                               T.C. Memo. 2019-96



                         UNITED STATES TAX COURT



                    PATRICK COMBS, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 22748-14.                          Filed August 5, 2019.



      Patrick Combs, pro se.

      Emerald G. Smith and Min Young Chan, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      THORNTON, Judge: Respondent determined deficiencies in petitioner’s

Federal income tax, section 6662(a) accuracy-related penalties, and a section

6651(a)(1) addition to tax as follows:1


      1
        All section references are to the Internal Revenue Code (Code) in effect at
all relevant times, and all Rule references are to the Tax Court Rules of Practice
                                                                       (continued...)
                                         -2-

[*2]                                      Penalty         Addition to tax
             Year      Deficiency       sec. 6662(a)      sec. 6651(a)(1)
            2010        $189,453          $37,891                -0-
            2011           32,713            6,543             $7,546
            2012            1,589              318               -0-

The Court has previously granted respondent’s motion for partial summary

judgment with respect to petitioner’s taxable years 2010 and 2011.2 After

concessions, the issues remaining for decision are: (1) whether petitioner received

constructive dividends from The Good Thinking Co., Inc. (Good Thinking),

during 2010, 2011, and 2012 (years at issue), as respondent determined;3

(2) whether he is liable for the section 6651(a)(1) addition to tax for failure to

timely file for 2011; (3) whether he is liable for section 6662(a) accuracy-related



       1
       (...continued)
and Procedure, unless otherwise indicated. All monetary amounts are rounded to
the nearest dollar.
       2
        By order dated August 2, 2018, this Court granted respondent’s motion for
partial summary judgment, holding that petitioner received but failed to report on
Schedule E, Supplemental Income and Loss, rental income of $241,141 and
$82,513 on his 2010 and 2011 returns, respectively. The Court took under
advisement respondent’s motion to impose a penalty under sec. 6673(a) filed April
27, 2018.
       3
       In his pretrial memorandum respondent conceded, as duplicative of the
constructive dividend determination, his determination that petitioner had failed to
report certain gross receipts on Schedule C, Profit or Loss From Business.
                                         -3-

[*3] penalties for 2010, 2011, and 2012; and (4) whether he should be subject to a

penalty pursuant to section 6673(a).

                                 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. When he

filed his petition, petitioner resided in California with his significant other Deanna

Latson and their two children.

      Petitioner is an author, a performer, and a motivational speaker. During the

years at issue he performed in “one-person comedy shows” and had various

speaking engagements. Compensation for these performances was generally made

by checks payable to Good Thinking and deposited into Good Thinking’s bank

account.
                                        -4-

[*4] This arrangement grew out of petitioner’s dealings with Robert Holcomb.4

Since at least 1999 Mr. Holcomb had promoted to petitioner a tax-avoidance

strategy which petitioner refers to as a Private Tax Excepted Self Supporting

Ministry (PTESSM). The general concept of this strategy was to shift business

income to various entities which would then use the funds to pay petitioner’s

personal expenses.5

      In furtherance of this strategy, on January 1, 1999, Mr. Holcomb arranged

for the incorporation of Good Thinking.6 Immediately after Good Thinking’s


      4
       In 2016 Mr. Holcomb was indicted by a grand jury in the Southern District
of California on charges including tax evasion, aiding or assisting in the
preparation of false returns, and making false statements to financial institutions.
See Indictment, United States v. Holcomb, No. 16-CR-01408-WQH (S.D. Cal.
June 16, 2016), ECF No. 1. After a jury trial he was found guilty on four counts
of making a false statement to a financial institution. See Jury Verdict, Holcomb,
No. 16-CR-01408-WQH (S.D. Cal. July 20, 2018), ECF No. 173. The court
declared a mistrial with respect to the other charges. See Declaration of Mistrial,
Holcomb, No. 16-CR-01408-WQH (S.D. Cal. July 20, 2018), ECF No. 172.
Judgment was entered and Mr. Holcomb was sentenced to 46 months of
imprisonment and fined $600,000. See Judgment, Holcomb, No. 16-CR-01408-
WQH (S.D. Cal. Feb. 19, 2019), ECF No. 219.
      5
      This tax-avoidance strategy is similar to that described in another case in
which Mr. Holcomb advised the taxpayers. See Carreon v. Commissioner, T.C.
Memo. 2014-6.
      6
        Good Thinking was part of a web of entities that constituted or participated
in the PTESSM and that were created for this purpose in accordance with Mr.
Holcomb’s plan. These other entities, which are referenced in the record at
                                                                       (continued...)
                                          -5-

