TP Loses His IRA Due To A Warrantless Levy
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TP Loses His IRA Due To A Warrantless Levy
MARK ANDRES GREEN,
Plaintiff,
v.
PERSHING, L.L.C. AND JOHN DOES 1-20,
Defendants.
Release Date: OCTOBER 22, 2012
UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF OKLAHOMA
OPINION AND ORDER
Now before the Court is defendant Pershing L.L.C.'s (Pershing) motion for judgment on the pleadings (Dkt. # 17), on the ground that Pershing is "expressly shielded from any and all liability to plaintiff." Id. at 1. Plaintiff Mark Green, appearing pro se, filed a complaint seeking to recover $ 113,457.83 in funds that Pershing paid to the Internal Revenue Service (IRS) from plaintiff's individual retirement account (IRA), and additionally seeking special, compensatory, and general damages, and punitive damages in the amount of $ 1,000,000. Dkt. # 2. Plaintiff asserts seven claims, all of which are premised upon the assertion that Pershing lacked the authority to surrender to the IRS cash proceeds in plaintiff's IRA.
I.
Plaintiff had an IRA account at Next Financial Group, Inc. (Next). Pershing is a securities clearing firm, which provides services to financial organizations, including Next. Dkt. # 17, at 1-2. In January 2010, Pershing received a notice of levy from the IRS regarding plaintiff's IRA. Dkt. # 2, at 33. Included with the notice of levy was a cover page, signed by Fred Rice, a Revenue Officer for the IRS, which noted that the Notice of Levy "attaches the taxpayer's property." Dkt. # 8-1, at 2. Pershing notified plaintiff in a letter dated January 26, 2010 that it had received a notice of levy, and asked that plaintiff notify his broker within fifteen days of receipt of the letter as to how he intended to satisfy his IRS obligation from the assets in his account. Dkt. # 2, at 33; Dkt. # 8-1, at 1. Pershing further noted that it would be required to restrict plaintiff's ability to withdraw any funds from his account until the outstanding amount was paid. Dkt. # 2, at 33. On May 6, 2010, Pershing received a "Final Demand for Payment" from the IRS that stated "[d]emand is again made for $ 329686.03," and that plaintiff still owed that amount to the United States. Dkt. # 8-2, at 1. The Final Demand for Payment also notified Pershing that if Pershing did not pay within five days, the IRS would consider that a refusal to pay and would enforce the penalty provisions of 26 U.S.C. section 6332. Dkt. # 8-2. Plaintiff gave notice to both Pershing and Next that funds from his IRA should not be forwarded to the IRS. 1 Dkt. # 2, at 8. As of May 18, 2010, the total account value of plaintiff's IRA was $ 113,457.83, and, on that day, Pershing issued a check to the IRS in the amount of $ 113,457.83. Dkt. # 8-3. On the same day, Pershing notified plaintiff that it had issued a check, in the amount of $ 113,457.83, from his account made payable to the United States Treasury. Dkt. # 2, at 34; Dkt. # 8-3, at 1.
II.
"After the pleadings are closed -- but early enough not to delay trial -- a party may move for judgment on the pleadings." Fed. R. Civ. P. 12(c). "A motion for judgment on the pleadings under Rule 12(c) is treated as a motion to dismiss under Rule 12(b)(6)." Atlantic Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1160 (10th Cir. 2000); accord Corder v. Lewis Palmer Sch. Dist. No. 38, 566 F.3d 1219, 1223-24 (10th Cir. 2009). In considering a motion under Rule 12(b)(6), a court must determine whether the claimant has stated a claim upon which relief may be granted. A motion to dismiss is properly granted when a complaint provides no "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). A complaint must contain enough "facts to state a claim to relief that is plausible on its face" and the factual allegations "must be enough to raise a right to relief above the speculative level." Id. (citations omitted). "Once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint." Id. at 562. Although decided within an antitrust context, Twombly stated the pleadings standard for all civil actions. See Ashcroft v. Iqbal, 556 U.S. 662 (2009). For the purpose of making the dismissal determination, a court must accept all the well-pleaded allegations of the complaint as true, even if doubtful in fact, and must construe the allegations in the light most favorable to claimant. Twombly, 550 U.S. at 555; Alvarado v. KOB-TV, L.L.C., 493 F.3d 1210, 1215 (10th Cir. 2007); Moffett v. Halliburton Energy Servs., Inc., 291 F.3d 1227, 1231 (10th Cir. 2002). However, a court need not accept as true those allegations that are conclusory in nature. Erikson v. Pawnee Cnty. Bd. Of Cnty. Com'rs, 263 F.3d 1151, 1154-55 (10th Cir. 2001). "[C]onclusory allegations without supporting factual averments are insufficient to state a claim upon which relief can be based." Hall v. Bellmon, 935 F.3d 1106, 1109-10 (10th Cir. 1991).
"Judgment on the pleadings should not be granted 'unless the moving party has clearly established that no material issue of fact remains to be resolved and the party is entitled to judgment as a matter of law.'" Park Univ. Enters., Inc. v. Am. Cas. Co., 442 F.3d 1239, 1244 (10th Cir. 2006) (quoting United States v. Any & All Radio Station Transmission Equip., 207 F.3d 458, 462 (8th Cir. 2000)). Finally, "[a] pro se litigant's pleadings are to be construed liberally and held to a less stringent standard than formal pleadings drafted by lawyers." Hall, 935 F.2d at 1110 (citing Hains v. Kerner, 404 U.S. 519, 520-21 (1972)) (remaining citations omitted). However, "it is [not] the proper function of the district court to assume the role of advocate for the pro se litigant." Id.
III.
To satisfy a federal tax debt, the IRS is authorized to impose a tax lien on "all property and rights to property, whether real or personal, belonging to [a] person." 26 U.S.C. section 6321. Such a lien was intended by Congress to "reach every interest in property that a taxpayer may have." United States v. Nat'l Bank of Commerce, 472 U.S. 713, 719-20 (1985); Kane v. Capital Guardian Trust Co., 145 F.3d 1218, 1221 (10th Cir. 1998). "Because a federal tax lien is not self-executing, the IRS must take affirmative measures to collect the delinquent taxes." Nat'l Bank of Commerce, 472 U.S. at 719-20. To enforce its lien, the IRS may initiate an administrative levy under 26 U.S.C. section 6331(a), which is a provisional remedy "justified by 'the need of the government promptly to secure its revenues.'" Id.
The administrative levy process begins "by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights to property subject to levy." Kane, 145 F.3d at 1221 (citation and quotation marks omitted). "The IRS effectuates a levy upon intangible property . . . by the sole act of serving notice of levy upon the third party holding the property." Id. (citations omitted). "Upon service of the notice of levy, the IRS 'steps into the shoes of the taxpayer and acquires 'whatever' rights to the property the taxpayer possessed.'" Id. (quoting United States v. Bell Credit Union, 860 F.2d 365, 369 (10th Cir. 1988)). In other words, the "notice gives the IRS the right to all property levied upon . . . and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government." Nat'l Bank of Commerce, 472 U.S. at 720 (citations omitted). "The constitutionality of the levy procedure, of course, 'has been long settled.'" Id. at 721 (quoting Phillips v. Commissioner, 283 U.S. 589, 595 (1931)) (citing G.M. Leasing Corp. v. United States, 429 U.S. 338, 628, n. 18 (1977)).
The IRS has the right to levy on "property or rights to property." 26 U.S.C. section 6332(a). Tenth Circuit precedent is clear that the right to withdraw funds from an IRA constitutes a "right to property." Kane, 145 F.3d at 1223. Further, "where a taxpayer has the right to withdraw funds from his account, 'it is inconceivable that Congress intended to prohibit the Government from levying on that which is plainly accessible to the delinquent taxpayer-depositor.'" Id. at 1223-23 (quoting Nat'l Bank of Commerce, 472 U.S. at 725-26)). Therefore, when the holder of the IRA liquidates and surrenders the cash value to the IRS, it is surrendering a "right to property." Id.
If a third party fails to honor a federal tax levy, the third party is "liable for a sum equal to the value of the property plus interests and costs." Kane, 145 F.3d at 1222 (citing 26 U.S.C. section 6332(c)(1)). "If the failure to surrender the property is without reasonable cause, the third party may incur a 50% penalty as well." Id. There are only two defenses to failure to comply with a notice of levy. Bell Credit Union, 860 F.2d at 367. "The third party must establish that it is not in possession of the property or that the property was subject to prior judicial attachment or execution." Id. (citations omitted). Once a third party surrenders the property to the IRS, the third party is "discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment." 26 U.S.C. section 6332(e).
"Under the 1939 [Internal Revenue] Code, the warrant for distraint was an official Treasury form (Form 69) issued to a revenue agent by the director . . . stating the account of the taxpayer and directing the agent to enforce collection." 4 Laurence F. Casey, Introductory Comments-History-Warrant for Distraint Under Prior Law, in Casey Fed. Tax. Prac. section 13C:03 (2012). However, "nder the current Code[,] a warrant of distraint is no longer necessary," and a third party is not required to command one prior to surrendering property. Id.; Rosenblum v. United States, 300 F.2d 843, 844-45 (1st Cir. 1962); United States v. Eiland, 223 F.2d 118, 121 (4th Cir. 1955); Heaton v. YRC, Inc., Civ. No. 09-2807 RHK/JJK, 2009 WL 5103228 *2 (D. Minn. Dec. 17, 2009). "Without exception the case law supports the use of a notice of levy." Schiff v. Simon & Schuster, Inc., 780 F.2d 210, 212 (2d Cir. 1985) (listing cases). Further, a notice of levy is the "usual and recognized method of distraint and seizure of property." St. Louis Union Trust Co. v. United States, 617 F.2d 1293, 1302 (8th Cir. 1980); Heaton, 2009 WL 5103228 *2.
Plaintiff's seven claims are all premised upon Pershing's compliance with the notice of levy. Dkt. # 2, at 8-10. Plaintiff claims (1) that Pershing "did not have any 'Warrant of Distraint' or 'Distraint Warrant' from the IRS;" (2) that Pershing "had no authority to issue any check to the Department of Treasury;" (3) that Pershing "had no authority under the Statutes of the United States . . . to issue any check;" (4) that Pershing "was required [] to have both a 'Notice of Levy' and a 'Warrant of Distraint;'" (5) that Pershing had no authority to issue a check without an order from a court; (6) that the notice of levy violated 5 U.S.C. section 706; and (7) that Pershing had "a duty to validate any Notice of Levy." Id.
Plaintiff acknowledges that Pershing received a notice of levy in January 2010. Dkt. # 2, at 7. Moreover, plaintiff acknowledges that his IRA was "property or rights to property." Id. at 8. However, plaintiff argues that Pershing was required to receive a "Warrant of Distraint" from the IRS prior to surrendering the cash value of his IRA to the IRS. Id. at 8-10. As noted above, a Warrant of Distraint is not a requirement. Once the IRS complies with the notice of levy provisions, section 6332(e) "clearly bars money damages against a person who has complied with an IRS levy." Smith v. Kitchen, 132 F.3d 43, *3 (10th Cir. 1997) (unpublished) (citations omitted).
Plaintiff's claim that Pershing had no authority to issue a check without a court order is also mistaken. There is no requirement that a third party seek a court order prior to complying with a notice of levy. "Administrative levy, unlike an ordinary lawsuit, . . . does not require any judicial intervention." United States v. Rogers, 461 U.S. 677, 682 (1983) (citation omitted). Plaintiff's seventh claim, that Pershing had a duty to validate the notice of levy, is similarly incorrect. See United States v. Moskowitz, Passam, & Edelman, 603 F.3d 162, 166 (2d Cir. 2010) (validity of levy not valid reason to refuse to honor the notice of levy); Schiff, 780 F.2d at 212 (dispute over underlying tax assessment immaterial to third party's obligation to honor notice of levy). Finally, plaintiff's claim that the notice of levy was in violation of 5 U.S.C. section 706 is unavailing because that section does not validate, or invalidate, actions of the IRS, but instead sets forth the scope of review of agency actions.
Because the IRS properly provided a notice of levy to Pershing, plaintiff is barred from recovering from Pershing for its compliance. This Court finds that Pershing is statutorily discharged from liability for surrendering funds from plaintiff's IRA to the IRS, and plaintiff's claims fail as a matter of law.
IT IS THEREFORE ORDERED that defendant Pershing, L.L.C.'s motion for judgment on the pleadings (Dkt. # 17) is granted.
IT IS FURTHER ORDERED that, because no other defendant has been served or entered an appearance in this case, this is a final order terminating the case. A separate judgment is entered herewith.
DATED this 22nd day of October, 2012.
Claire V. Eagan
United States District Judge
FOOTNOTES:
/1/ On April 16, 2010, plaintiff and his wife, Jana Rae Green, proceeding pro se, filed a "Motion for Emergency Stay -- Injunction." Mark Andres Green and Jana Rae Green v. United States of America and Fred Rice, N. D. Okla. Case No.: 10-CV-00241-GKF-TLW. Plaintiff requested an injunction because, he argued, he had "fraudulent Notices of Federal Tax Liens . . . and Levies filed against" him. Dkt. # 1, at 1. Plaintiff attached a copy of the notice of levy, dated December 16, 2009, to his motion. Dkt. # 1-1, at 1. On April 30, 2010, plaintiff's motion was denied and his case was dismissed for lack of subject matter jurisdiction. Dkt. # 3, at 4.
Plaintiff,
v.
PERSHING, L.L.C. AND JOHN DOES 1-20,
Defendants.
Release Date: OCTOBER 22, 2012
UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF OKLAHOMA
OPINION AND ORDER
Now before the Court is defendant Pershing L.L.C.'s (Pershing) motion for judgment on the pleadings (Dkt. # 17), on the ground that Pershing is "expressly shielded from any and all liability to plaintiff." Id. at 1. Plaintiff Mark Green, appearing pro se, filed a complaint seeking to recover $ 113,457.83 in funds that Pershing paid to the Internal Revenue Service (IRS) from plaintiff's individual retirement account (IRA), and additionally seeking special, compensatory, and general damages, and punitive damages in the amount of $ 1,000,000. Dkt. # 2. Plaintiff asserts seven claims, all of which are premised upon the assertion that Pershing lacked the authority to surrender to the IRS cash proceeds in plaintiff's IRA.
I.
