                              T.C. Memo. 2018-138



                        UNITED STATES TAX COURT



                LARRY W. MACDONALD, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 5503-16, 17660-16.               Filed August 27, 2018.



      Larry W. Macdonald, pro se.

      Brenn C. Bouwhuis, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      PUGH, Judge: In notices of deficiency dated February 10, 2016, and May

11, 2016, respectively, respondent determined deficiencies in petitioner’s 2013

and 2014 Federal income tax and penalties as follows:
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[*2]                                                               Penalty
            Year                         Deficiency               sec. 6662
            2013                         $21, 966                   $3,267
            2014                           40,315                    7,364


       The issues for decision are: (1) whether petitioner has unreported wage

income of $102,207 for 2013 and $105,496 for 2014; (2) whether petitioner

received and failed to report retirement income of $7,500 for 2013 and $53,796 for

2014; (3) whether petitioner is liable for a 10% additional tax under section 72(t)

of $750 for 2013 and $5,379 for 2014; (4) whether petitioner is liable for a section

6662(a) accuracy-related penalty for both taxable years; and (5) whether petitioner

is liable for a section 6673 penalty.1

                                FINDINGS OF FACT

       Petitioner refused to stipulate any facts or documents. At the time the

petitions were filed, petitioner resided in the State of Utah. During the years at

issue, petitioner, an engineer, was employed by Wencor LLC (Wencor) and was

paid wages in exchange for his services of $102,207 for 2013 and $105,496 for



       1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, in effect for the years at issue. Rule references are to
the Tax Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
                                        -3-

[*3] 2014, which were reported on Forms W-2, Wage and Tax Statement.

Petitioner also received distributions from an individual retirement account (IRA)

held by Utah Community Credit Union of $7,500 for 2013 and $53,796 for 2014,

which were reported on Forms 1099-R, Distributions From Pensions, Annuities,

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

      For each of 2013 and 2014, petitioner timely filed Form 1040EZ, Income

Tax Return for Single and Joint Filers With No Dependents, reporting zero income

and zero tax liability. Petitioner prepared and filed with each return a substitute

Form W-2 and a corrected Form 1099-R indicating that he had zero in wages and

zero in taxable retirement income. In December 2016 petitioner submitted a Form

1040X, Amended U.S. Individual Income Tax Return, for 2014. On that Form

1040X petitioner reported all of the income listed on the notice of deficiency for

2014, reported the 10% early distribution additional tax under section 72(t), and

claimed various deductions.2

      Respondent determined a frivolous return penalty for these years that was

abated after petitioner and his wife submitted the Form 1040X for 2014.




      2
         This Form 1040X was attached as an exhibit to respondent’s Motion to
Impose Sanctions Under Section 6673(a)(1), filed April 9, 2018, but was not a trial
exhibit.
                                         -4-

[*4] Petitioner then rejected the position he had taken on that Form 1040X and

before us takes the position that he is not subject to tax.

      Respondent’s notices of deficiency determined that petitioner was

(1) taxable on the wages he received from Wencor in 2013 and 2014 of $102,207

and $105,496, respectively; (2) taxable on retirement distributions he received

from Utah Community Credit Union in 2013 and 2014 of $7,500 and $53,796,

respectively; (3) liable for a 10% additional tax under section 72(t) for the

retirement distributions in 2013 and 2014 of $750 and $5,379, respectively; and

(4) liable for an accuracy-related penalty under section 6662(a) for 2013 and 2014

of $3,267 and $7,364, respectively.

      The examining agent’s immediate supervisor approved the section 6662(a)

penalties in writing by making an entry in the Correspondence Examination

Automation Case Support Notes on April 29, 2015, with respect to 2013, and

March 7, 2016, with respect to 2014.

      At the end of trial respondent filed a Motion to Impose Sanctions Under

Section 6673(a)(1), which we took under advisement. Petitioner also renewed his

motion for default judgment (before trial we had denied a written motion for

default and dismissal) and after trial submitted a memorandum in support of that

motion.
                                        -5-

[*5]                                 OPINION

I. Burden of Proof

       Ordinarily, the burden of proof in cases before the Court is on the taxpayer.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). However, if the

Commissioner raises a new issue or seeks an increase in the deficiency, the

Commissioner bears the burden of proof as to the new issue or the increased

deficiency. See Rule 142(a)(1).

       The record establishes, and petitioner concedes, that he received payments

for services provided to Wencor and retirement distributions from Utah

Community Credit Union. Petitioner does not dispute the amounts he received

either. He disputes only the characterization of these payments as taxable income.

Because petitioner raises only legal issues, we decide whether he is liable for the

deficiencies at issue without regard to the burden of proof.3

II. Taxable Income

       Section 61(a) provides that “gross income means all income from whatever

source derived,” including compensation for services. Gross income also includes

distributions from a qualified retirement plan for the year of distribution under the


       3
        We address the burden with respect to the accuracy-related penalties in
section IV below.
                                          -6-

[*6] provisions of section 72. Secs. 61(a)(10), 408(d); see Sears v. Commissioner,

T.C. Memo. 2010-146. As noted above, petitioner does not dispute that he

received wages in exchange for services he provided to Wencor in 2013 and 2014,

and he does not dispute that he received distributions from his IRA. Rather, he

argues that the payments are not taxable income. He also argues that he has not

engaged in any of the sorts of activities that are subject to tax and is not the type of

taxpayer that is subject to tax. In a previous case before this Court at docket No.

1016-16 petitioner made these same arguments. We dismissed that case for failure

to state a claim and warned petitioner that his arguments were frivolous and have

been rejected by this and other courts.