[*5] incorporation, petitioner was its sole stockholder, president, chief executive

officer, chief financial officer, sole director, and treasurer. Ms. Latson served as

its secretary.7

       During the years at issue, in accordance with Mr. Holcomb and petitioner’s

plan, the fees paid for petitioner’s speaking engagements were generally made

payable to an account at Bank of America under the account name Good Thinking,

account No. xxxxxx2520 (GT 2520 account). Insofar as the record shows,

petitioner and Ms. Latson were the only individuals with signature authority over

the GT 2520 account. Petitioner and Ms. Latson were also authorized users of

Good Thinking’s American Express credit card account (GT credit card account).8


       6
        (...continued)
various places but do not seem to enter directly into respondent’s determinations
that presently concern us, include Builders Trust, Stillwater Trust, and Goldwater
Trust. Mr. Holcomb and petitioner were generally cotrustees of these entities, and
petitioner was authorized to act as an agent for each entity. The general purpose
of these entities was to shift assets and income from one to the other. For instance,
from 2010 to 2012 petitioner wrote checks to Builders Trust from the Good
Thinking accounts.
       7
       Good Thinking was dissolved in May 2012. Great Thinking LLC was
created in 2011 to be its replacement. After a period during which the two entities
ran concurrently, the transition between the two entities was completed in 2012.
Petitioner was the fiduciary of both entities. None of the adjustments in the
current proceedings relate to Good Thinking.
       8
           Two other individuals, Fouade RC Dini and Lyne Inada, were also listed as
                                                                      (continued...)
                                       -6-

[*6] During the years at issue petitioner and Ms. Latson paid various expenses

using the GT credit card account and funds deposited into the GT 2520 account.

These expenses included airfare, payments to video rental stores, grocery stores,

fast-food restaurants, and payments for other miscellaneous expenses.

      Petitioner filed his Forms 1040, U.S. Individual Income Tax Return, for tax

years 2010 and 2012 on time but filed his Form 1040 for 2011 (which was due

April 17, 2012) on June 24, 2013. On these Forms 1040 he reported wages from

Good Thinking of $13,750, $17,019, and $7,862 for 2010, 2011, and 2012,

respectively.

      For tax years 2010, 2011, and 2012 Good Thinking filed Forms 1120, U.S.

Corporation Income Tax Return, reporting the following amounts of income and

expenses:




      8
       (...continued)
authorized users of the GT credit card account. Mr. Dini charged only about $154
on the GT credit card account over the years at issue. Ms. Inada made charges on
the GT credit card account similar in amount to charges made by petitioner and
Ms. Latson. Although the record does not make clear the exact nature of Mr. Dini
and Ms. Inada’s relationship to petitioner and Good Thinking, the record does
contain numerous checks written from petitioner and from Good Thinking to Ms.
Inada with the memo lines on many of the checks indicating variously that the
payments are for “Kids”, “Babysitting”, “Childcare”, or similar things.
                                          -7-

[*7]                                     2010        2011        2012
         Gross profits               $217,789       $65,520     $9,611
         Expenses:
           Salaries and wages             60,288     56,894      7,500
           Taxes and licenses              6,294      6,023        952
           Advertising                     3,359      -0-         -0-
           Employee benefits               3,270      -0-         -0-
           Travel                         69,316      -0-         -0-
           Other deductions               78,930      2,603      1,159
            Total                        221,457     65,520      9,611
             Taxable income               (3,668)     -0-         -0-