Plaintiff had an IRA account at Next Financial Group, Inc. (Next). Pershing is a securities clearing firm, which provides services to financial organizations, including Next. Dkt. # 17, at 1-2. In January 2010, Pershing received a notice of levy from the IRS regarding plaintiff's IRA. Dkt. # 2, at 33. Included with the notice of levy was a cover page, signed by Fred Rice, a Revenue Officer for the IRS, which noted that the Notice of Levy "attaches the taxpayer's property." Dkt. # 8-1, at 2. Pershing notified plaintiff in a letter dated January 26, 2010 that it had received a notice of levy, and asked that plaintiff notify his broker within fifteen days of receipt of the letter as to how he intended to satisfy his IRS obligation from the assets in his account. Dkt. # 2, at 33; Dkt. # 8-1, at 1. Pershing further noted that it would be required to restrict plaintiff's ability to withdraw any funds from his account until the outstanding amount was paid. Dkt. # 2, at 33. On May 6, 2010, Pershing received a "Final Demand for Payment" from the IRS that stated "[d]emand is again made for $ 329686.03," and that plaintiff still owed that amount to the United States. Dkt. # 8-2, at 1. The Final Demand for Payment also notified Pershing that if Pershing did not pay within five days, the IRS would consider that a refusal to pay and would enforce the penalty provisions of 26 U.S.C. section 6332. Dkt. # 8-2. Plaintiff gave notice to both Pershing and Next that funds from his IRA should not be forwarded to the IRS. 1 Dkt. # 2, at 8. As of May 18, 2010, the total account value of plaintiff's IRA was $ 113,457.83, and, on that day, Pershing issued a check to the IRS in the amount of $ 113,457.83. Dkt. # 8-3. On the same day, Pershing notified plaintiff that it had issued a check, in the amount of $ 113,457.83, from his account made payable to the United States Treasury. Dkt. # 2, at 34; Dkt. # 8-3, at 1.
II.
"After the pleadings are closed -- but early enough not to delay trial -- a party may move for judgment on the pleadings." Fed. R. Civ. P. 12(c). "A motion for judgment on the pleadings under Rule 12(c) is treated as a motion to dismiss under Rule 12(b)(6)." Atlantic Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1160 (10th Cir. 2000); accord Corder v. Lewis Palmer Sch. Dist. No. 38, 566 F.3d 1219, 1223-24 (10th Cir. 2009). In considering a motion under Rule 12(b)(6), a court must determine whether the claimant has stated a claim upon which relief may be granted. A motion to dismiss is properly granted when a complaint provides no "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). A complaint must contain enough "facts to state a claim to relief that is plausible on its face" and the factual allegations "must be enough to raise a right to relief above the speculative level." Id. (citations omitted). "Once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint." Id. at 562. Although decided within an antitrust context, Twombly stated the pleadings standard for all civil actions. See Ashcroft v. Iqbal, 556 U.S. 662 (2009). For the purpose of making the dismissal determination, a court must accept all the well-pleaded allegations of the complaint as true, even if doubtful in fact, and must construe the allegations in the light most favorable to claimant. Twombly, 550 U.S. at 555; Alvarado v. KOB-TV, L.L.C., 493 F.3d 1210, 1215 (10th Cir. 2007); Moffett v. Halliburton Energy Servs., Inc., 291 F.3d 1227, 1231 (10th Cir. 2002). However, a court need not accept as true those allegations that are conclusory in nature. Erikson v. Pawnee Cnty. Bd. Of Cnty. Com'rs, 263 F.3d 1151, 1154-55 (10th Cir. 2001). "[C]onclusory allegations without supporting factual averments are insufficient to state a claim upon which relief can be based." Hall v. Bellmon, 935 F.3d 1106, 1109-10 (10th Cir. 1991).
"Judgment on the pleadings should not be granted 'unless the moving party has clearly established that no material issue of fact remains to be resolved and the party is entitled to judgment as a matter of law.'" Park Univ. Enters., Inc. v. Am. Cas. Co., 442 F.3d 1239, 1244 (10th Cir. 2006) (quoting United States v. Any & All Radio Station Transmission Equip., 207 F.3d 458, 462 (8th Cir. 2000)). Finally, "[a] pro se litigant's pleadings are to be construed liberally and held to a less stringent standard than formal pleadings drafted by lawyers." Hall, 935 F.2d at 1110 (citing Hains v. Kerner, 404 U.S. 519, 520-21 (1972)) (remaining citations omitted). However, "it is [not] the proper function of the district court to assume the role of advocate for the pro se litigant." Id.
III.
To satisfy a federal tax debt, the IRS is authorized to impose a tax lien on "all property and rights to property, whether real or personal, belonging to [a] person." 26 U.S.C. section 6321. Such a lien was intended by Congress to "reach every interest in property that a taxpayer may have." United States v. Nat'l Bank of Commerce, 472 U.S. 713, 719-20 (1985); Kane v. Capital Guardian Trust Co., 145 F.3d 1218, 1221 (10th Cir. 1998). "Because a federal tax lien is not self-executing, the IRS must take affirmative measures to collect the delinquent taxes." Nat'l Bank of Commerce, 472 U.S. at 719-20. To enforce its lien, the IRS may initiate an administrative levy under 26 U.S.C. section 6331(a), which is a provisional remedy "justified by 'the need of the government promptly to secure its revenues.'" Id.
The administrative levy process begins "by serving a notice of levy on any person in possession of, or obligated with respect to, property or rights to property subject to levy." Kane, 145 F.3d at 1221 (citation and quotation marks omitted). "The IRS effectuates a levy upon intangible property . . . by the sole act of serving notice of levy upon the third party holding the property." Id. (citations omitted). "Upon service of the notice of levy, the IRS 'steps into the shoes of the taxpayer and acquires 'whatever' rights to the property the taxpayer possessed.'" Id. (quoting United States v. Bell Credit Union, 860 F.2d 365, 369 (10th Cir. 1988)). In other words, the "notice gives the IRS the right to all property levied upon . . . and creates a custodial relationship between the person holding the property and the IRS so that the property comes into the constructive possession of the Government." Nat'l Bank of Commerce, 472 U.S. at 720 (citations omitted). "The constitutionality of the levy procedure, of course, 'has been long settled.'" Id. at 721 (quoting Phillips v. Commissioner, 283 U.S. 589, 595 (1931)) (citing G.M. Leasing Corp. v. United States, 429 U.S. 338, 628, n. 18 (1977)).
The IRS has the right to levy on "property or rights to property." 26 U.S.C. section 6332(a). Tenth Circuit precedent is clear that the right to withdraw funds from an IRA constitutes a "right to property." Kane, 145 F.3d at 1223. Further, "where a taxpayer has the right to withdraw funds from his account, 'it is inconceivable that Congress intended to prohibit the Government from levying on that which is plainly accessible to the delinquent taxpayer-depositor.'" Id. at 1223-23 (quoting Nat'l Bank of Commerce, 472 U.S. at 725-26)). Therefore, when the holder of the IRA liquidates and surrenders the cash value to the IRS, it is surrendering a "right to property." Id.
If a third party fails to honor a federal tax levy, the third party is "liable for a sum equal to the value of the property plus interests and costs." Kane, 145 F.3d at 1222 (citing 26 U.S.C. section 6332(c)(1)). "If the failure to surrender the property is without reasonable cause, the third party may incur a 50% penalty as well." Id. There are only two defenses to failure to comply with a notice of levy. Bell Credit Union, 860 F.2d at 367. "The third party must establish that it is not in possession of the property or that the property was subject to prior judicial attachment or execution." Id. (citations omitted). Once a third party surrenders the property to the IRS, the third party is "discharged from any obligation or liability to the delinquent taxpayer and any other person with respect to such property or rights to property arising from such surrender or payment." 26 U.S.C. section 6332(e).
"Under the 1939 [Internal Revenue] Code, the warrant for distraint was an official Treasury form (Form 69) issued to a revenue agent by the director . . . stating the account of the taxpayer and directing the agent to enforce collection." 4 Laurence F. Casey, Introductory Comments-History-Warrant for Distraint Under Prior Law, in Casey Fed. Tax. Prac. section 13C:03 (2012). However, "nder the current Code[,] a warrant of distraint is no longer necessary," and a third party is not required to command one prior to surrendering property. Id.; Rosenblum v. United States, 300 F.2d 843, 844-45 (1st Cir. 1962); United States v. Eiland, 223 F.2d 118, 121 (4th Cir. 1955); Heaton v. YRC, Inc., Civ. No. 09-2807 RHK/JJK, 2009 WL 5103228 *2 (D. Minn. Dec. 17, 2009). "Without exception the case law supports the use of a notice of levy." Schiff v. Simon & Schuster, Inc., 780 F.2d 210, 212 (2d Cir. 1985) (listing cases). Further, a notice of levy is the "usual and recognized method of distraint and seizure of property." St. Louis Union Trust Co. v. United States, 617 F.2d 1293, 1302 (8th Cir. 1980); Heaton, 2009 WL 5103228 *2.
Plaintiff's seven claims are all premised upon Pershing's compliance with the notice of levy. Dkt. # 2, at 8-10. Plaintiff claims (1) that Pershing "did not have any 'Warrant of Distraint' or 'Distraint Warrant' from the IRS;" (2) that Pershing "had no authority to issue any check to the Department of Treasury;" (3) that Pershing "had no authority under the Statutes of the United States . . . to issue any check;" (4) that Pershing "was required [] to have both a 'Notice of Levy' and a 'Warrant of Distraint;'" (5) that Pershing had no authority to issue a check without an order from a court; (6) that the notice of levy violated 5 U.S.C. section 706; and (7) that Pershing had "a duty to validate any Notice of Levy." Id.
Plaintiff acknowledges that Pershing received a notice of levy in January 2010. Dkt. # 2, at 7. Moreover, plaintiff acknowledges that his IRA was "property or rights to property." Id. at 8. However, plaintiff argues that Pershing was required to receive a "Warrant of Distraint" from the IRS prior to surrendering the cash value of his IRA to the IRS. Id. at 8-10. As noted above, a Warrant of Distraint is not a requirement. Once the IRS complies with the notice of levy provisions, section 6332(e) "clearly bars money damages against a person who has complied with an IRS levy." Smith v. Kitchen, 132 F.3d 43, *3 (10th Cir. 1997) (unpublished) (citations omitted).
Plaintiff's claim that Pershing had no authority to issue a check without a court order is also mistaken. There is no requirement that a third party seek a court order prior to complying with a notice of levy. "Administrative levy, unlike an ordinary lawsuit, . . . does not require any judicial intervention." United States v. Rogers, 461 U.S. 677, 682 (1983) (citation omitted). Plaintiff's seventh claim, that Pershing had a duty to validate the notice of levy, is similarly incorrect. See United States v. Moskowitz, Passam, & Edelman, 603 F.3d 162, 166 (2d Cir. 2010) (validity of levy not valid reason to refuse to honor the notice of levy); Schiff, 780 F.2d at 212 (dispute over underlying tax assessment immaterial to third party's obligation to honor notice of levy). Finally, plaintiff's claim that the notice of levy was in violation of 5 U.S.C. section 706 is unavailing because that section does not validate, or invalidate, actions of the IRS, but instead sets forth the scope of review of agency actions.
Because the IRS properly provided a notice of levy to Pershing, plaintiff is barred from recovering from Pershing for its compliance. This Court finds that Pershing is statutorily discharged from liability for surrendering funds from plaintiff's IRA to the IRS, and plaintiff's claims fail as a matter of law.
IT IS THEREFORE ORDERED that defendant Pershing, L.L.C.'s motion for judgment on the pleadings (Dkt. # 17) is granted.
IT IS FURTHER ORDERED that, because no other defendant has been served or entered an appearance in this case, this is a final order terminating the case. A separate judgment is entered herewith.
DATED this 22nd day of October, 2012.
Claire V. Eagan
United States District Judge
FOOTNOTES:
/1/ On April 16, 2010, plaintiff and his wife, Jana Rae Green, proceeding pro se, filed a "Motion for Emergency Stay -- Injunction." Mark Andres Green and Jana Rae Green v. United States of America and Fred Rice, N. D. Okla. Case No.: 10-CV-00241-GKF-TLW. Plaintiff requested an injunction because, he argued, he had "fraudulent Notices of Federal Tax Liens . . . and Levies filed against" him. Dkt. # 1, at 1. Plaintiff attached a copy of the notice of levy, dated December 16, 2009, to his motion. Dkt. # 1-1, at 1. On April 30, 2010, plaintiff's motion was denied and his case was dismissed for lack of subject matter jurisdiction. Dkt. # 3, at 4.
"I could be dead wrong on this" - Irwin Schiff
"Do you realize I may even be delusional with respect to my income tax beliefs? " - Irwin Schiff
"Do you realize I may even be delusional with respect to my income tax beliefs? " - Irwin Schiff
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Re: TP Loses His IRA Due To A Warrantless Levy
The really bad thing is that he probably was hit for the income tax on the levy but at least he would not get the 10% penalty for early withdrawal.
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Re: TP Loses His IRA Due To A Warrantless Levy
Yes, the IRA trustee should have issued a 1099R for the 113K in 2012 for the tax year 2011. If this guy is like most taxpayers, he is going to consider the 1099R as non-taxable because "he didn't receive the money. He then will be matched up by Underreporter in 2013 and around June get a CP 2501 letter notifying him of the payment and notifying him that IRS is considering the 20% penalty for substantial understatement of tax.
Remember that CtC is about the rule of law.
John J. Bulten
John J. Bulten
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Re: TP Loses His IRA Due To A Warrantless Levy
If anyone would be so kind to speculate, I am curious:
Does Pershing LLC have any recourse for recovery of the cost of defending against this suit?
Would the agreement on the terms of opening the account have bearing on potential recovery?
Thanks in advance.
Does Pershing LLC have any recourse for recovery of the cost of defending against this suit?
Would the agreement on the terms of opening the account have bearing on potential recovery?
Thanks in advance.
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Re: TP Loses His IRA Due To A Warrantless Levy
And the saga continues. Note that our mulish TP husband is still keeping up the good fight with "indecipherable" garbage, the wife is not opposing the filed motions. Looks like someone learned a valuable lesson and someone else did not...
UNITED STATES OF AMERICA,
Plaintiff,
v.
MARK ANDRES GREEN,
JANA RAE GREEN,
D. SCOTT HEINEMAN AND
KURT F. JOHNSON AS TRUSTEES OF
THE GREEN FAMILY TRUST,
BROOKLYN M. GREEN,
WELLS FARGO HOME MORTGAGE, BANK OF AMERICA, N.A., AND
WORLD SAVINGS BANK FSB,
Defendants.
Published by Tax Analysts(R)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA
OPINION AND ORDER
Before the Court are the Motions for Summary Judgment filed by the United States (Doc. 64), and Bank of America, N.A. (Doc. 80).
I. BACKGROUND
The Properties
The plaintiff, United States of America, seeks to enforce tax liens against three properties (collectively the "Properties") owned or beneficially owned by the Greens, described as follows:
"Beech Property" at 4328 Beech Avenue, Broken Arrow,
Oklahoma
Lot Fifteen (15), Block Four (4), Aspen Park, an
addition to the City of Broken Arrow, Tulsa County,
Oklahoma.
"Aspen Property" at 4200 South Aspen Place, Broken
Arrow, Oklahoma
A tract of land located in the Southeast Quarter
of the Northeast Quarter (SE/4NE/4) of Section Twenty-eight
(28), Township Eighteen (18) North, Range Fourteen
(14) East of the Indian Base and meridian, Tulsa
County, State of Oklahoma, according to the United
States Government Survey thereof, being more particularly
described as follows, to-wit:
BEGINNING at the Southeast corner of the NE/4 of
said Section 28; thence North 197.10 feet; thence
West 221.0 feet; thence South 197.10 feet; thence
East 221.0 feet to the POINT OF BEGINNING.
