NANCY LOUISE CORCORAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2947-01.             Filed January 18, 2002.




     Mark Christopher Corcoran, pro se.

     Timothy F. Salel, for respondent.



                       MEMORANDUM OPINION

     WOLFE, Special Trial Judge:   Respondent determined a

deficiency of $4,155 in petitioners’ 1998 Federal income tax.     In

the answer to the petition respondent asserted an accuracy-

related penalty of $831 pursuant to section 6662(a).   At trial

respondent filed a written motion for a penalty under section
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6673(a)(1).   All section references are to the Internal Revenue

Code in effect for 1998.

     The issues for decision are:   (1) Whether petitioners’

compensation for services, unemployment compensation, and

interest received during 1998 constitute gross income; (2)

whether petitioners are liable for an accuracy-related penalty

under section 6662(a); and (3) whether imposition of a penalty

under section 6673(a) is appropriate under the circumstances of

this case.

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

The stipulation of facts and the accompanying exhibits are

incorporated herein by this reference.   Petitioners resided in

Fallbrook, California, when they filed their petition.

     Petitioners are well-educated people.   Both graduated from

California State University at Long Beach.   Mark Corcoran

(petitioner) received a bachelor’s degree in business

administration with an emphasis in accounting.   Petitioner Nancy

Corcoran (Mrs. Corcoran) holds a master’s degree in education.

Petitioner is an accountant for Global Outdoors, Inc.    Mrs.

Corcoran teaches in the San Diego Catholic school system.

     During 1998, petitioner received compensation for services

of $13,269 and $5,773 from All American Homes and Empire Marine,

Inc., respectively.   Petitioner also received unemployment

compensation of $168 from the California Employment Development
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Department.    Mrs. Corcoran received $25,761 from the Roman

Catholic Bishop of San Diego with respect to her teaching job.

Petitioners also received interest on their bank account

balances.   In total, petitioners received compensation for

services of $44,803, unemployment compensation of $168, and

interest of $426.    Petitioners jointly filed a 1998 Federal

income tax return.    They filled in lines 7 through 56 of their

Form 1040, U.S. Individual Income Tax Return, with a zero on each

line and claimed a refund of $937.90.    Petitioners attached to

their tax return a Form W-2, Wage and Tax Statement, reporting

wages of $25,761 from Mrs. Corcoran’s employer.    Respondent

treated the $25,761 as if it were properly reported on the tax

return.

     Petitioners stipulated that they received all the amounts

that their employers reported to the Internal Revenue Service on

Forms W-2, as wages or compensation paid to them.    However,

petitioners refused to stipulate that such amounts constitute

wages.    Petitioners also stipulated that they received all of the

unemployment compensation and interest that respondent determined

were income.    Petitioners do not challenge the facts on which

respondent’s determinations are based or respondent’s calculation

of tax.   Rather, petitioners, by selectively analyzing statutes,

regulations, and judicial authorities out of context, have

reached the conclusion that their compensation for services,
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unemployment compensation, and interest do not constitute gross

income.

     Petitioners argue:   (1) There is no law making petitioners

liable for a personal income tax; (2) petitioners have no gross

income pursuant to section 861 et seq. concerning gross income

from sources within the United States and without the United

States; and (3) the notice of deficiency with respect to

petitioners’ 1998 return is invalid because petitioners allegedly

were denied an administrative hearing and because respondent

failed to carry the burden of proof at the administrative level.

     At the outset we note that petitioners’ arguments are

without factual or legal foundation.    Their contentions are

reminiscent of standard tax protester rhetoric.    They have

presented as exhibits copies of materials apparently prepared and

distributed by an organization opposed to compliance with the

income tax laws.   While petitioners’ arguments certainly do not

require refutation “with somber reasoning and copious citation of

precedent”, Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984),

we shall, nevertheless, briefly discuss some of the issues

raised.

     Section 1 imposes an income tax on the income of every

individual who is a citizen or resident of the United States.

Sec. 1.1-1(a)(1), Income Tax Regs.     Section 61(a) provides that

except as otherwise provided in subtitle A (income taxes) gross
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income   includes “all income from whatever source derived,”

including compensation for services and interest.   Secs.

61(a)(1), (4).   Section 85(a) provides that an individual’s gross

income includes unemployment compensation.

     Ignoring these statutory provisions, petitioners argue that

their compensation for services, unemployment compensation, and

interest do not constitute gross income because these items of

income are not listed in section 1.861-8(f), Income Tax Regs.

Their argument is misplaced and takes section 1.861-8(f), Income

Tax Regs., out of context.   The rules of sections 861-865 have

significance in determining whether income is considered from

sources within or without the United States.   The source rules do

not exclude from U.S. taxation income earned by U.S. citizens

from sources within the United States.   See, e.g., Williams v.

Commissioner, 114 T.C. 136, 138-139 (2000) (rejecting claim that

income is not subject to tax because it is not from any of the

sources listed in sec. 1.861-8(a), Income Tax Regs.); Aiello v.

Commissioner, T.C. Memo. 1995-40 (rejecting claim that the only

sources of income for purposes of sec. 61 are listed in sec.

861); Great-West Life Assur. Co. v. United States, 230 Ct. Cl.