       The Internal Revenue Service (IRS) selected petitioner’s and Good

Thinking’s returns for examination. By notice of deficiency dated July 3, 2014,

the IRS adjusted Good Thinking’s taxable income by disallowing, for lack of

substantiation, most of the claimed deductions and by adjusting upward its gross

profits for 2011 and 2012, as follows:
                                        -8-

[*8]                                  2010           2011         2012
           Gross profits            $217,789       $89,710       $47,146
           Expenses:
            Salaries and wages         13,750       17,000         7,500
            Taxes and licenses         -0-            -0-          -0-
            Advertising                -0-            -0-          -0-
            Employee benefits          -0-            -0-          -0-
            Travel                     -0-            -0-          -0-
            Other deductions           -0-            -0-          -0-
             Total                    13,750        17,000         7,500
              Taxable income         204,039        72,710       39,646

       By a separate notice of deficiency, also dated July 3, 2014, respondent

determined that petitioner had failed to report constructive dividends attributable

to personal expenses that Good Thinking had paid on his behalf of $207,707,

$72,710, and $39,646 for 2010, 2011, and 2012, respectively.9 In addition,

       9
        For all years at issue the IRS counted as constructive dividends those
expenses that Good Thinking had reported and that the IRS had disallowed as
deductions, namely $207,707 ($221,457 of reported expenses less the $13,750
allowed), $48,520 ($65,520 of reported expenses less the $17,000 allowed), and
$2,111 ($9,611 of reported expenses less the $7,500 allowed) for 2010, 2011, and
2012, respectively. For 2011 and 2012 the IRS also counted as constructive
dividends payments of $24,190 and $37,353, respectively, that Good Thinking had
made on its GT credit card account. Good Thinking had neither included these
latter amounts in its gross proceeds nor claimed any deduction for these amounts
on its corporate returns for 2011 and 2012. In the notice of deficiency issued to
                                                                       (continued...)
                                        -9-

[*9] respondent determined that for each year at issue petitioner was liable for an

accuracy-related penalty under section 6662(a) as a result of one or more of

(1) negligence or disregard of rules or regulations, (2) a substantial understatement

of income tax, or (3) a substantial valuation overstatement.

      The record includes a Civil Penalty Approval Form, dated May 14, 2014,

and signed by the IRS examiner’s group manager on May 23, 2014, for the

assertion of accuracy-related penalties under section 6662(a) for negligence.

There was no formal communication of penalties giving petitioner the right to

protest them or challenge them in court before the notice of deficiency.

                                     OPINION

I. Burden of Proof

      The Commissioner’s determinations in a notice of deficiency are presumed

correct, and the taxpayer generally bears the burden of proving those

determinations erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).10


      9
       (...continued)
Good Thinking, respondent determined that these amounts should have been
included in Good Thinking’s gross proceeds.
      10
        Under sec. 7491(a) if the taxpayer introduces credible evidence with
respect to any factual issue relevant to ascertaining the proper income tax liability,
                                                                       (continued...)
                                        - 10 -

[*10] II. Constructive Dividends

      Respondent determined that petitioner received from Good Thinking

constructive dividends attributable to personal expenses that Good Thinking paid

on his behalf. Respondent’s determination of constructive dividends is a

determination of unreported income. See Pac. Mgmt. Grp. v. Commissioner, T.C.

Memo. 2018-131, at *64. The Court of Appeals for the Ninth Circuit, to which

any 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 income-producing activity, 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. See Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th

Cir. 1999), aff’g T.C. Memo. 1997-97.

      Respondent has established a sufficient evidentiary foundation to satisfy any

threshold burden. The evidence shows that petitioner owned 100% of Good


      10
        (...continued)
and if certain conditions are met, the burden of proof shifts to the Commissioner.
See also Rule 142(a)(2). Petitioner does not contend, and the record does not
establish, that the burden of proof should shift pursuant to sec. 7491(a).
                                        - 11 -

[*11] Thinking and maintained authority over its checking and credit card

accounts. He was integrally linked to--apparently the sole source of--its income-

producing activity. The record shows that respondent’s determination is based on

an extensive review of both petitioner’s and Good Thinking’s activities, bank

accounts, and other financial accounts. Respondent introduced evidence to show

that Good Thinking made significant expenditures primarily for petitioner’s

benefit.