"111th Street Property" at 13565 111th Street, Broken
Arrow, Oklahoma
The W/2 SE/4 SE/4 SW/4 of Section 28, Township 18
North, Range 14 East of the Indian Base and Meridian,
Tulsa County, State of Oklahoma.
The Tax Assessments
Between 1996 and 2002, the Internal Revenue Service (IRS) determined that defendants Mark Andres Green and Jana Rae Green filed 12 frivolous federal income tax returns. Jana Green did not oppose the summary judgment motions. Although Mark Green filed responses with taxpayer protest type arguments and other arguments that are at times indecipherable, he presented no evidence to controvert the specific bases upon which the returns were determined frivolous. The Greens were assessed penalties for each of those frivolous returns. The Greens also owe unpaid federal income taxes for years 1999, 2000, and 2010. Additional assessments were made by the Secretary of Treasury for taxes, penalties, and interest owing.
The Attempt to Participate in a Mortgage-Elimination Scheme
In 2004, the Greens learned that D. Scott Heineman and Kurt F. Johnson claimed to be able to eliminate a person's mortgage payments, through a process which Heineman and Johnson called the Dorean Process. Johnson and Heineman were convicted of federal fraud crimes in relation to that process. In affirming those federal convictions, the Ninth Circuit Court of Appeals summarized the "Dorean Process" scheme as follows:
In 2004-2005, Kurt F. Johnson and Dale Scott Heineman
started a debt-elimination program. The premise of
their program was that banks had an unfair advantage
over borrowers; the program purportedly provided
a mechanism for borrowers to eliminate their mortgage
debt. The program was entitled the "Dorean Process"
and consisted of several steps. Homeowners first
transferred their interest in their properties to
a trust, naming the defendants as trustees. The
defendants then sent demand notices to the lenders
questioning the validity of their lending practices.
When banks failed to respond or "prove" that their
lending practices were valid, the defendants recorded
bogus documents with county clerks' offices ostensibly
establishing that the homes were no longer subject
to a mortgage. The homeowners then refinanced with
a different bank using their supposedly unencumbered
homes as collateral. In addition to upfront fees,
Heineman and Johnson also took as a fee a significant
portion of the proceeds of the new loans the homeowners
thus obtained. By their own admission, the defendants
made over three million dollars in this scheme.
United States v. Johnson, 610 F.3d 1138, 1140 (9th Cir. 2010) (emphasis added).
The Greens attempted to participate in this fraudulent mortgage elimination process and attempted to create the Green Family Trust naming Heineman and Johnson as purported trustees. Mark Green acknowledges that the Green Family Trust was not completed or formally created, and the Greens never obtained copies of fully executed trust documents. Nonetheless, on June 10 and September 15, 2004, the Greens executed quitclaim deeds for the three Properties to the Green Family Trust, at the direction of Heineman and Johnson. Before doing so, Mr. Green was aware that the Greens owed money to the IRS. The Trust paid no consideration to the Greens for title to the Properties. Johnson and Heineman then filed bogus instruments purporting to discharge mortgages on the Properties. Notwithstanding the filing of the bogus documents, the Greens continued to make mortgage payments on the Properties and have personally paid other expenses on the Properties. They have resided on the Beech Property continuously since 1990. They consider themselves to be the owners of the Properties and they make decisions with respect to the Properties without consulting Heineman or Johnson. 1
On March 19, 2008, Heineman and Johnson were found guilty of conspiracy to commit mail fraud, wire fraud, and bank fraud due to their fraudulent trust scheme. The government also filed a civil suit against Johnson and Heineman, based upon their actions relating to Properties throughout the nation (i.e. like the Greens' Properties). Following the entry of summary judgment determining that the scheme devised by Heineman and Johnson was fraudulent and ordering that they be permanently enjoined from "engaging in activities related to their fraudulent scheme," the federal district court entered an Amended Final Judgment that
any conveyances that a homeowner made upon direction
from [Johnson and Heineman] to a so-called 'family
trust' which named defendants as trustees are null
and void, and any interest in the homeowner's property
that was transferred to such a family trust is hereby
transferred back to the homeowner. The county clerk,
county recorder's office, or register of deeds shall
consider this Amended Final Judgment sufficient to
transfer a homeowner's interest in his or her property
from a family trust to the homeowner.
(See Doc. 65-49; United States v. Heineman, Johnson et al., No. C 05-2730 WHA, (N.D. Cal. Aug 18, 2008 Order and Oct. 14, 2008 Amended Final Judgment)).
The Mortgages
The Greens obtained a mortgage on the Beech Property on March 30, 2004, and the mortgage is now held by Wells Fargo Bank, N.A. The Greens obtained a purchase money mortgage on the Aspen Property on September 12, 2003, and the mortgage is now held by Bank of America, N.A. On April 20, 2004, the Greens obtained a mortgage on the 111th Street Property, which is now held by Wells Fargo Bank, N.A. All three mortgages were recorded before the United States filed its notice of federal tax lien.
II. DISCUSSION
The United States seeks to reduce to judgment the federal tax and penalty assessments against the Greens. The United States has produced Certificates of Assessments and Payments, Forms 4340, to demonstrate the validity of the assessments. The Greens have failed to pay the tax liabilities, and they remain indebted to the United States. "For purposes of granting summary judgment, a Certificate of Assessments and Payments is sufficient evidence that an assessment was made in accordance [with statutory and regulatory requirements]." Long v. United States, 972 F.2d 1174, 1181 (10th Cir. 1992) (collecting cases). The United States has accordingly established its prima facie case of the Greens' tax liability. See id.
The Greens thus have the burden to establish to the contrary. As noted, Jana Green did not oppose the motions. Mark Green did file briefs in opposition. His response to the motion of the United States primarily contains arguments that are patently frivolous and based upon partial citations to inapplicable portions of regulations, statutes, and cases, in an effort to promote his convoluted interpretation of the Internal Revenue Code. In responding to Bank of America's motion, Mr. Green argues that the Bank lacks standing. The Court rejects that argument as meritless. Most of the cites in Mark Green's papers are unaccompanied by any discernable application or argument. These "tax protester" type arguments, including his suggestion that wages are not taxable, have been uniformly rejected by the courts. See, e.g., Lonsdale v. United States, 919 F.2d 1440, 1448 (10th Cir. 1990); United States v. Connor, 898 F.2d 942, 943 (3rd Cir. 1990) ("Every court which has ever considered the issue has unequivocally rejected the argument that wages are not income.") (citing authorities); see also 26 U.S.C. section 61 ("gross income" means all income from whatever source and includes compensation for services).
While Mark Green generally asserts that he did not receive all "procedural documents" required by 26 U.S.C. section 6303, Jana Green has not made that argument, and in any event, Mark Green has not provided any evidence to dispute that the United States sent notices of the assessments and demands for payment as required by that statute. The Greens have not established the existence of any genuine dispute of material fact relating to the validity of the tax assessments and penalties, and summary judgment is appropriate on the tax liens and enforcement thereof against the Properties is proper.
Both the United States and Bank of America request in their motions (Doc. 64, 80) that the documents filed pursuant to the mortgage-debt elimination scheme in a fraudulent effort to eliminate the mortgages on the Properties be determined null, void, and without effect. Mark Green admits that "the Trust was never finished therein it is Null and Void." (Doc. 84 at 5).
As noted, the District Court for the Northern District of California determined that "any conveyances that a homeowner made upon direction from [Johnson and Heineman] to a so-called 'family trust' which named defendants as trustees are null and void, and any interest in the homeowner's property that was transferred to such a family trust is hereby transferred back to the homeowner." Consistent with that determination and the undisputed evidence regarding the improper conveyance of the Properties to the Green Family Trust, the Court determines that the transfers of the Properties into the Trust, and all instruments filed on the Properties pursuant to the fraudulent mortgage-debt elimination scheme, should be declared null and void.
IT IS THEREFORE ORDERED that the summary judgment motions filed by the United States and Bank of America, N.A. (Doc. 64, 80) are hereby granted. Further, the Court makes the following determinations and orders:
1. Mark Andres Green and Jana Rae Green are jointly and severally liable to the United States for unpaid federal income taxes and penalties in the amount of $ 210,385.47, plus interest and statutory additions according to law from August 1, 2012 until paid, as provided by 26 U.S.C. section 6601;
2. Mark Andres Green is liable to the United States for an additional amount for unpaid civil penalties in the amount of $ 3,479.95, plus interest and statutory additions according to law from August 1, 2012 until paid, as provided by 26 U.S.C. 6601;
3. The transfers or attempted transfers of the Properties into the Green Family Trust are null and void. The Greens are the owners of the Properties;
4. The instruments filed of record by the Greens, Heineman or Johnson in an attempt to extinguish or diminish the lien rights of the mortgagee Banks or the United States, including without limitation any Mortgage Note Rider, Specific Power of Attorney, and/or Discharge of Mortgage, are likewise null, void, and without effect;
5. The United States may enforce its federal tax liens against the Properties, and the sales of those Properties are ordered, with the proceeds to be applied as follows:
a. Beech Property
i) The proceeds of the sale of the Beech Property shall
first be distributed to Wells Fargo Home Mortgage Inc.,
now Wells Fargo Bank, N.A., in the amount of the unpaid
mortgage held by Wells Fargo Home Mortgage Inc.;
ii) The remaining proceeds shall be distributed to
the United States, and the United States shall apply
the proceeds against the unpaid federal income tax
liabilities of Mark Andres Green and Jana Rae Green;
b. Aspen Property
i) The proceeds of the sale of the Aspen Property shall
first be distributed to Bank of America, N.A. in the
amount of the unpaid
ii) The remaining proceeds shall be distributed to
the United States, and the United States shall apply
the proceeds against the unpaid federal income tax
liabilities of Mark Andres Green and Jana Rae Green;
c. 111th Street Property
i) The proceeds of the sale of the 111th Street Property
shall first be distributed to World Savings Bank, now
Wells Fargo Bank, N.A., in the amount of the unpaid
mortgage held by World Savings Bank, now Wells Fargo
Bank, N.A.
ii) The remaining proceeds shall be distributed to
the United States, and the United States shall apply
the proceeds against the unpaid federal income tax
liabilities of Mark Andres Green and Jana Rae Green;
d. Remaining Proceeds
If the federal income tax liabilities of Mark Andres
Green and Jana Rae Green are fully satisfied after
applying the proceeds from the sales of the Properties
in accordance with this Opinion and Order, any remaining
proceeds shall then be distributed to Mark Andres
Green and Jana Rae Green;
6. Brooklyn Green is dismissed from this suit and all of the United States' claims alleged in the Complaint against Brooklyn Green are dismissed in accordance with the Joint Stipulation of Voluntary Dismissal (Doc. 29); and
7. Within 10 days of the filing of this Opinion and Order, the plaintiff shall confer with the Banks and shall submit a proposed Judgment consistent with the rulings herein.
SO ORDERED this 31st day of March, 2015.
John E. Dowdell
United States District Judge
FOOTNOTES:
/1/ The Court has entered a Default Judgment against Heineman and Johnson, as the purported Trustees of the Green Family Trust, because they did not properly appear on behalf of the Trust through counsel. (See Doc. 148).
"I could be dead wrong on this" - Irwin Schiff
"Do you realize I may even be delusional with respect to my income tax beliefs? " - Irwin Schiff
"Do you realize I may even be delusional with respect to my income tax beliefs? " - Irwin Schiff
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Re: TP Loses His IRA Due To A Warrantless Levy
So another Dorean victim, hadn't heard this one before.
The fact that you sincerely and wholeheartedly believe that the “Law of Gravity” is unconstitutional and a violation of your sovereign rights, does not absolve you of adherence to it.
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Re: TP Loses His IRA Due To A Warrantless Levy
The great (and not so great) thing is that TPs are always good for another try. The post today deals with their latest effort, one where they tried to super-size their filing and included lots of bolding and underlining, perhaps thinking it would be this sort of thing that would impress the judge and get a ruling in their favor. Unfortunately it didn't - the judge seemed to have gotten hung up over trifling issues such as the incoherency and irrelevance of their filing.
And a bonus for Burnaby: the word "paraclete" appears in the ruling.
And a bonus for Burnaby: the word "paraclete" appears in the ruling.
UNITED STATES OF AMERICA,
Plaintiff,
v.
MARK ANDRES GREEN et al.
Defendants.
Release Date: MAY 22, 2015
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA
OPINION AND ORDER
Before the Court is the "Motion to Vacate Judgment including Under Rule 60(b)(3)(4)(6)" [sic] (Doc. 151), filed by defendants Mark Andres Green and Jana Rae Green. Their arguments are less than clear. Construed liberally in light of their pro se status, it appears that the Greens contend that the Court lacked authority to enter the Judgment it entered on April 13, 2015. The plaintiff filed a response to the motion (Doc. 158), and the Greens filed a reply (Doc. 170). 1
I. Standards
The Greens' Motion is premised upon Fed. R. Civ. P. 60(b), subsections (3), (4), and (6), which provide:
On motion and just terms, the court may relieve a
party or its legal representative from a final judgment,
order, or proceeding for the following reasons: .
. .
(3) fraud (whether previously called intrinsic or
extrinsic), misrepresentation, or misconduct by an
opposing party;
(4) the judgment is void; . . .
(6) any other reason that justifies relief.
Fed. R. Civ. P. 60(b). In this Circuit, it is well-settled that "Rule 60(b) relief 'is extraordinary and may only be granted in exceptional circumstances.'" Zurich North Am. v. Matrix Serv., Inc., 426 F.3d 1281, 1289 (10th Cir. 2005) (quoting Servants of Paraclete v. Does, 204 F.3d 1005, 1009 (10th Cir. 2000)).
To obtain relief from a judgment under Rule 60(b)(3), the moving party "must, by adequate proof, clearly substantiate the claim of fraud, misconduct or misrepresentation." Zurich, 426 F.3d at 1290. "In other words, 'they must show 'clear and convincing proof' of fraud, misrepresentation, or misconduct.'" Id. (citations omitted). Under Rule 60(b)(4), "[a] judgment is void 'only if the court which rendered it lacked jurisdiction of the subject matter, or of the parties, or acted in a manner inconsistent with due process of law.'" United States v. Buck, 281 F.3d 1336, 1344 (10th Cir. 2002) (quoting In re Four Seasons Sec. Laws Litig., 502 F.2d 834, 842 (10th Cir. 1974)). Relief from judgment under Rule 60(b)(6) "is even more difficult to attain and is appropriate only 'when it offends justice to deny such relief.'" Zurich, 426 F.3d at 1293 (quoting Yapp v. Excel Corp., 186 F.3d 1222, 1232 (10th Cir. 1999)). "Parties moving for relief under Rule 60(b) cannot simply throw in subsection (6) without any new arguments and expect to obtain a new trial," but must identify "reasons other than those enumerated in the previous five clauses" of Rule 60(b). Id. (citing Buck, 281 F.3d at 1341).