477, 678 F.2d 180, 183 (1982) (“The determination of where income

is derived or ‘sourced’ is generally of no moment to either

United States citizens or United States corporations, for
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such persons are subject to tax under section 1 and section 11,

respectively, on their worldwide income.”).

     Petitioners’ procedural arguments likewise are without

merit.   Petitioners argue that the notice of deficiency is

invalid because they allegedly were denied an administrative

hearing, and because respondent failed to carry the burden of

proof at the administrative level.

     The record is unclear as to whether petitioners were

provided the opportunity for an administrative hearing.

Regardless, it is readily apparent that an administrative hearing

in this case would have been futile.   Petitioners never disputed

the amounts omitted from their tax return.    Their positions were

certainly not going to be accepted by the Internal Revenue

Service.   See Madge v. Commissioner, T.C. Memo. 2000-370

(rejecting taxpayer’s due process claim in a deficiency suit and

finding that an administrative hearing would have been futile),

affd. per curiam without published opinion ___ F.3d ___ (8th Cir.

2001).   As a general rule, this Court will not look behind a

deficiency notice to examine the evidence used, the propriety of

respondent’s motives, or the administrative policy or procedure

that informs respondent’s determinations.     Pietanza v.

Commissioner, 92 T.C. 729, 735 (1989), affd. without published

opinion 935 F.2d 1282 (3d Cir. 1991); Greenberg’s Express, Inc.

v. Commissioner, 62 T.C. 324, 327 (1974); see Snyder v.
                                 - 7 -

Commissioner, T.C. Memo. 2001-255.       A trial before the Tax Court

is a proceeding de novo; our determination of a taxpayer’s

liability is based on the merits of the case and not on the

record developed at the administrative level.       Greenberg’s

Express, Inc. v. Commissioner, supra at 328.

     With regard to the burden of proof as it pertains to their

liability for the deficiency in their income tax, petitioners’

long-winded arguments are misplaced.       The resolution of their

liability for the deficiency does not depend on which party has

the burden of proof.    Petitioners have stipulated the amounts

omitted from their tax return.    There are no material facts in

dispute.    Since only legal issues remain, the burden of proof is

irrelevant.     Nis Family Trust v. Commissioner, 115 T.C. 523, 538

(2000).    Accordingly, we sustain respondent’s deficiency

determination.

     The second issue for decision is whether petitioners are

liable for the section 6662(a) accuracy-related penalty for 1998.

Section 6662(a) imposes a 20-percent penalty on underpayments

attributable to, among other things, the taxpayer’s negligence or

disregard of rules or regulations.       Negligence is defined to

include the “failure to make a reasonable attempt to comply” with

the tax laws.    Sec. 6662(c).   A position with respect to an item

is attributable to negligence if it lacks a reasonable basis.

Sec. 1.6662-3(b)(1), Income Tax Regs.       The term “disregard”
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includes any careless, reckless or intentional disregard of rules

or regulations.    Sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax

Regs.   “‘[I]ntentional disregard occurs when a taxpayer who knows

or should know of a rule or regulation chooses to ignore its

requirements.’”    Cramer v. Commissioner, 64 F.3d 1406, 1414 (9th

Cir. 1995)(quoting Hansen v. Commissioner, 820 F.2d 1464, 1469

(9th Cir. 1987)), affg. 101 T.C. 225 (1993).

     By failing to report income and persistently refusing to

acknowledge their tax liability with respect to undisputed

revenues, despite self-professed familiarity with the tax laws,

petitioners have behaved unreasonably and have intentionally

disregarded the rules and regulations.    These circumstances,

which are not disputed, demonstrate that respondent has satisfied

his burden of production under section 7491(c) for his

determination of the accuracy-related penalty based on negligence

or disregard of rules or regulations.    Higbee v. Commissioner,

116 T.C. 438, 448-449 (2001).    Accordingly, we sustain

respondent’s determination of the accuracy-related penalty under

section 6662(a).

     By motion at the conclusion of trial, respondent requested

that the Court impose a penalty under section 6673(a).     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, inter

alia, the taxpayer’s position in the proceeding is frivolous.      A
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position maintained by a taxpayer is frivolous if 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).    Sanctions are properly imposed when

the taxpayer knew or should have known that his claim or argument

was frivolous.     Hansen v. Commissioner, supra at 1470; Nis Family

Trust v. Commissioner, supra at 544.

     Petitioners knew or should have known that their position

was frivolous.   Mr. Corcoran has been trained as an accountant

and has been employed in that capacity.    He testified that he has

spent 4 years researching the tax laws.    One month before trial,

respondent’s counsel sent a letter to petitioners clearly

outlining the relevant Code sections.    He warned petitioners that

respondent would move for the Court to impose the section 6673(a)

penalty if they continued to pursue their frivolous arguments.

Petitioners ignored our precedents and the warnings from

respondent’s counsel.    At trial petitioners introduced numerous

inappropriate exhibits, including a copy of a Peanuts Cartoon

featuring Snoopy.    They have wasted limited judicial and

administrative resources.    Accordingly, we shall require

petitioners to pay a $2,000 penalty to the United States under

section 6673(a).

     To the extent not herein discussed, we have considered

petitioners’ other arguments and found them to be meritless.
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To reflect the foregoing,

                                  An appropriate order

                             and decision will be entered

                             for respondent.