      Sections 301 and 316 govern the characterization, for Federal income tax

purposes, of corporate distributions of property to shareholders. If the distributing

corporation has sufficient earnings and profits (E&P), the distribution is a

dividend that the shareholder must include in gross income. Secs. 301(c)(1), 316.

If the distribution exceeds the corporation’s E&P, the excess generally represents

a nontaxable return of capital to the extent of the shareholder’s basis in the

corporation, and any remaining amount is taxable to the shareholder as a gain from

the sale or exchange of property. Sec. 301(c)(2) and (3); Truesdell v.

Commissioner, 89 T.C. 1280, 1295-1298 (1987).

      Petitioner bears the burden of proving that Good Thinking lacked sufficient

E&P to support dividend treatment at the shareholder level. See Truesdell v.

Commissioner, 89 T.C. at 1295-1296; Fazzio v. Commissioner, T.C. Memo. 1991-
                                       - 12 -

[*12] 130, aff’d, 959 F.2d 630 (6th Cir. 1992); Zalewski v. Commissioner, T.C.

Memo. 1988-340; Delgado v. Commissioner, T.C. Memo. 1988-66. If neither

party presents evidence as to the distributing corporation’s E&P, the taxpayer has

not met his burden of proof. Truesdell v. Commissioner, 89 T.C. at 1295-1296;

Vlach v. Commissioner, T.C. Memo. 2013-116, at *33 n.38.

      Petitioner produced no evidence concerning Good Thinking’s E&P during

the years at issue and has thus failed to meet his burden of proving that there were

insufficient E&P to support respondent’s determinations of constructive dividends

to petitioner. See Truesdell v. Commissioner, 89 T.C. at 1295-1296; Pac. Mgmt.

Grp. v. Commissioner, at *65-*66. We therefore deem Good Thinking to have

had sufficient E&P in each year to support dividend treatment.

      Characterization of a distribution as a dividend does not depend upon a

formal dividend declaration. See Boulware v. United States, 552 U.S. 421, 429-

430 (2008); Truesdell v. Commissioner, 89 T.C. at 1295; see also Noble v.

Commissioner, 368 F.2d 439, 442 (9th Cir. 1966), aff’g T.C. Memo. 1965-84.

Dividends may be formally declared or constructive. A constructive dividend is

an economic benefit conferred upon a shareholder by a corporation without

expectation of repayment. Truesdell v. Commissioner, 89 T.C. at 1295. Corporate

funds that a controlling shareholder diverts to personal use are generally
                                       - 13 -

[*13] characterized for tax purposes as constructive distributions to the

shareholder. See Erickson v. Commissioner, 598 F.2d 525, 531 (9th Cir. 1979),

aff’g in part, rev’g in part T.C. Memo. 1976-147. Such a diversion may occur, for

example, where a corporation makes a distribution to a controlling shareholder

that results in an economic benefit to the shareholder but serves no legitimate

corporate purpose. See Meridian Wood Prods. Co. v. United States, 725 F.2d

1183, 1191 (9th Cir. 1984). Such a diversion may also occur where a controlling

shareholder causes a corporation to pay his or her personal expense for the

shareholder’s primary benefit and without expectation of repayment. See Hood v.

Commissioner, 115 T.C. 172, 179-180 (2000). A distribution does not escape

taxation as a dividend simply because the shareholder did not personally receive

the property. Sammons v. United States, 433 F.2d 728, 730 (5th Cir. 1970); see

also Sparks Nugget, Inc. v. Commissioner, T.C. Memo. 1970-74, aff’d, 458 F.2d

631 (9th Cir. 1972). Rather, “it is the power to dispose of income and the exercise

of that power that determines whether * * * [a dividend] has been received.”