II. Discussion
Without any coherent analysis or explanation, the Greens assert several arguments apparently intended to support their assertion that "[t]his Court lacks jurisdiction under the stricture of being a bona fide Article III Court arising under the Constitution of the United States exercising the judicial Power of the United States in the territorial boundaries of the several States." (Doc. 151 at 3). While the Greens use extensive bolding and underlining throughout their Motion, their argument is mostly incomprehensible. They do not explain their contention that this Court is not a "bona fide Article III Court." While they emphasize that the United States Tax Court, as an Article I court, adjudicates "federal rights" and "public rights," they do not coherently explain why that assertion has any application to this Court's Judgment in this case.
To the extent the Greens are arguing that this Court lacked subject matter jurisdiction over the plaintiff's suit to reduce tax assessments to judgment and foreclose federal tax liens on the properties that are the subject of the Judgment, federal law provides to the contrary. The Internal Revenue Code expressly authorizes this type of suit and the Court's Judgment:
In any case where there has been a refusal or neglect
to pay any tax, or to discharge any liability in
respect thereof, whether or not levy has been made,
the Attorney General or his delegate, at the request
of the Secretary, may direct a civil action to be
filed in a district court of the United States to
enforce the lien of the United States under this
title with respect to such tax or liability or to
subject any property, of whatever nature, of the
delinquent, or in which he has any right, title,
or interest, to the payment of such tax or liability.
. . . All persons having liens upon or claiming any
interest in the property involved in such action
shall be made parties thereto.
The Court shall . . . proceed to adjudicate all matters
involved therein and finally determine the merits
of all claims to and liens upon the property, and,
in all cases where a claim or interest of the United
States therein is established, may decree a sale
of such property, by the proper officer of the court,
and a distribution of the proceeds of such sale according
to the findings of the court in respect to the interests
of the parties and of the United States.
26 U.S.C. section 7403(a)-(c); see also 28 U.S.C. section 1340 ("district courts shall have original jurisdiction of any civil action arising under any Act of Congress providing for internal revenue . . ."); 28 U.S.C. section 1345 ("district courts shall have original jurisdiction of all civil actions, suits or proceedings commenced by the United States, or by any agency or officer thereof expressly authorized to sue by Act of Congress"); 26 U.S.C. section 7402(a) (district courts have jurisdiction to "render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws"); United States v. Dawes, 161 F. App'x 742, 744-45 (10th Cir. 2005) (rejecting arguments that a district court lacked subject matter jurisdiction in a similar action: "Contrary to the Daweses' frivolous assertions, . . . the United States . . . properly alleg[ed] jurisdiction in its complaint under 26 U.S.C. section 7402(a) and 7403 and 28 U.S.C. section 1340 and 1345").
In their briefing and attached affidavits (Doc. 151 and 170), the Greens assert numerous tax protester arguments that have long been determined patently meritless and frivolous. For example, they argue that they "are not domiciled in the District of Columbia or one of the Territories" and thus do not have any federal tax obligations. (Doc. 170 at 24). They claim that they are not "taxpayers" subject to paying taxes, they are not "citizen[s] of the United States . . . wanting the same rights as 'enjoyed by white citizens,'" they are not "associated with the 'United States,'" they are domiciled in a state and are not "federal citizens," and they have never "knowingly waived by [sic] unalienable rights to accept any benefit as a 'citizen of the United States," or waived their "unalienable rights to enter and consent to any 'public rights' doctrine via any adhesion contract or implied-in-law contract." (Doc. 151 at 27-32; see also Doc. 170 at 7-9). The Greens also contend that "Congress has plenary Powers for the citizens in the District of Columbia and certain issues of the National Government of the United States including the Power to Tax . . .," and thus suggest that they may not be subjected to federal taxes because they do not reside in the District of Columbia. (Doc. 151 at 14). The Greens also argue that the Internal Revenue Service (IRS) has failed to promulgate any "substantive regulations" in the Federal Register and that the IRS has violated the Administrative Procedures Act, such that the Greens have no "obligation or known legal duty" to pay income taxes. (Id. at 17, 24; Doc. 170 at 10, 19). 2
Similar tax protester arguments have been squarely rejected as a basis to avoid payment of, or consequences for failure to pay, taxes:
[T]he bulk of the Lonsdales' suit constitutes a
refrain about the federal government's power to tax
wages or to tax individuals at all, which the Lonsdales
have been pursuing for at least fourteen years. .
. . [S]ince this circuit has made itself clear
on these and similar issues numerous times, the Lonsdales
cannot by any stretch of the imagination assert that
their arguments regarding the taxability of wages
have any support in this circuit. See United States
v. Christensen, 1990 U.S. App. LEXIS 17594 (10th
Cir.1990); United States v. Mann, 884 F.2d 532
(10th Cir.1989); United States v. Dawes, 874 F.2d
746, 750-51 (10th Cir.1989); Charczuk v. Commissioner,
771 F.2d 471, 472-73 (10th Cir.1985); United States
v. Stillhammer, 706 F.2d 1072, 1077-78 (10th Cir.1983).
As the cited cases, as well as many others, have
made abundantly clear, the following arguments alluded
to by the Lonsdales are completely lacking in legal
merit and patently frivolous: (1) individuals ("free
born, white, preamble, sovereign, natural, individual
common law 'de jure' citizens of a state, etc.")
are not "persons" subject to taxation under the Internal
Revenue Code; (2) the authority of the United States
is confined to the District of Columbia; (3) the
income tax is a direct tax which is invalid absent
apportionment, and Pollock v. Farmers' Loan & Trust
Co., 157 U.S. 429, 15 S. Ct. 673, 39 L. Ed. 759,
modified, 158 U.S. 601, 15 S.Ct. 912, 39 L.Ed.
1108 (1895), is authority for that and other arguments
against the government's power to impose income taxes
on individuals; (4) the Sixteenth Amendment to the
Constitution is either invalid or applies only to
corporations; (5) wages are not income; (6) the income
tax is voluntary; (7) no statutory authority exists
for imposing an income tax on individuals; (8) the
term "income" as used in the tax statutes is unconstitutionally
vague and indefinite; (9) individuals are not required
to file tax returns fully reporting their income;
and (10) the Anti-Injunction Act is invalid.
To this short list of rejected tax protester arguments
we now add as equally meritless the additional arguments
made herein that (1) the Commissioner of Internal
Revenue and employees of the Internal Revenue Service
have no power or authority to administer the Internal
Revenue laws, including power to issue summons, liens
and levies, because of invalid or nonexistent delegations
of authority, lack of publication of delegations
of authority in the Federal Register, violations
of the Paperwork Reduction Act, and violations of
the Administrative Procedure Act, including the Freedom
of Information Act; and (2) tax forms, including
1040, 1040A, 1040EZ and other reporting forms, are
invalid because they have not been published in the
Federal Register.
Lonsdale v. United States, 919 F.2d 1440, 1447-48 (10th Cir. 1990).
III. Conclusion
The Greens have provided no legitimate argument that would support a finding of any "fraud . . ., misrepresentation, or misconduct" by the United States, and there is thus no basis for relief from judgment under Fed. R. Civ. P. 60(b)(3). They have also failed to present any cogent or applicable argument questioning this Court's subject matter jurisdiction, such that there is no basis for the Court to vacate the Judgment under Fed. R. Civ. P. 60(b)(4). Finally, the Greens have presented no "other reason that justifies relief" from Judgment under Rule 60(b)(6). Their arguments are patently frivolous.
The Motion to Vacate (Doc. 151) is hereby denied.
ORDERED this 22nd day of May, 2015.
FOOTNOTES:
/1/ The Greens' reply contains over 22 pages of text, exclusive of tables and signatures. (Doc. 170). Prior to the filing of the reply, the Court denied the Greens' request to file an oversized reply and ordered that an earlier reply, which contained over 40 pages of text and was filed by the Greens without authorization, be stricken. (Doc. 168). In that Order, the Court noted that the plaintiff's response included only four pages of text and that the Greens had shown no justification for needing additional pages beyond the 10 pages permitted under N.D. Okla. LCvR 7.2(h). The Court gave the Greens additional time to file a reply brief of no more than 10 pages. (Doc. 168) . In blatant disregard of that Order and LCvR 7.2(h), the Greens filed a reply brief containing over 22 pages of text, much of which is a regurgitation of prior briefing. Rather than delay this matter any further by permitting the Greens another chance to comply with this Court's order and the Local Rules, the Court has elected to consider the oversized reply.
/2/ The Greens also dedicate significant briefing to other arguments which have no conceivable relationship to this case. For example, they assert in question format, "Does the Fifteenth Amendment confer any right of suffrage on anyone with the answer being no?" (Doc. 151 at 16; see also Doc. 170 at 10). Similarly, they ask, "where is the right or privilege of voting arise under: The Constitution of the United States or the constitution of one of the several States?" (Id. at 12). These nonsensical assertions are representative of much of the Greens' briefing in this case.
"I could be dead wrong on this" - Irwin Schiff
"Do you realize I may even be delusional with respect to my income tax beliefs? " - Irwin Schiff
"Do you realize I may even be delusional with respect to my income tax beliefs? " - Irwin Schiff
-
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Re: TP Loses His IRA Due To A Warrantless Levy
I don't see "Prothonotary" in there.
"Yes Burnaby49, I do in fact believe all process servers are peace officers. I've good reason to believe so." Robert Menard in his May 28, 2015 video "Process Servers".
https://www.youtube.com/watch?v=XeI-J2PhdGs
https://www.youtube.com/watch?v=XeI-J2PhdGs
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Re: TP Loses His IRA Due To A Warrantless Levy
Of course not-- it was in the first filing, on page 23.
Three cheers for the Lesser Evil!
10 . . . . . . . . . . . . . . . 2
. . . . . . Dr Pepper
. . . . . . . . . . . . . . .. . . 4
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Re: TP Loses His IRA Due To A Warrantless Levy
Mark Andres Green fails in the CA10:
http://www.ca10.uscourts.gov/opinions/14/14-9002.pdf
UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT
_________________________________
MARK ANDRES GREEN,
Petitioner - Appellant,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent - Appellee.
No. 14-9002
(T.C. No. 3931-12 L)
(United States Tax Court)
_________________________________
ORDER AND JUDGMENT*
_________________________________
Before MATHESON, BACHARACH, and MORITZ, Circuit Judges.
_________________________________
Mark Andres Green, proceeding pro se, petitions for review of a Tax Court decision granting summary judgment to the Commissioner in this action challenging the imposition of a federal tax lien on his property for a deficiency arising out of the 2010 tax year. We summarily affirm the decision of the Tax Court.
Green filed a joint return with his wife for the 2010 tax year specifying an amount due of $34,828. After applying a $728 credit and assessing interest and a penalty totaling $509.57, the Commissioner sent the Greens a notice of balance due and demand for payment. When they failed to pay, a lien arose in favor of the United States and attached to their property under 26 U.S.C. § 6321. The Commissioner filed a notice of tax lien with the county clerk and then issued a notice of federal tax lien filing to the Greens, informing them of their right to a collection due process (CDP) hearing, which they timely requested. Before the hearing, the settlement officer told the Greens that if they intended to challenge the tax liability reported on their 2010 return, they should file an amended return. The settlement officer also requested the Greens provide information regarding any estimated tax payments for current tax year liabilities and a plan regarding payment of their 2010 tax liability. The Greens provided neither an amended return nor the requested information.
Following the CDP hearing, the settlement officer verified that the Commissioner had followed all required procedures: an assessment based on the Greens’ return, notice and demand for payment of the assessed amount, and notice of tax lien filing after nonpayment of the assessment. Although Green had objected to the assessment, the settlement officer found his objection groundless because the assessment was based on Green’s own tax return and Green failed to file an amended tax return showing error in the original. Green had also inaptly complained of a levy on his retirement account based on deficiencies from prior tax years, which the settlement officer explained was irrelevant to the validity of the 2010 lien.
Green sought review of the settlement officer’s decision in the Tax Court, objecting to both the tax liability assessment and the settlement officer’s verification of procedural regularity regarding imposition of the resulting lien. The Tax Court rejected the former objection as unsubstantiated:
A taxpayer [does] not properly raise an underlying tax liability if the taxpayer failed to present the settlement officer with any evidence regarding the liability after being given a reasonable amount of time to do so. During the CDP hearing, [Green] disagreed with the assessment. When [the settlement officer] invited [him] to file an amended 2010 return, he did not. Indeed [he] has yet to file an amended return reporting and substantiating a change from his self-reported return. Thus, while [he] was entitled to challenge the underlying tax liability, he failed to do so.
R. doc. 25, at 4-5 (citations and internal quotation marks omitted). As for the regularity of the procedures culminating in the 2010 lien, the Tax Court recounted the proper assessment, notice and demand for payment, notice of tax lien filing, and CDP hearing afforded Green. Id. at 6-7. The Tax Court further explained that “[a]lthough [Green] claimed a desire to file an offer in compromise on the basis of doubt as to collectability, he failed to submit requested financial information” and therefore “it was not an abuse of discretion for [the settlement officer] to sustain the [notice of lien filing] when no collection alternatives or financial information were offered.” Id. at 7. Finally, the Tax Court noted that Green “asserts various unintelligible and nonsensical positions and cites irrelevant legal authorities or erroneous legal arguments that are commonly raised by those seeking to protest Federal tax laws in general” and concluded that he had failed to demonstrate a genuine issue of material fact calling into question the procedural or substantive bases for the lien at issue. Id.
On appeal, Green fails to demonstrate any error in the Tax Court’s decision. His briefing is devoted to attacking assessment and collection activities for tax liabilities not at issue here,1 and to advancing meritless tax-protestor positions of the
sort alluded to by the Tax Court.
The decision of the Tax Court is affirmed.
Entered for the Court
Nancy L. Moritz
Circuit Judge
* After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist in the determination of
this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and collateral
estoppel. It may be cited, however, for its persuasive value consistent with
Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
1 His overriding objection concerns the failure to follow requirements for preparing a substitute return for a non-filing taxpayer under 26 U.S.C. § 6020. But for the 2010 tax year at issue, the Commissioner’s reliance on Green’s own tax return, pursuant to id. § 6201(a)(1), obviated the need to prepare a substitute return.
http://www.ca10.uscourts.gov/opinions/14/14-9002.pdf
UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT
_________________________________
MARK ANDRES GREEN,
Petitioner - Appellant,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent - Appellee.
No. 14-9002
(T.C. No. 3931-12 L)
(United States Tax Court)
_________________________________
ORDER AND JUDGMENT*
_________________________________
Before MATHESON, BACHARACH, and MORITZ, Circuit Judges.
_________________________________
Mark Andres Green, proceeding pro se, petitions for review of a Tax Court decision granting summary judgment to the Commissioner in this action challenging the imposition of a federal tax lien on his property for a deficiency arising out of the 2010 tax year. We summarily affirm the decision of the Tax Court.