      Petitioner’s arguments have not changed, and we again reject them. In

general, we do not address frivolous 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); see, e.g., Cabirac v. Commissioner, 120 T.C. 163 (2003), aff’d without

published opinion, 2004 WL 7318960 (3d Cir. 2004); Rowlee v. Commissioner,

80 T.C. 1111, 1120 (1983) (rejecting the taxpayer’s claim that he is not a “person

liable” for tax); Waltner v. Commissioner, T.C. Memo. 2014-35 (laying out and
                                         -7-

[*7] rejecting a litany of frivolous positions), aff’d, 659 F. App’x 440 (9th Cir.

2016). Petitioner is subject to tax under the Internal Revenue Code.

      Therefore we find that petitioner received taxable wages from Wencor and

taxable distributions from Utah Community Credit Union, and we sustain

respondent’s determination that those amounts are includable in his gross income

for 2013 and 2014.

III. Additional Tax on Early Retirement Plan Distributions

      Section 72(t)(1) imposes a 10% additional tax on early distributions from a

qualified retirement plan, including an IRA. See sec. 4974(c). Petitioner

conceded that he received the distributions and presented no evidence or argument

that the amounts should be excepted from the additional tax under section 72(t)(1)

for either year. We therefore sustain respondent’s determination.

IV. Section 6662(a) Penalty

      Section 6662(a) and (b)(2) imposes an accuracy-related penalty equal to

20% of the portion of an underpayment of tax required to be shown on a return

that is attributable to a “substantial understatement of income tax.” An

understatement of income tax is “substantial” if it exceeds the greater of 10% of

the tax required to be shown on the return or $5,000. Sec. 6662(d).
                                         -8-

[*8] The Commissioner bears the burden of production with respect to a

taxpayer’s liability for accuracy-related penalties, requiring the Commissioner to

come forward with sufficient evidence indicating that imposition of the penalties

is appropriate. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446

(2001). In addition, as part of that burden the Commissioner must show that he

complied with the procedural requirements of section 6751(b)(1) for the section

6662(a) accuracy-related penalty imposed. See sec. 7491(c); Graev v.

Commissioner (Graev III), 149 T.C. __, __ (slip op. at 13-14) (Dec. 20, 2017),

supplementing and overruling in part 147 T.C. 460 (2016). Section 6751(b)

requires the Commissioner to show that penalties assessed under section 6662

were “personally approved (in writing) by the immediate supervisor of the

individual making such determination”. See Graev III, 149 T.C. at __ (slip op. at

13-14).

      Once the Commissioner satisfies the burden of production, the taxpayer

must come forward with persuasive evidence that the Commissioner’s

determination as to the application of penalties is incorrect or that the taxpayer has

an affirmative defense such as reasonable cause. See Rule 142(a); Higbee v.

Commissioner, 116 T.C. at 446-447.
                                         -9-

[*9] Petitioner reported liabilities of zero on his returns for 2013 and 2014, so

his understatements of income tax equal the deficiencies in tax we found above of

$21,966 for 2013 and $40,315 for 2014 and therefore are 100% of the tax he was

required to show on each return. We hold that respondent has met his burden on

the basis of those computations and the notation in the Correspondence

Examination Automation Case Support Notes regarding approval of those

penalties. Therefore the burden shifts to petitioner to demonstrate that

respondent’s penalty determinations were incorrect, for example, because there

was reasonable cause for any portion of either underpayment and he acted in good

faith. See sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 446-447.

      The decision as to whether a taxpayer acted with reasonable cause and in

good faith is made on a case-by-case basis, taking into account all 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 efforts to assess the proper tax

liability. Id.; see Halby v. Commissioner, T.C. Memo. 2009-204. We also

consider the taxpayer’s experience, knowledge, and education. Sec. 1.6664-

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

      Petitioner has not shown reasonable cause for the underpayments of tax. He

offered only frivolous arguments to justify them. We therefore hold that petitioner
                                        - 10 -

[*10] is liable for the penalty for an underpayment attributable to a substantial

understatement of income tax under section 6662(a) and (b)(2) for each year.

V. Section 6673 Sanction

      Respondent moved that the Court impose sanctions against petitioner

pursuant to section 6673(a)(1). Section 6673(a)(1) authorizes the Court to require

a taxpayer to pay a penalty to the United States in an amount not to exceed

$25,000 whenever it appears to the Court that the taxpayer instituted or maintained

the proceeding primarily for delay or that the taxpayer’s position in the proceeding

is frivolous or groundless.

      We warned petitioner in several orders prior to trial about the possibility of

this penalty’s being imposed, and we note that petitioner was warned in his prior

case in this Court that his arguments lack merit. We even warned petitioner at trial

that we would take into account everything he said when we considered

respondent’s motion. Notwithstanding that warning, petitioner filed a

memorandum after trial that repeated the same rejected arguments. Therefore, we

will grant respondent’s motion and impose a penalty of $5,000 under section

6673(a)(1) on petitioner. We again warn petitioner that if he does not abandon his

misguided positions--e.g., that his wages received for services and retirement

distributions are not taxable income, even though reported to him as such, and that
                                       - 11 -

[*11] he is not required to file timely and proper tax returns or pay taxes when

due--a greater penalty may be imposed in future cases before this Court.

      We have considered petitioner’s remaining arguments, and we conclude that

they also are frivolous and devoid of any basis in law. See Crain v. Commissioner,

737 F.2d at 1417; Wnuck v. Commissioner, 136 T.C. 498 (2011).

      To reflect the foregoing,


                                                      Appropriate orders and

                                                decisions will be entered.