Sammons, 433 F.2d at 732; see also Helvering v. Horst, 311 U.S. 112 (1940);

Clark v. Commissioner, 266 F.2d 698, 713 (9th Cir. 1959), aff’g on this issue and

remanding T.C. Memo. 1957-129. Whether corporate expenditures are disguised

dividends presents a question of fact. See Pittman v. Commissioner, 100 F.3d
                                       - 14 -

[*14] 1308, 1313-1314 (7th Cir. 1996), aff’g T.C. Memo. 1995-243; Hood v.

Commissioner, 115 T.C. at 180.

      The Court of Appeals for the Ninth Circuit has enunciated a two-part test

for determining constructive dividends: “Corporate expenditures constitute

constructive dividends only if 1) the expenditures do not give rise to a deduction

on behalf of the corporation, and 2) the expenditures create ‘economic gain,

benefit, or income to the owner-taxpayer.’” P.R. Farms, Inc. v. Commissioner,

820 F.2d 1084, 1088 (9th Cir. 1987) (quoting Meridian Wood Prods. Co., 725

F.2d at 1191), aff’g T.C. Memo. 1984-549; see also Erickson v. Commissioner,

598 F.2d at 531.

      As we observed in Falsetti v. Commissioner, 85 T.C. 332, 357 (1985):

              Often the Court will have before it both the individual
      shareholder and the corporation so that application of the two-part
      test is a relatively simple matter. However, Tax Court jurisdiction is
      dependent upon timely filed petitions by both the individual
      shareholder and the corporation. Thus * * * application of the Ninth
      Circuit’s constructive dividend rule is complicated when only one of
      the parties is before the Court, a circumstance beyond our control.
      ***

Similarly in this case, because only petitioner and not Good Thinking is before the

Court, we “proceed as best we can on the record before us.” Id.
                                       - 15 -

[*15] For all years at issue respondent determined the amount of constructive

dividends on the basis of Good Thinking’s disallowed claimed deductions and, for

2011 and 2012, also on the basis of additional charges made on the GT credit card

account. Petitioner claims that many of these expenditures and charges represent

legitimate business expenses of Good Thinking.

      Petitioner offered into evidence, without meaningful explanation, hundreds

of pages of photocopied receipts, expense ledgers, spreadsheets, and various other

unsorted documentation. These materials are not linked in any meaningful way to

respondent’s adjustments. At trial petitioner attempted selectively to link a very

few of these items to deductible expenses of Good Thinking. We did not find his

testimony as to these few items credible or adequate to show that any particular

item represented an ordinary and necessary business expense of Good Thinking.11

      11
        For instance, acknowledging that he was “a little slow” on the difference
between debits and credits on the GT 2520 account statement, petitioner got it
backwards and claimed that certain bank statement credits (i.e., increases to the
account balance) represented expenses. As another example, petitioner pointed to
certain Good Thinking checks that were written in 2009; we see no basis for
concluding that these checks represent ordinary and necessary expenses for 2010,
2011, or 2012. He also claimed that Good Thinking had made certain charitable
contributions but offered no contemporaneous documentation as required by sec.
170(f)(8). He also pointed to a few other photocopied canceled checks--made out
variously to a phone company, an internet provider, a publishing house, a video
production company, a college, and a law firm and totaling about $2,249--but
offered no invoices or contracts to show that these checks represented ordinary
                                                                       (continued...)
                                        - 16 -

[*16] In fact, petitioner conceded at trial that certain categories of expenses

reported by Good Thinking--such as for child care--were not allowable business

expenses. Particularly in the light of this concession, we need not and shall not

undertake the task of sorting through petitioner’s voluminous evidence in an

attempt to determine deductible business expenses of Good Thinking. See Hale v.

Commissioner, T.C. Memo. 2010-229; Patterson v. Commissioner, T.C. Memo.

1979-362.

      In sum, petitioner’s voluminous documentation, in which personal living

expenses are not clearly distinguished from legitimate business expenses, provides

us no reasonable means of estimating or determining which if any of the

expenditures in question were incurred as ordinary and necessary business

expenses of Good Thinking for the years at issue.