Green filed a joint return with his wife for the 2010 tax year specifying an amount due of $34,828. After applying a $728 credit and assessing interest and a penalty totaling $509.57, the Commissioner sent the Greens a notice of balance due and demand for payment. When they failed to pay, a lien arose in favor of the United States and attached to their property under 26 U.S.C. § 6321. The Commissioner filed a notice of tax lien with the county clerk and then issued a notice of federal tax lien filing to the Greens, informing them of their right to a collection due process (CDP) hearing, which they timely requested. Before the hearing, the settlement officer told the Greens that if they intended to challenge the tax liability reported on their 2010 return, they should file an amended return. The settlement officer also requested the Greens provide information regarding any estimated tax payments for current tax year liabilities and a plan regarding payment of their 2010 tax liability. The Greens provided neither an amended return nor the requested information.
Following the CDP hearing, the settlement officer verified that the Commissioner had followed all required procedures: an assessment based on the Greens’ return, notice and demand for payment of the assessed amount, and notice of tax lien filing after nonpayment of the assessment. Although Green had objected to the assessment, the settlement officer found his objection groundless because the assessment was based on Green’s own tax return and Green failed to file an amended tax return showing error in the original. Green had also inaptly complained of a levy on his retirement account based on deficiencies from prior tax years, which the settlement officer explained was irrelevant to the validity of the 2010 lien.
Green sought review of the settlement officer’s decision in the Tax Court, objecting to both the tax liability assessment and the settlement officer’s verification of procedural regularity regarding imposition of the resulting lien. The Tax Court rejected the former objection as unsubstantiated:
A taxpayer [does] not properly raise an underlying tax liability if the taxpayer failed to present the settlement officer with any evidence regarding the liability after being given a reasonable amount of time to do so. During the CDP hearing, [Green] disagreed with the assessment. When [the settlement officer] invited [him] to file an amended 2010 return, he did not. Indeed [he] has yet to file an amended return reporting and substantiating a change from his self-reported return. Thus, while [he] was entitled to challenge the underlying tax liability, he failed to do so.
R. doc. 25, at 4-5 (citations and internal quotation marks omitted). As for the regularity of the procedures culminating in the 2010 lien, the Tax Court recounted the proper assessment, notice and demand for payment, notice of tax lien filing, and CDP hearing afforded Green. Id. at 6-7. The Tax Court further explained that “[a]lthough [Green] claimed a desire to file an offer in compromise on the basis of doubt as to collectability, he failed to submit requested financial information” and therefore “it was not an abuse of discretion for [the settlement officer] to sustain the [notice of lien filing] when no collection alternatives or financial information were offered.” Id. at 7. Finally, the Tax Court noted that Green “asserts various unintelligible and nonsensical positions and cites irrelevant legal authorities or erroneous legal arguments that are commonly raised by those seeking to protest Federal tax laws in general” and concluded that he had failed to demonstrate a genuine issue of material fact calling into question the procedural or substantive bases for the lien at issue. Id.
On appeal, Green fails to demonstrate any error in the Tax Court’s decision. His briefing is devoted to attacking assessment and collection activities for tax liabilities not at issue here,1 and to advancing meritless tax-protestor positions of the
sort alluded to by the Tax Court.
The decision of the Tax Court is affirmed.
Entered for the Court
Nancy L. Moritz
Circuit Judge
* After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist in the determination of
this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument. This order and judgment is not binding
precedent, except under the doctrines of law of the case, res judicata, and collateral
estoppel. It may be cited, however, for its persuasive value consistent with
Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
1 His overriding objection concerns the failure to follow requirements for preparing a substitute return for a non-filing taxpayer under 26 U.S.C. § 6020. But for the 2010 tax year at issue, the Commissioner’s reliance on Green’s own tax return, pursuant to id. § 6201(a)(1), obviated the need to prepare a substitute return.
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Re: TP Loses His IRA Due To A Warrantless Levy
MARK ANDRES GREEN,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
Release Date: APRIL 14, 2016
UNITED STATES TAX COURT
Filed April 14, 2016
Mark Andres Green, pro se.
Dessa J. Baker-Inman, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARIS, Judge: In two notices of deficiency dated November 18, 2011, respondent determined Federal income tax deficiencies, additions to tax, and a civil fraud penalty, as follows:
[*2]
Civil fraud
Additions to tax penalty
______________________________________ ___________
Sec. Sec. Sec. sec.
Year Deficiency 6651(a)(2)/1/ 6651(f) 6654(a) 6663
______________________________________________________________________________
2001 $ 43,790 $ 10,947.50 $ 31,747.75 $ 985.63 ---
2002 4,039 --- --- --- $ 3,029.25
2003 12,149 1,619.75 4,697.27 150.93 ---
2004 3,342 621.00 1,800.90 --- ---
______________________________________________________________________________
/1/ determined pursuant to sec. 6651(a)(2), (b), and (c).
After concessions, 1 the issues for decision are whether: (1) petitioner failed to report income for 2001, 2003, and 2004; (2) petitioner is entitled to a deduction under sections 861 and 1341 2 for 2002; (3) petitioner is liable for additions to tax under section 6651(f) for fraudulent failure to file for 2001, 2003, and 2004; (4) petitioner is liable for a civil fraud penalty under section 6663 for 2002; (5) petitioner is liable for additions to tax under section 6651(a)(2) for failure to pay for 2001, 2003, and 2004; (6) petitioner is liable for an addition to tax under section 6654 for failure to make estimated tax payments for 2001; (7) if petitioner [*3] is not liable under section 6651(f), he is liable for additions to tax under section 6651(a)(1) for 2001, 2003, and 2004; and (8) if petitioner is not liable under section 6663, he is liable for an accuracy-related penalty under section 6662(a) for 2002.
FINDINGS OF FACT
Some of the facts were deemed stipulated under Rule 91(f) and are so found. The stipulated facts and the exhibits attached thereto are incorporated herein by this reference. Petitioner resided in Oklahoma at the time his petition was timely filed.
During the years at issue petitioner was married, had three children, and was employed as a construction manager for Petroleum Marketers Equipment Company of Tulsa, Inc. (PMEC).
I. 2001 Tax Year
At the end of 2001 PMEC issued to petitioner a Form W-2, Wage and Tax Statement (2001 Form W-2). The 2001 Form W-2 reported wages of $ 152,496.72 and withholding of $ 4,984.80 for Social Security tax, $ 2,363.39 for Medicare tax, and zero for Federal income tax. Also in 2001 petitioner received $ 207.59 of nonemployee compensation for services he provided to another entity, which the entity reported on a Form 1099-MISC, Miscellaneous Income.
[*4] Petitioner did not file a 2001 Form 1040, U.S. Individual Income Tax Return, by its due date or extension date in 2002. In January 2003 petitioner submitted a Form 1040X, Amended U.S. Individual Income Tax Return, for 2001 (first 2001 Form 1040X). Petitioner reported adjusted gross income (AGI) of $ 152,705 but did not specify the source of his income (e.g., whether it was income from wages, interest, dividends, etc.). He claimed itemized deductions of $ 163,054 and exemptions of $ 5,300, to total zero taxable income. Petitioner also reported income tax withholding of $ 4,985 and claimed a refund of $ 4,985, an amount equal to the Social Security tax PMEC had previously withheld, but did not specify the source from which tax was withheld.
Petitioner submitted with his first 2001 Form 1040X a Schedule A, Itemized Deductions, and Schedule C, Profit or Loss From Business. On line 27 of Schedule A, Other Miscellaneous Deductions, petitioner claimed a $ 152,705 deduction for what he called a "claim of Right founded on USC 26, 1341 -- compensation for personal labor." The "claim of right" deduction of $ 152,705 was equal to the amount of AGI petitioner reported on his first 2001 Form 1040X. On Schedule C petitioner reported gross income of $ 515 and an offsetting "claim of right" deduction of $ 515. Petitioner also submitted with his first 2001 Form 1040X an affidavit, which, in part, stated:
[*5] 5) Affiants affirm that the $ 152,705.00
deduction claimed on line 27 of the attached U.S.
Individual Income Tax Return Form 1040 Schedule A
Itemized Deduction [sic] is a claim of right adjustment
founded on USC Title 26, section 1341.
6) Affiants make "the claim of right" is as [sic]
follows: a) The Affiants are claiming a natural right;
b) the natural right is a right to make a living;
c) The amount being claimed is a compensation for
personal labor that was received as repayment of
a debt that was owed to Affiants; d) The debt owed
was for personal labor furnished by Affiants; 3)
[sic] No profit was made.
7) The law for this claim is founded in 26 CFR 1.861-8(a)(5)(i)
and USC Title 26 section 1341 * * *
In September 2005 petitioner submitted a second Form 1040X for 2001 (second 2001 Form 1040X). Petitioner reported zero AGI. In the "Explanation of Changes to Income, Deductions, and Credits" section of the second 2001 Form 1040X, petitioner stated: "1099 + W-2 Payer made an error concluding I was an IRC 3401(c) employee and earned 3401(a) wages." Petitioner submitted with his second 2001 Form 1040X a self-prepared Form 4852, Substitute 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., (2001 Form 4852), reporting zero wages. The 2001 Form 4852 required petitioner to explain his efforts to obtain a corrected Form W-2; petitioner stated: [*6] "Requested, but the company refuses to issue forms correctly listing payments a[s] wages as defined in 3401(a) and 3121(a)".
In contrast to the amounts reported on his first 2001 Form 1040X, on his second 2001 Form 1040X petitioner reported income tax withholding of $ 7,348.29, resulting in a second refund claim increased to $ 7,348.29, an amount reflecting the Social Security tax and Medicare tax PMEC had previously withheld.
Respondent determined that neither the first 2001 Form 1040X nor the second 2001 Form 1040X was a valid return and did not process either return.
II. 2002 Tax Year
In 2002 petitioner submitted to PMEC a Form W-4, Employee's Withholding Allowance Certificate, claiming that he was exempt from tax. At the end of 2002 PMEC issued to petitioner a Form W-2 (2002 Form W-2). The 2002 Form W-2 reported wages of $ 44,760.62 and withholding of $ 3,039.01 for Social Security tax, $ 710.60 for Medicare tax, and no withholding for Federal income tax.
Petitioner timely submitted a Form 1040 for 2002. Petitioner reported income from wages of $ 44,761 and AGI of $ 44,761 and claimed itemized deductions of $ 51,587 and exemptions of $ 6,000, to total zero taxable income. [*7] Petitioner also reported income tax withholding of $ 3,750, resulting in a refund claim of $ 3,750, an amount equal to the Social Security tax and Medicare tax PMEC had previously withheld. Again, petitioner claimed a deduction for what he called a "claim of right" on Schedule A in an amount equal to his Form W-2 wages. Attached to petitioner's 2002 return was an affidavit that was identical to the affidavit attached to the first 2001 Form 1040X except for the amount of deduction claimed, which for 2002 was $ 44,761. See supra p. 5.
In September 2005 petitioner submitted a Form 1040X for 2002. Petitioner reported AGI of zero, itemized deductions or standard deduction of $ 7,800, exemptions of $ 6,000, and negative taxable income of $ 11,852. Petitioner reported income tax withholding of $ 3,750, resulting in a refund claim of $ 3,750. As with his second 2001 Form 1040X, in the "Explanation of Changes to Income, Deductions, and Credits" section, petitioner wrote: "W-2 Payer made an error concluding I was an IRC 3401(c) employee and earned 3401(a) wages."
Petitioner submitted with his 2002 Form 1040X a self-prepared Form 4852 (2002 Form 4852) reporting zero wages. The 2002 Form 4852 required petitioner to explain his efforts to obtain a corrected Form W-2; petitioner again wrote: "Requested, but the company refuses to issue forms correctly listing payments a[s] wages as defined in 3401(a) and 3121(a)".
[*8] Petitioner's timely filed 2002 Form 1040 was accepted as a valid return and processed. Respondent determined that petitioner's 2002 Form 1040X was not a valid return and did not process it.
III. 2003 Tax Year
At the end of 2003 PMEC issued to petitioner a Form W-2 (2003 Form W-2). The 2003 Form W-2 reported wages of $ 68,444.95 and withholding of $ 4,672.55 for Social Security tax, $ 1,092.92 for Medicare tax, and $ 5,670.66 for Federal income tax. Also at the end of 2003 PMEC issued to petitioner a Form 1099-MISC reporting $ 304.
Petitioner did not file a Form 1040 for 2003 by its due date or extension date in 2004. In September 2005 petitioner submitted a Form 1040 for 2003. Petitioner drew a line through all of the income items and did not report any income or AGI. Petitioner reported income tax withholding of $ 11,436.13 and claimed a refund of $ 11,436.13, an amount equal to the Federal income tax, Social Security tax, and Medicare tax PMEC had previously withheld.
Petitioner submitted with his 2003 Form 1040 a self-prepared Form 4852 (2003 Form 4852) reporting zero wages. The 2003 Form 4852 required petitioner to explain his efforts to obtain a corrected Form W-2; once again, petitioner wrote: [*9] "Requested, but the company refuses to issue forms correctly listing payments a[s] wages as defined in 3401(a) and 3121(a)".
Respondent determined that petitioner's 2003 Form 1040 was not a valid return and did not process it.
IV. 2004 Tax Year
At the end of 2004 PMEC issued to petitioner a Form W-2 (2004 Form W-2). The 2004 Form W-2 reported wages of $ 28,251.58 and withholding of $ 1,994.66 for Social Security tax, $ 466.49 for Medicare tax, and $ 858.64 for Federal income tax. Also at the end of 2004 PMEC issued to petitioner a Form 1099-MISC reporting $ 2,320.73.
Petitioner submitted a Form 1040 for 2004 on September 6, 2005. Petitioner again drew a line through all of the income items and did not report any income or AGI. Petitioner reported income tax withholding of $ 3,319.79 and claimed a refund of $ 3,319.79, an amount equal to the Federal income tax, Social Security tax, and Medicare tax PMEC had previously withheld.
Petitioner submitted with his 2004 tax return a self-prepared Form 4852 (2004 Form 4852) reporting zero wages. The 2004 Form 4852 required petitioner to explain his efforts to obtain a corrected Form W-2; as with every other Form [*10] 4852, petitioner wrote: "Requested, but the company refuses to issue forms correctly listing payments a[s] wages as defined in 3401(a) and 3121(a)".
Respondent determined that petitioner's 2004 Form 1040 was not a valid income tax return and did not process it.
V. Revenue Agent Examination
Revenue Agent Jeffers (RA Jeffers) was assigned to examine petitioner's tax returns for 2001-2004. RA Jeffers credibly testified that petitioner was uncooperative and that he continuously asserted frivolous arguments throughout the examination process. Petitioner failed to appear for three different scheduled appointments with RA Jeffers. In a letter dated May 3, 2003, petitioner submitted to the Internal Revenue Service (IRS) the same affidavit that was attached to his 2002 Form 1040 in which he asserted a "claim of right" deduction. In another letter petitioner submitted to RA Jeffers dated October 13, 2004, petitioner stated that he and his wife were "private citizens and non-taxpayers, as legally defined." RA Jeffers issued to petitioner publications addressing topics such as why citizens of the United States must pay taxes and the truth about frivolous tax arguments. After failing to receive documentation from petitioner, RA Jeffers issued summonses to PMEC, and to Bank of America for petitioner's bank records. [*11] Petitioner responded by writing a letter dated January 28, 2005, to Bank of America urging it not to comply with the summons.
VI. Petitioner's Bank Records
Petitioner endorsed checks and deposited moneys received from PMEC and various other sources into several different bank accounts at Local Oklahoma Bank. 3 One such account was petitioner's personal checking account that he held jointly with his wife (personal account), while another was held in the names of petitioner's wife and daughter.
A. Petitioner's Personal Account 4
Petitioner deposited most of the paychecks he received from PMEC into his personal account. Several times each month in 2002 and 2003, petitioner or his wife wrote checks from petitioner's personal account made payable to Braechele Resources, Inc. (Braechele), for approximately $ 450-$ 500 per check.
[*12] B. Wife and Daughter's Account 5
On occasion, petitioner would deposit checks made out to him into the account held in the names of his wife and daughter. As with petitioner's personal account, in 2002 and 2003 the account held in the names of petitioner's wife and daughter made regular payments to Braechele. Also in 2002 and 2003 Braechele issued checks made payable to petitioner's daughter that were deposited into the account held in the names of petitioner's wife and daughter.
VII. Petitioner's Concealed Bank Records
In addition to depositing moneys into his personal account and the account held in the names of his wife and daughter, petitioner also deposited moneys received from various sources into another Local Oklahoma Bank account held in the name of Theocentric Foundation (Theocentric account) and a Bank of America account held in the name of Braechele (Braechele account). Although the Braechele and Theocentric accounts were in the names of business entities, petitioner used the funds deposited into these accounts to pay the personal living expenses of himself and his family. Petitioner has identified these accounts, but [*13] he has failed to explain any business purpose for either the Theocentric account or the Braechele account.
A. Theocentric Account 6
Petitioner opened the Theocentric account with Local Oklahoma Bank in October 2002. On Local Oklahoma Bank's "Business Application/Signature Card" petitioner indicated that Theocentric Foundation (Theocentric) was a "corporation sole", 7 but he did not provide a taxpayer identification number or any other identifying information other than Theocentric's name and address. Petitioner designated himself as "overseer" of Theocentric. As overseer, petitioner had full control over the corporation sole, including signature authority. In 2002 and 2003 petitioner occasionally caused Theocentric to write checks made payable [*14] to Braechele and consistently used funds deposited into the Theocentric account to pay his personal living expenses, including his credit card and cell phone bills. Petitioner has failed to explain any business purpose for the Theocentric account.
B. Braechele Account 8
Braechele was incorporated in the State of Nevada on April 16, 2001. On its Form SS-4, Application for Employer Identification Number, William Reed was listed as the principal officer of Braechele. In its articles of incorporation, Braechele stated that its first board of directors would consist of one member, Mr. Reed. On another document submitted to Bank of America, Mr. Reed was listed as Braechele's president, secretary, treasurer, and director. On Bank of America's "Signatory Notarization Form" Mr. Reed was listed as the person with signature authority over the Braechele account. On its Form SS-4, however, Braechele listed its business address as the same address petitioner had consistently listed on his IRS filings, and the account statements for the Braechele account were mailed to petitioner's address.
[*15] Petitioner routinely deposited personal checks he received from various sources into the Braechele account. In addition, as discussed supra, Braechele received and deposited checks from petitioner's personal account, the account held in the names of petitioner's wife and daughter, and the Theocentric account. During all of the years at issue, petitioner used the Braechele account to pay for the personal living expenses and other personal expenses of himself and his family. Importantly, all checks issued out of the Braechele account were in the name of Braechele and were pre-signed by Mr. Reed. Petitioner admitted during trial that the Braechele account, although in the name of Braechele, was really his personal account.
In summary, much of petitioner's income was concealed in the Braechele and Theocentric accounts. Petitioner sometimes deposited moneys directly into the corporate accounts, but most of the time he deposited moneys he received into his personal account, or, alternatively, into an account held in the names of his wife and daughter. Regular payments were then made to Braechele from petitioner's personal account and the account held in the names of petitioner's wife and daughter. From the Theocentric and Braechele accounts, petitioner would then issue checks in the names of the corporations to pay the personal expenses of himself and his family. Most expenses were paid out of the Braechele [*16] account, likely because Mr. Reed sent blank, pre-signed checks to petitioner, who then had unfettered discretion to use checks that were in a corporation's name and were not signed by petitioner himself to pay personal expenses.
In fact, in 2012 Mr. Reed pleaded guilty to 1 count of conspiracy to defraud the United States, 31 counts of aggravated identity theft, and 1 count of evasion of payment of tax. As part of the plea memorandum submitted to the U.S. District Court for the District of Nevada, Mr. Reed admitted that he helped form and was a member of the first board of directors of Asset Protection Group, Inc. (APG). In the plea memorandum Mr. Reed also admitted to the following:
APG's "asset protection" services allowed clients
to place funds in bank accounts that could never
be traced back to the clients themselves. APG effectuated
this process by creating and using Nevada corporations
which employed APG as resident agent and nominee
officer, via REED. The vast majority of the Nevada
corporations listed REED as the nominee officer.
The majority of bank accounts established by APG
for these newly formed Nevada corporations were opened
at Nevada First Bank, which was purchased by Bank
of Nevada in 2006. Because REED was the sole officer
and director of the Nevada corporations created by
APG, REED was usually the sole signor on the Bank
of Nevada nominee bank accounts. To allow APG clients
to access funds deposited in the nominee accounts,
REED would either issue checks on the nominee bank
accounts at the direction of the APG clients, or
he would send blank, pre-signed, checks to the customers
to use at their discretion. The APG clients had complete
control of the Nevada corporations and the nominee
bank accounts associated with the corporations.
[*17] VIII. Petitioner's Concealed Real Estate Properties and
the Green Family Trust
Petitioner owned several properties, including one on Beech Street, another on 111th Street, and one on Aspen Street, all in Broken Arrow, Oklahoma (Beech Property, 111th Street Property, and Aspen Property, respectively). According to a uniform residential loan application signed by petitioner on April 20, 2004, the Beech Property, 111th Street Property, and Aspen Property had market values of $ 165,000, $ 140,000, and $ 85,000, respectively. Dating back to 1996 each of these properties appeared to have been transferred several times between petitioner and several entities for little or no consideration via quitclaim deed or general warranty deed. Petitioner has failed to explain any business purpose for the multiple transfers.
A. Beech Property
On April 25, 1996, petitioner purported to transfer the Beech Property to an entity called Beach Properties for consideration of $ 21. 9 On August 7, 2001, Beach Properties purported to transfer the Beech Property to Braechele for [*18] consideration of $ 121. On March 18, 2004, Braechele purported to transfer the Beech Property back to petitioner for consideration of $ 25; petitioner's wife signed the quitclaim deed as Braechele's vice president. On March 30, 2004, Beach Properties purported to transfer the Beech Property back to petitioner for consideration of $ 10; petitioner signed the quitclaim deed as Beach Properties' authorized agent. Also on March 30, 2004, Braechele again purported to transfer the Beech Property back to petitioner for consideration of $ 10, but this time petitioner signed the quitclaim deed as Braechele's vice president. Petitioner then purported to transfer the Beech Property to D. Scott Heineman and Kurt F. Johnson, trustees of the Green Family Trust, on June 10, 2004. None of the transfers were reflected on the respective tax returns for the years at issue.
B. 111th Street Property
On January 16, 1998, petitioner signed a quitclaim deed purporting to transfer the 111th Street Property to an entity called Future Resources for consideration of $ 21. Future Resources then purported to transfer the 111th Street Property to Braechele by quitclaim deed for consideration of $ 121 on August 7, 2001. On March 18, 2004, Braechele purported to transfer the 111th Street property back to petitioner for consideration of $ 25; petitioner's wife signed the quitclaim deed as Braechele's vice president. On April 20, 2004, Braechele again [*19] purported to transfer the 111th Street Property to petitioner for consideration of $ 10, only this time petitioner signed the quitclaim deed as Braechele's vice president. Again, none of the transfers were reflected on the respective tax returns for the years at issue.
C. Aspen Property
On September 16, 2003, an entity called SEJA-4, L.C., purported to transfer the Aspen Property to petitioner by general warranty deed for consideration of $ 10. Petitioner then purported to transfer the Aspen Property to Theocentric for consideration of $ 25 on March 12, 2004. On June 10, 2004, petitioner and his wife again purported to transfer the Aspen Property by quitclaim deed, but this time to Mr. Heineman and Mr. Johnson, trustees of the Green Family Trust. On August 16, 2004, Theocentric purported to transfer the Aspen Property to the Green Family Trust for consideration of $ 10; petitioner signed the quitclaim deed as Theocentric's overseer. None of the transfers were reported on the respective tax returns for the years at issue.
D. Green Family Trust
Petitioner and his wife purported to establish the "Green Family Trust", naming Mr. Heineman and Mr. Johnson as trustees.
[*20] In 2004 and 2005 Mr. Heineman and Mr. Johnson ran a mortgage elimination scheme through an entity called the "Dorean Group". In 2005 Mr. Heineman and Mr. Johnson were indicted on charges of conspiracy to commit mail fraud and over 30 counts of mail fraud for their participation in the mortgage elimination scheme; both were ultimately found guilty and sentenced to over 20 years in a Federal penitentiary. Respondent introduced into evidence the indictment against Mr. Johnson and Mr. Heineman that was filed in the U.S. District Court for the Northern District of California. The relevant paragraphs in the indictment state:
10. As part of the Dorean Group's debt elimination
program, Heineman, Johnson, and the Dorean Group
established trusts ("Trusts"). The trustees of the
Trusts were Heineman and Johnson, and the beneficiaries
were the Dorean Group's client. In furtherance of
the program, Heineman, Johnson, and the Dorean Group
caused Dorean Group clients to record quitclaim deeds
with the recorder's office, clerk of the court's
office, and register of deeds' office in the jurisdiction
in which the Dorean Group's clients' properties were
located, whereby clients purportedly transferred
their respective interests in mortgaged properties
to the corresponding Trusts.
11. Heineman, Johnson, and the Dorean Group then
caused to be sent by Mail Delivery a "self-executing
presentment packet" (hereinafter, "Presentment Packet")
consisting of various documents to the lenders of
the Dorean Group's clients' loans. In the Presentment
Packet, Heineman, Johnson, and the Dorean Group claimed
to be authorized to act on behalf of the borrower
and demanded the lender to prove the validity of
its loan to the borrower within 10 days * * *. Wording
in the Presentment Packet further [*21] alleged
that if the lender failed to prove the validity of
the loan, the Dorean Group would deem this to be
the lender's "tacit asset" and "default," and would
act as the lender's agent and attorney-in-fact to
"correct title" on the property secured by the lender's
loan.
12. After a Presentment Packet was sent by Mail Delivery
to the lender of a Dorean Group client's loan, and
at least 10 days had elapsed, Heineman, Johnson,
and the Dorean Group caused a * * * "Specific Power
of Attorney" * * * to be sent, typically by Mail
Delivery, to the recorder's office, clerk of the
court's office, and register of deeds' office in
the jurisdiction in which each client's property
was located to be recorded on the client's property
title. In this recordation, on which Heineman's signature
typically appeared, Heineman, and if he was not able,
Johnson, was purportedly acting as agent and attorney-in-fact
on behalf of the lender.
13. Acting allegedly on behalf of the lender as its
agent and/or attorney-in-fact, Heineman, Johnson,
and the Dorean Group caused a * * * "Discharge of
Mortgage" * * * to be sent, typically by Mail Delivery,
to the recorder's office, clerk of the court's office,
and register of deeds' office in the jurisdiction
in which the Dorean Group client's property was located
to be recorded as part of that property's title.
In this recordation * * * it was falsely claimed
that the loan secured by the property had been fully
paid, when such loan had not been fully repaid. This
recordation caused the Dorean Group client's property
title to falsely appear free and clear of any encumbrances,
when the lender's secured loan had not been fully
paid.
14. With title appearing free and clear of any encumbrances,
Heineman, Johnson, and the Dorean Group caused at
least five of its clients to successfully obtain
a refinance loan from a separate lender. When a refinance
loan was obtained, the Dorean Group * * * received
50% of the refinance loan's proceeds, the Dorean
Group client retained approximately 25-40% of the
proceeds * * *
[*22] Respondent introduced the following documents into evidence to demonstrate that petitioner participated in this mortgage elimination scheme: on a uniform residential loan application signed April 20, 2004, petitioner stated that the Aspen Property was subject to a mortgage of $ 63,000; petitioner caused to be recorded with the recorder's office a quitclaim deed signed on June 10, 2004, whereby petitioner and his wife purported to transfer the Aspen Property to Mr. Heineman and Mr. Johnson in their capacity as trustees of the Green Family Trust; Mr. Heineman then signed and sent to the recorder's office a discharge of mortgage which claimed that the mortgage on the Aspen Property was fully paid and requested the register of deeds to discharge the mortgage; and attached to the discharge of mortgage was a specific power of attorney through which Mr. Heineman purported to be the attorney-in-fact of Countrywide Home Loans.
In March 2015 the U.S. District Court for the Northern District of Oklahoma determined that petitioner had attempted to participate in the mortgage elimination scheme by creating the Green Family Trust and naming Mr. Heineman and Mr. Johnson as purported trustees. See United States v. Green, No. 12-CV-441-JED-FHM, 2015 WL 1482508 (N.D. Okla. Mar. 31, 2015), aff'd sub nom. United States v. Wells Fargo Home Mortg., ____ F. App'x ____, 2015 WL 7567269 [*23] (10th Cir. Nov. 25, 2015). 10 The District Court ordered that all transfers of the Beech Property, 111th Street Property, and Aspen Property made to the Green Family Trust were null, void, and without effect. Id., 2015 WL 7567269, at *4. In addition, the District Court ordered that all instruments filed by the Greens, Mr. Heineman, or Mr. Johnson in an attempt to extinguish or diminish the lien rights of the mortgagee banks, including any specific power of attorney and discharge of mortgage, were null, void, and without effect. Id.
IX. Substitutes for Returns
Respondent prepared substitutes for returns under section 6020(b) for petitioner's tax years 2001, 2003, and 2004 stating that petitioner had unreported wage or salary income of $ 152,496, $ 68,444, and $ 28,251 and unreported business income of $ 207, $ 304, and $ 2,320 for 2001, 2003, and 2004, respectively. In addition, the substitute for return for petitioner's 2004 tax year stated that petitioner was subject to self-employment tax of $ 328. These substitutes for returns consisted of Forms 4549, Income Tax Examination Changes, Forms 886-A, Explanation of Items, and Forms 13496, IRC Section [*24] 6020(b) Certification, which were signed by an authorized IRS official or employee.