      Because petitioner has failed to show that the expenditures in question

properly gave rise to deductions on behalf of Good Thinking, the remaining

question is whether these expenditures created “economic gain, benefit, or income

to the owner-taxpayer.” P.R. Farms, Inc. v. Commissioner, 820 F.2d at 1088


      11
        (...continued)
and necessary business expenses of Good Thinking. Our skepticism on this score
is heightened by petitioner and Mr. Holcomb’s tax-avoidance strategy of having
Good Thinking deduct petitioner’s personal living expenses as business expenses.
                                        - 17 -

[*17] (quoting Meridian Wood Prods. Co., 725 F.2d at 1191). The expenditures in

question show a pattern of payment of personal expenses, for items such as child

care, clothing, groceries, and fast-food restaurants. This pattern is consistent with

petitioner’s tax-avoidance strategy, as devised by Mr. Holcomb, to have Good

Thinking deduct petitioner’s personal living expenses as business expenses.

      Petitioner has not identified any category of challenged corporate expenses

that did not benefit him personally. Instead, he has resorted to groundless and

frivolous arguments. As has been often observed, “[w]e perceive no need to refute

these arguments with somber reasoning and copious citation of precedent; to do so

might suggest that these arguments have some colorable merit.” Crain v.

Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984).

      We sustain respondent’s determinations that petitioner received and failed

to report constructive dividends of $207,707, $72,710, and $39,646 for 2010,

2011, and 2012, respectively.

III. Section 6651(a)(1) Addition to Tax

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

addition to tax for failing to file his 2011 Federal income tax return on time.

Section 6651(a)(1) provides for an addition to tax for failure to file a return by the

date prescribed unless the taxpayer establishes that the failure is due to reasonable
                                         - 18 -

[*18] cause and not willful neglect. The Commissioner bears the burden of

production with respect to whether it is appropriate to impose the section

6651(a)(1) addition to tax, see sec. 7491(c), and the burden of proof is on the

taxpayer to establish reasonable cause and the absence of willful neglect, United

States v. Boyle, 469 U.S. 241, 245 (1985). Reasonable cause exists when a

taxpayer exercises ordinary business care and prudence and is nonetheless unable

to file his return by the date prescribed by law. Sec. 301.6651-1(c)(1), Proced. &

Admin. Regs. Willful neglect connotes “conscious, intentional failure or reckless

indifference.” Boyle, 469 U.S. at 245.

      Petitioner’s 2011 tax return was due April 17, 2012. It was filed June 24,

2013. Respondent has met his burden of production. Petitioner failed to show

reasonable cause for not timely filing his 2011 tax return. We sustain respondent’s

determination of the section 6651(a)(1) addition to tax.

IV. Section 6662(a) Accuracy-Related Penalties

      Respondent determined that for each year at issue petitioner is liable for a

20% accuracy-related penalty pursuant to section 6662(a). Under section 7491(c),

respondent bears the burden of production with respect to the section 6662(a)

penalty. Generally, this means that he must come forward with sufficient evidence

indicating that it is appropriate to impose the relevant penalty. See Higbee v.
                                       - 19 -

[*19] Commissioner, 116 T.C. 438, 446 (2001). The Commissioner’s burden of

production under section 7491(c) includes establishing compliance with the

supervisory approval requirement of section 6751(b). Graev v. Commissioner,

149 T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460

(2016). Once the Commissioner has met his burden of production, the burden of

proof is upon the taxpayer to show that he is not liable for the penalty. See Higbee

v. Commissioner, 116 T.C. at 449. The taxpayer may meet this burden by proving

that he acted with reasonable cause and in good faith with regard to the

underpayment. See sec. 6664(c)(1).

      Section 6662(a) imposes a penalty of 20% of the portion of any

underpayment attributable to, among other things, negligence or disregard of rules

or regulations. See sec. 6662(b)(1). Negligence includes the failure to make a

reasonable attempt to comply with the provisions of the Code and also includes

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. The evidence shows that

petitioner has failed to make a reasonable attempt to comply with the provisions of

the Code and failed to keep adequate books and records, instead espousing various

frivolous and groundless arguments. The record includes a Civil Penalty

Approval Form for the accuracy-related negligence penalties, signed by the IRS
                                        - 20 -

[*20] examiner’s group manager before the first formal communication of

penalties, in the notice of deficiency, giving petitioner the right to challenge them.