OPINION
I. Unreported Income
A. Burden of Proof
Generally, the Commissioner's determinations set forth in a notice of deficiency are presumed correct, and the taxpayer bears the burden of showing the determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). When a case involves unreported income, the U.S. Court of Appeals for the Tenth Circuit, to which this case would be appealable absent a stipulation to the contrary, has held that the Commissioner's determination of unreported income is entitled to a presumption of correctness once some substantive evidence is introduced demonstrating that the taxpayer received unreported income. United States v. McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991). Once the Commissioner introduces some substantive evidence linking the taxpayer to the income, the presumption of correctness applies and the burden shifts to the taxpayer to produce substantial evidence overcoming it. Id.
Respondent introduced into evidence Forms W-2 and Forms 1099-MISC for 2001, 2003, and 2004. The record establishes and petitioner admitted at trial that [*25] he received payments as reported for 2001, 2003, and 2004. The Court concludes that respondent has laid the requisite minimal evidentiary foundation for the contested unreported income and that respondent's determinations are entitled to the presumption of correctness.
Section 7491(a) shifts the burden of proof to the Commissioner if the taxpayer produces credible evidence on any factual issues and satisfies the requirements of section 7491(a)(2). Petitioner did not argue for the applicability of section 7491(a) and has not shown that he meets the requirements to shift the burden; therefore, the burden of proof remains his.
B. Gross Income
The notice of deficiency for 2001, 2003, and 2004 was based on substitutes for returns prepared by respondent under section 6020(b). On the basis of the Forms W-2 and Forms 1099-MISC, substitutes for returns were prepared in which respondent determined that petitioner had unreported wage or salary income of $ 152,496, $ 68,444, and $ 28,251 and unreported business income of $ 207, $ 304, and $ 2,320 for 2001, 2003, and 2004, respectively.
Section 61(a)(1) and (2) defines gross income as "all income from whatever source derived", including compensation for services and gross income derived [*26] from business. Wages and salaries are compensation for services that are includible in gross income. See sec. 1.61-2(a), Income Tax Regs.
Petitioner admitted at trial to receiving compensation for services as reported on Forms W-2 and Forms 1099-MISC for 2001, 2003, and 2004. That compensation falls within the definition of gross income under section 61(a). Petitioner has made many unfounded arguments -- including an assertion that wages are not income -- which lead him to his conclusion that he is not liable for Federal income tax, all of which, this Court and the U.S. Court of Appeals for the Tenth Circuit have consistently held, lack even colorable merit and are frivolous. See Lonsdale v. United States, 919 F.2d 1440, 1448 (10th Cir. 1990) (the following arguments, among others, made by the taxpayers were "completely lacking in legal merit and patently frivolous": (1) wages are not income, (2) no statutory authority exists for imposing an income tax on individuals, and (3) the Commissioner has no power or authority to administer the Internal Revenue laws); Aldrich v. Commissioner, T.C. Memo. 2013-201, at * 9 (taxpayer's argument that the "lack of underlying Code of Federal Regulations to support the statutes" nullified the statutes was frivolous); Garber v. Commissioner, T.C. Memo. 2012-47, 2012 WL 570728, at * 2 (taxpayer's claims that the Commissioner was unable to provide him with any section of the Code that would make the taxpayer liable [*27] for Federal income tax and that he was not a withholding agent were frivolous and devoid of any basis in law), aff'd, 500 F. App'x 540 (7th Cir. 2013); Lindberg v. Commissioner, T.C. Memo. 2010-67 (taxpayer's argument that her wages were not taxable because the third-party information returns did not correctly apply the definition of wages in section 3121(a) lacked even considerable merit and was frivolous); Carskadon v. Commissioner, T.C. Memo. 2003-237, 2003 WL 21904166, at * 3 (taxpayers' argument that wages were not income was frivolous where the arguments were tax defier rhetoric "based on mere semantics" and unsupported by the law); Corcoran v. Commissioner, T.C. Memo. 2002-18, 2002 WL 71029, at * 2 (taxpayer's argument that he had no gross income pursuant to section 861 from sources within the United States and without the United States was completely lacking in merit), aff'd, 54 F. App'x 254 (9th Cir. 2002). The Court perceives no need to address petitioner's arguments further; 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, 513 (2011). Accordingly, respondent's determinations with respect to petitioner's unreported income for 2001, 2003, and 2004 are sustained, and [*28] respondent's determination that petitioner is liable for self-employment tax for 2004 is sustained. 11
II. 2002 Deduction Based on Sections 861 and 1341
Deductions and credits are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction or credit claimed on a return. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). As with the unreported income issue, see supra p. 25, petitioner did not argue for the applicability of section 7491(a) and has not shown that he meets the requirements to shift the burden; therefore, the burden of proof remains his.
Respondent processed petitioner's 2002 income tax return but disallowed what petitioner had termed a "claim of right" deduction on his Schedule A of $ 44,761. Petitioner's claimed deduction was equal to the wages he received from PMEC in 2002. In the affidavit attached to his 2002 Form 1040, petitioner stated that the deduction was based on section 1341 and section 1.861-8(a)(5)(i), Income Tax Regs., for "compensation for personal labor that was received as repayment of [*29] a debt". As discussed supra, petitioner's argument is the type of frivolous argument that this Court and the U.S. Court of Appeals for the Tenth Circuit have consistently rejected. See e.g., Lonsdale, 919 F.2d at 1448; Carskadon v. Commissioner, 2003 WL 21904166, at *3; Corcoran v. Commissioner, 2002 WL 71029, at * 2. Accordingly, respondent's disallowance of petitioner's 2002 Schedule A deduction based on sections 861 and 1341 is sustained.
(continued)
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
Release Date: APRIL 14, 2016
UNITED STATES TAX COURT
Filed April 14, 2016
Mark Andres Green, pro se.
Dessa J. Baker-Inman, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARIS, Judge: In two notices of deficiency dated November 18, 2011, respondent determined Federal income tax deficiencies, additions to tax, and a civil fraud penalty, as follows:
[*2]
Civil fraud
Additions to tax penalty
______________________________________ ___________
Sec. Sec. Sec. sec.
Year Deficiency 6651(a)(2)/1/ 6651(f) 6654(a) 6663
______________________________________________________________________________
2001 $ 43,790 $ 10,947.50 $ 31,747.75 $ 985.63 ---
2002 4,039 --- --- --- $ 3,029.25
2003 12,149 1,619.75 4,697.27 150.93 ---
2004 3,342 621.00 1,800.90 --- ---
______________________________________________________________________________
/1/ determined pursuant to sec. 6651(a)(2), (b), and (c).
After concessions, 1 the issues for decision are whether: (1) petitioner failed to report income for 2001, 2003, and 2004; (2) petitioner is entitled to a deduction under sections 861 and 1341 2 for 2002; (3) petitioner is liable for additions to tax under section 6651(f) for fraudulent failure to file for 2001, 2003, and 2004; (4) petitioner is liable for a civil fraud penalty under section 6663 for 2002; (5) petitioner is liable for additions to tax under section 6651(a)(2) for failure to pay for 2001, 2003, and 2004; (6) petitioner is liable for an addition to tax under section 6654 for failure to make estimated tax payments for 2001; (7) if petitioner [*3] is not liable under section 6651(f), he is liable for additions to tax under section 6651(a)(1) for 2001, 2003, and 2004; and (8) if petitioner is not liable under section 6663, he is liable for an accuracy-related penalty under section 6662(a) for 2002.
FINDINGS OF FACT
Some of the facts were deemed stipulated under Rule 91(f) and are so found. The stipulated facts and the exhibits attached thereto are incorporated herein by this reference. Petitioner resided in Oklahoma at the time his petition was timely filed.
During the years at issue petitioner was married, had three children, and was employed as a construction manager for Petroleum Marketers Equipment Company of Tulsa, Inc. (PMEC).
I. 2001 Tax Year
At the end of 2001 PMEC issued to petitioner a Form W-2, Wage and Tax Statement (2001 Form W-2). The 2001 Form W-2 reported wages of $ 152,496.72 and withholding of $ 4,984.80 for Social Security tax, $ 2,363.39 for Medicare tax, and zero for Federal income tax. Also in 2001 petitioner received $ 207.59 of nonemployee compensation for services he provided to another entity, which the entity reported on a Form 1099-MISC, Miscellaneous Income.
[*4] Petitioner did not file a 2001 Form 1040, U.S. Individual Income Tax Return, by its due date or extension date in 2002. In January 2003 petitioner submitted a Form 1040X, Amended U.S. Individual Income Tax Return, for 2001 (first 2001 Form 1040X). Petitioner reported adjusted gross income (AGI) of $ 152,705 but did not specify the source of his income (e.g., whether it was income from wages, interest, dividends, etc.). He claimed itemized deductions of $ 163,054 and exemptions of $ 5,300, to total zero taxable income. Petitioner also reported income tax withholding of $ 4,985 and claimed a refund of $ 4,985, an amount equal to the Social Security tax PMEC had previously withheld, but did not specify the source from which tax was withheld.
Petitioner submitted with his first 2001 Form 1040X a Schedule A, Itemized Deductions, and Schedule C, Profit or Loss From Business. On line 27 of Schedule A, Other Miscellaneous Deductions, petitioner claimed a $ 152,705 deduction for what he called a "claim of Right founded on USC 26, 1341 -- compensation for personal labor." The "claim of right" deduction of $ 152,705 was equal to the amount of AGI petitioner reported on his first 2001 Form 1040X. On Schedule C petitioner reported gross income of $ 515 and an offsetting "claim of right" deduction of $ 515. Petitioner also submitted with his first 2001 Form 1040X an affidavit, which, in part, stated:
[*5] 5) Affiants affirm that the $ 152,705.00
deduction claimed on line 27 of the attached U.S.
Individual Income Tax Return Form 1040 Schedule A
Itemized Deduction [sic] is a claim of right adjustment
founded on USC Title 26, section 1341.
6) Affiants make "the claim of right" is as [sic]
follows: a) The Affiants are claiming a natural right;
b) the natural right is a right to make a living;
c) The amount being claimed is a compensation for
personal labor that was received as repayment of
a debt that was owed to Affiants; d) The debt owed
was for personal labor furnished by Affiants; 3)
[sic] No profit was made.
7) The law for this claim is founded in 26 CFR 1.861-8(a)(5)(i)
and USC Title 26 section 1341 * * *
In September 2005 petitioner submitted a second Form 1040X for 2001 (second 2001 Form 1040X). Petitioner reported zero AGI. In the "Explanation of Changes to Income, Deductions, and Credits" section of the second 2001 Form 1040X, petitioner stated: "1099 + W-2 Payer made an error concluding I was an IRC 3401(c) employee and earned 3401(a) wages." Petitioner submitted with his second 2001 Form 1040X a self-prepared Form 4852, Substitute 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., (2001 Form 4852), reporting zero wages. The 2001 Form 4852 required petitioner to explain his efforts to obtain a corrected Form W-2; petitioner stated: [*6] "Requested, but the company refuses to issue forms correctly listing payments a[s] wages as defined in 3401(a) and 3121(a)".
In contrast to the amounts reported on his first 2001 Form 1040X, on his second 2001 Form 1040X petitioner reported income tax withholding of $ 7,348.29, resulting in a second refund claim increased to $ 7,348.29, an amount reflecting the Social Security tax and Medicare tax PMEC had previously withheld.
Respondent determined that neither the first 2001 Form 1040X nor the second 2001 Form 1040X was a valid return and did not process either return.
II. 2002 Tax Year
In 2002 petitioner submitted to PMEC a Form W-4, Employee's Withholding Allowance Certificate, claiming that he was exempt from tax. At the end of 2002 PMEC issued to petitioner a Form W-2 (2002 Form W-2). The 2002 Form W-2 reported wages of $ 44,760.62 and withholding of $ 3,039.01 for Social Security tax, $ 710.60 for Medicare tax, and no withholding for Federal income tax.
Petitioner timely submitted a Form 1040 for 2002. Petitioner reported income from wages of $ 44,761 and AGI of $ 44,761 and claimed itemized deductions of $ 51,587 and exemptions of $ 6,000, to total zero taxable income. [*7] Petitioner also reported income tax withholding of $ 3,750, resulting in a refund claim of $ 3,750, an amount equal to the Social Security tax and Medicare tax PMEC had previously withheld. Again, petitioner claimed a deduction for what he called a "claim of right" on Schedule A in an amount equal to his Form W-2 wages. Attached to petitioner's 2002 return was an affidavit that was identical to the affidavit attached to the first 2001 Form 1040X except for the amount of deduction claimed, which for 2002 was $ 44,761. See supra p. 5.
In September 2005 petitioner submitted a Form 1040X for 2002. Petitioner reported AGI of zero, itemized deductions or standard deduction of $ 7,800, exemptions of $ 6,000, and negative taxable income of $ 11,852. Petitioner reported income tax withholding of $ 3,750, resulting in a refund claim of $ 3,750. As with his second 2001 Form 1040X, in the "Explanation of Changes to Income, Deductions, and Credits" section, petitioner wrote: "W-2 Payer made an error concluding I was an IRC 3401(c) employee and earned 3401(a) wages."
Petitioner submitted with his 2002 Form 1040X a self-prepared Form 4852 (2002 Form 4852) reporting zero wages. The 2002 Form 4852 required petitioner to explain his efforts to obtain a corrected Form W-2; petitioner again wrote: "Requested, but the company refuses to issue forms correctly listing payments a[s] wages as defined in 3401(a) and 3121(a)".
[*8] Petitioner's timely filed 2002 Form 1040 was accepted as a valid return and processed. Respondent determined that petitioner's 2002 Form 1040X was not a valid return and did not process it.
III. 2003 Tax Year
At the end of 2003 PMEC issued to petitioner a Form W-2 (2003 Form W-2). The 2003 Form W-2 reported wages of $ 68,444.95 and withholding of $ 4,672.55 for Social Security tax, $ 1,092.92 for Medicare tax, and $ 5,670.66 for Federal income tax. Also at the end of 2003 PMEC issued to petitioner a Form 1099-MISC reporting $ 304.
Petitioner did not file a Form 1040 for 2003 by its due date or extension date in 2004. In September 2005 petitioner submitted a Form 1040 for 2003. Petitioner drew a line through all of the income items and did not report any income or AGI. Petitioner reported income tax withholding of $ 11,436.13 and claimed a refund of $ 11,436.13, an amount equal to the Federal income tax, Social Security tax, and Medicare tax PMEC had previously withheld.
Petitioner submitted with his 2003 Form 1040 a self-prepared Form 4852 (2003 Form 4852) reporting zero wages. The 2003 Form 4852 required petitioner to explain his efforts to obtain a corrected Form W-2; once again, petitioner wrote: [*9] "Requested, but the company refuses to issue forms correctly listing payments a[s] wages as defined in 3401(a) and 3121(a)".
Respondent determined that petitioner's 2003 Form 1040 was not a valid return and did not process it.
IV. 2004 Tax Year
At the end of 2004 PMEC issued to petitioner a Form W-2 (2004 Form W-2). The 2004 Form W-2 reported wages of $ 28,251.58 and withholding of $ 1,994.66 for Social Security tax, $ 466.49 for Medicare tax, and $ 858.64 for Federal income tax. Also at the end of 2004 PMEC issued to petitioner a Form 1099-MISC reporting $ 2,320.73.