See Rose v. Commissioner, T.C. Memo. 2019-73, at *40; cf. Clay v.

Commissioner, 152 T.C. ___, ___ (slip op. at 44) (Apr. 24, 2019). We hold that

respondent has satisfied his burden of production, including his burden pursuant to

section 6751(b)(1), with respect to the section 6662 accuracy-related penalties for

negligence.12

      Reasonable cause requires that the taxpayer exercise ordinary business care

and prudence as to the disputed item. Boyle, 469 U.S. at 246. The term “good

faith” has no precise definition but connotes, among other things, (1) an honest

belief and (2) the intent to perform all lawful obligations. Sampson v.

Commissioner, T.C. Memo. 2013-212, at *18. The determination of whether a

taxpayer acted with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all facts and circumstances. Higbee v. Commissioner,

116 T.C. at 448; sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most

important factor is the extent of the taxpayer’s effort to assess the proper tax


      12
        Because we conclude that respondent has met his burden of production for
imposing penalties based on negligence, and we sustain the sec. 6662(a) penalties
on that ground, we need not consider whether respondent has met his burden of
production with respect to the accuracy-related penalties as to any other ground.
                                         - 21 -

[*21] liability. Sec. 1.6664-4(b)(1), Income Tax Regs. Other circumstances that

may indicate reasonable cause and good faith include an honest misunderstanding

of fact or law that is reasonable in the light of all of the facts and circumstances,

including the experience, knowledge, and education of the taxpayer. Higbee v.

Commissioner, 116 T.C. at 449; Sampson v. Commissioner, at *18; sec. 1.6664-

4(b)(1), Income Tax Regs.

      Petitioner has failed to establish that he acted with reasonable cause and in

good faith. To the contrary, the record convinces us that he purposefully

participated in a scheme to reduce his income tax by improperly treating personal

living expenses as business deductions. Accordingly, we sustain respondent’s

determination that petitioner is liable for accuracy-related penalties for negligence

for 2010, 2011, and 2012.

V. Section 6673 Penalty

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

the United States a penalty of up to $25,000 when it appears that the taxpayer

instituted or maintained proceedings primarily for delay, that the taxpayer’s

position in such proceedings is frivolous or groundless, or that the taxpayer

unreasonably failed to pursue available administrative remedies. See Burke v.

Commissioner, 124 T.C. 189, 197 (2005).
                                        - 22 -

[*22] Throughout these proceedings petitioner has advanced frivolous and

groundless positions.13 He has been warned repeatedly about the possibility of a

penalty under section 6673(a). Nevertheless, he has persisted in his misguided

course of conduct, causing this Court and respondent to waste significant time and

resources. It appears to the Court that petitioner’s position in this proceeding is

frivolous and groundless and that he has instituted and maintained these

proceedings primarily for delay. Consequently, we will grant respondent’s motion

and will require petitioner to pay to the United States a penalty of $2,500 pursuant

to section 6673(a)(1).

      To reflect respondent’s concession and the Court’s August 2, 2018, order,


                                                 Decision will be entered under

                                       Rule 155.


      13
         Petitioner’s various filings include arguments that: as a result of the
PTESSM he is a “kept Man” benefiting from the “Artistic Patronage” of Mr.
Holcomb; any taxes due are the sole responsibility of Mr. Holcomb; petitioner is
not a “U.S. franchised 14th [A]mendment citizen” or a “U.S. resident” or a
“person” within the meaning of Federal statutes; and this Court and its officers are
“benefiting financially” from a “securitized document package” listed under
petitioner’s name and case number. At trial petitioner repeatedly invoked his
reliance on the PTESSM strategy and offered into evidence a letter from Mr.
Holcomb espousing frivolous and groundless claims; petitioner testified that the
letter “mirrors my mindset of exactly what my situation is and my relationship
with Mr. Holcomb and the PTESSM.”