Petitioner submitted a Form 1040 for 2004 on September 6, 2005. Petitioner again drew a line through all of the income items and did not report any income or AGI. Petitioner reported income tax withholding of $ 3,319.79 and claimed a refund of $ 3,319.79, an amount equal to the Federal income tax, Social Security tax, and Medicare tax PMEC had previously withheld.
Petitioner submitted with his 2004 tax return a self-prepared Form 4852 (2004 Form 4852) reporting zero wages. The 2004 Form 4852 required petitioner to explain his efforts to obtain a corrected Form W-2; as with every other Form [*10] 4852, petitioner wrote: "Requested, but the company refuses to issue forms correctly listing payments a[s] wages as defined in 3401(a) and 3121(a)".
Respondent determined that petitioner's 2004 Form 1040 was not a valid income tax return and did not process it.
V. Revenue Agent Examination
Revenue Agent Jeffers (RA Jeffers) was assigned to examine petitioner's tax returns for 2001-2004. RA Jeffers credibly testified that petitioner was uncooperative and that he continuously asserted frivolous arguments throughout the examination process. Petitioner failed to appear for three different scheduled appointments with RA Jeffers. In a letter dated May 3, 2003, petitioner submitted to the Internal Revenue Service (IRS) the same affidavit that was attached to his 2002 Form 1040 in which he asserted a "claim of right" deduction. In another letter petitioner submitted to RA Jeffers dated October 13, 2004, petitioner stated that he and his wife were "private citizens and non-taxpayers, as legally defined." RA Jeffers issued to petitioner publications addressing topics such as why citizens of the United States must pay taxes and the truth about frivolous tax arguments. After failing to receive documentation from petitioner, RA Jeffers issued summonses to PMEC, and to Bank of America for petitioner's bank records. [*11] Petitioner responded by writing a letter dated January 28, 2005, to Bank of America urging it not to comply with the summons.
VI. Petitioner's Bank Records
Petitioner endorsed checks and deposited moneys received from PMEC and various other sources into several different bank accounts at Local Oklahoma Bank. 3 One such account was petitioner's personal checking account that he held jointly with his wife (personal account), while another was held in the names of petitioner's wife and daughter.
A. Petitioner's Personal Account 4
Petitioner deposited most of the paychecks he received from PMEC into his personal account. Several times each month in 2002 and 2003, petitioner or his wife wrote checks from petitioner's personal account made payable to Braechele Resources, Inc. (Braechele), for approximately $ 450-$ 500 per check.
[*12] B. Wife and Daughter's Account 5
On occasion, petitioner would deposit checks made out to him into the account held in the names of his wife and daughter. As with petitioner's personal account, in 2002 and 2003 the account held in the names of petitioner's wife and daughter made regular payments to Braechele. Also in 2002 and 2003 Braechele issued checks made payable to petitioner's daughter that were deposited into the account held in the names of petitioner's wife and daughter.
VII. Petitioner's Concealed Bank Records
In addition to depositing moneys into his personal account and the account held in the names of his wife and daughter, petitioner also deposited moneys received from various sources into another Local Oklahoma Bank account held in the name of Theocentric Foundation (Theocentric account) and a Bank of America account held in the name of Braechele (Braechele account). Although the Braechele and Theocentric accounts were in the names of business entities, petitioner used the funds deposited into these accounts to pay the personal living expenses of himself and his family. Petitioner has identified these accounts, but [*13] he has failed to explain any business purpose for either the Theocentric account or the Braechele account.
A. Theocentric Account 6
Petitioner opened the Theocentric account with Local Oklahoma Bank in October 2002. On Local Oklahoma Bank's "Business Application/Signature Card" petitioner indicated that Theocentric Foundation (Theocentric) was a "corporation sole", 7 but he did not provide a taxpayer identification number or any other identifying information other than Theocentric's name and address. Petitioner designated himself as "overseer" of Theocentric. As overseer, petitioner had full control over the corporation sole, including signature authority. In 2002 and 2003 petitioner occasionally caused Theocentric to write checks made payable [*14] to Braechele and consistently used funds deposited into the Theocentric account to pay his personal living expenses, including his credit card and cell phone bills. Petitioner has failed to explain any business purpose for the Theocentric account.
B. Braechele Account 8
Braechele was incorporated in the State of Nevada on April 16, 2001. On its Form SS-4, Application for Employer Identification Number, William Reed was listed as the principal officer of Braechele. In its articles of incorporation, Braechele stated that its first board of directors would consist of one member, Mr. Reed. On another document submitted to Bank of America, Mr. Reed was listed as Braechele's president, secretary, treasurer, and director. On Bank of America's "Signatory Notarization Form" Mr. Reed was listed as the person with signature authority over the Braechele account. On its Form SS-4, however, Braechele listed its business address as the same address petitioner had consistently listed on his IRS filings, and the account statements for the Braechele account were mailed to petitioner's address.
[*15] Petitioner routinely deposited personal checks he received from various sources into the Braechele account. In addition, as discussed supra, Braechele received and deposited checks from petitioner's personal account, the account held in the names of petitioner's wife and daughter, and the Theocentric account. During all of the years at issue, petitioner used the Braechele account to pay for the personal living expenses and other personal expenses of himself and his family. Importantly, all checks issued out of the Braechele account were in the name of Braechele and were pre-signed by Mr. Reed. Petitioner admitted during trial that the Braechele account, although in the name of Braechele, was really his personal account.
In summary, much of petitioner's income was concealed in the Braechele and Theocentric accounts. Petitioner sometimes deposited moneys directly into the corporate accounts, but most of the time he deposited moneys he received into his personal account, or, alternatively, into an account held in the names of his wife and daughter. Regular payments were then made to Braechele from petitioner's personal account and the account held in the names of petitioner's wife and daughter. From the Theocentric and Braechele accounts, petitioner would then issue checks in the names of the corporations to pay the personal expenses of himself and his family. Most expenses were paid out of the Braechele [*16] account, likely because Mr. Reed sent blank, pre-signed checks to petitioner, who then had unfettered discretion to use checks that were in a corporation's name and were not signed by petitioner himself to pay personal expenses.
In fact, in 2012 Mr. Reed pleaded guilty to 1 count of conspiracy to defraud the United States, 31 counts of aggravated identity theft, and 1 count of evasion of payment of tax. As part of the plea memorandum submitted to the U.S. District Court for the District of Nevada, Mr. Reed admitted that he helped form and was a member of the first board of directors of Asset Protection Group, Inc. (APG). In the plea memorandum Mr. Reed also admitted to the following:
APG's "asset protection" services allowed clients
to place funds in bank accounts that could never
be traced back to the clients themselves. APG effectuated
this process by creating and using Nevada corporations
which employed APG as resident agent and nominee
officer, via REED. The vast majority of the Nevada
corporations listed REED as the nominee officer.
The majority of bank accounts established by APG
for these newly formed Nevada corporations were opened
at Nevada First Bank, which was purchased by Bank
of Nevada in 2006. Because REED was the sole officer
and director of the Nevada corporations created by
APG, REED was usually the sole signor on the Bank
of Nevada nominee bank accounts. To allow APG clients
to access funds deposited in the nominee accounts,
REED would either issue checks on the nominee bank
accounts at the direction of the APG clients, or
he would send blank, pre-signed, checks to the customers
to use at their discretion. The APG clients had complete
control of the Nevada corporations and the nominee
bank accounts associated with the corporations.
[*17] VIII. Petitioner's Concealed Real Estate Properties and
the Green Family Trust
Petitioner owned several properties, including one on Beech Street, another on 111th Street, and one on Aspen Street, all in Broken Arrow, Oklahoma (Beech Property, 111th Street Property, and Aspen Property, respectively). According to a uniform residential loan application signed by petitioner on April 20, 2004, the Beech Property, 111th Street Property, and Aspen Property had market values of $ 165,000, $ 140,000, and $ 85,000, respectively. Dating back to 1996 each of these properties appeared to have been transferred several times between petitioner and several entities for little or no consideration via quitclaim deed or general warranty deed. Petitioner has failed to explain any business purpose for the multiple transfers.
A. Beech Property
On April 25, 1996, petitioner purported to transfer the Beech Property to an entity called Beach Properties for consideration of $ 21. 9 On August 7, 2001, Beach Properties purported to transfer the Beech Property to Braechele for [*18] consideration of $ 121. On March 18, 2004, Braechele purported to transfer the Beech Property back to petitioner for consideration of $ 25; petitioner's wife signed the quitclaim deed as Braechele's vice president. On March 30, 2004, Beach Properties purported to transfer the Beech Property back to petitioner for consideration of $ 10; petitioner signed the quitclaim deed as Beach Properties' authorized agent. Also on March 30, 2004, Braechele again purported to transfer the Beech Property back to petitioner for consideration of $ 10, but this time petitioner signed the quitclaim deed as Braechele's vice president. Petitioner then purported to transfer the Beech Property to D. Scott Heineman and Kurt F. Johnson, trustees of the Green Family Trust, on June 10, 2004. None of the transfers were reflected on the respective tax returns for the years at issue.
B. 111th Street Property
On January 16, 1998, petitioner signed a quitclaim deed purporting to transfer the 111th Street Property to an entity called Future Resources for consideration of $ 21. Future Resources then purported to transfer the 111th Street Property to Braechele by quitclaim deed for consideration of $ 121 on August 7, 2001. On March 18, 2004, Braechele purported to transfer the 111th Street property back to petitioner for consideration of $ 25; petitioner's wife signed the quitclaim deed as Braechele's vice president. On April 20, 2004, Braechele again [*19] purported to transfer the 111th Street Property to petitioner for consideration of $ 10, only this time petitioner signed the quitclaim deed as Braechele's vice president. Again, none of the transfers were reflected on the respective tax returns for the years at issue.
C. Aspen Property
On September 16, 2003, an entity called SEJA-4, L.C., purported to transfer the Aspen Property to petitioner by general warranty deed for consideration of $ 10. Petitioner then purported to transfer the Aspen Property to Theocentric for consideration of $ 25 on March 12, 2004. On June 10, 2004, petitioner and his wife again purported to transfer the Aspen Property by quitclaim deed, but this time to Mr. Heineman and Mr. Johnson, trustees of the Green Family Trust. On August 16, 2004, Theocentric purported to transfer the Aspen Property to the Green Family Trust for consideration of $ 10; petitioner signed the quitclaim deed as Theocentric's overseer. None of the transfers were reported on the respective tax returns for the years at issue.
D. Green Family Trust
Petitioner and his wife purported to establish the "Green Family Trust", naming Mr. Heineman and Mr. Johnson as trustees.
[*20] In 2004 and 2005 Mr. Heineman and Mr. Johnson ran a mortgage elimination scheme through an entity called the "Dorean Group". In 2005 Mr. Heineman and Mr. Johnson were indicted on charges of conspiracy to commit mail fraud and over 30 counts of mail fraud for their participation in the mortgage elimination scheme; both were ultimately found guilty and sentenced to over 20 years in a Federal penitentiary. Respondent introduced into evidence the indictment against Mr. Johnson and Mr. Heineman that was filed in the U.S. District Court for the Northern District of California. The relevant paragraphs in the indictment state:
10. As part of the Dorean Group's debt elimination
program, Heineman, Johnson, and the Dorean Group
established trusts ("Trusts"). The trustees of the
Trusts were Heineman and Johnson, and the beneficiaries
were the Dorean Group's client. In furtherance of
the program, Heineman, Johnson, and the Dorean Group
caused Dorean Group clients to record quitclaim deeds
with the recorder's office, clerk of the court's
office, and register of deeds' office in the jurisdiction
in which the Dorean Group's clients' properties were
located, whereby clients purportedly transferred
their respective interests in mortgaged properties
to the corresponding Trusts.
11. Heineman, Johnson, and the Dorean Group then
caused to be sent by Mail Delivery a "self-executing
presentment packet" (hereinafter, "Presentment Packet")
consisting of various documents to the lenders of
the Dorean Group's clients' loans. In the Presentment
Packet, Heineman, Johnson, and the Dorean Group claimed
to be authorized to act on behalf of the borrower
and demanded the lender to prove the validity of
its loan to the borrower within 10 days * * *. Wording
in the Presentment Packet further [*21] alleged
that if the lender failed to prove the validity of
the loan, the Dorean Group would deem this to be
the lender's "tacit asset" and "default," and would
act as the lender's agent and attorney-in-fact to
"correct title" on the property secured by the lender's
loan.
12. After a Presentment Packet was sent by Mail Delivery
to the lender of a Dorean Group client's loan, and
at least 10 days had elapsed, Heineman, Johnson,
and the Dorean Group caused a * * * "Specific Power
of Attorney" * * * to be sent, typically by Mail
Delivery, to the recorder's office, clerk of the
court's office, and register of deeds' office in
the jurisdiction in which each client's property
was located to be recorded on the client's property
title. In this recordation, on which Heineman's signature
typically appeared, Heineman, and if he was not able,
Johnson, was purportedly acting as agent and attorney-in-fact
on behalf of the lender.
13. Acting allegedly on behalf of the lender as its
agent and/or attorney-in-fact, Heineman, Johnson,
and the Dorean Group caused a * * * "Discharge of
Mortgage" * * * to be sent, typically by Mail Delivery,
to the recorder's office, clerk of the court's office,
and register of deeds' office in the jurisdiction
in which the Dorean Group client's property was located
to be recorded as part of that property's title.
In this recordation * * * it was falsely claimed
that the loan secured by the property had been fully
paid, when such loan had not been fully repaid. This
recordation caused the Dorean Group client's property
title to falsely appear free and clear of any encumbrances,
when the lender's secured loan had not been fully
paid.
14. With title appearing free and clear of any encumbrances,
Heineman, Johnson, and the Dorean Group caused at
least five of its clients to successfully obtain
a refinance loan from a separate lender. When a refinance
loan was obtained, the Dorean Group * * * received
50% of the refinance loan's proceeds, the Dorean
Group client retained approximately 25-40% of the
proceeds * * *
[*22] Respondent introduced the following documents into evidence to demonstrate that petitioner participated in this mortgage elimination scheme: on a uniform residential loan application signed April 20, 2004, petitioner stated that the Aspen Property was subject to a mortgage of $ 63,000; petitioner caused to be recorded with the recorder's office a quitclaim deed signed on June 10, 2004, whereby petitioner and his wife purported to transfer the Aspen Property to Mr. Heineman and Mr. Johnson in their capacity as trustees of the Green Family Trust; Mr. Heineman then signed and sent to the recorder's office a discharge of mortgage which claimed that the mortgage on the Aspen Property was fully paid and requested the register of deeds to discharge the mortgage; and attached to the discharge of mortgage was a specific power of attorney through which Mr. Heineman purported to be the attorney-in-fact of Countrywide Home Loans.
In March 2015 the U.S. District Court for the Northern District of Oklahoma determined that petitioner had attempted to participate in the mortgage elimination scheme by creating the Green Family Trust and naming Mr. Heineman and Mr. Johnson as purported trustees. See United States v. Green, No. 12-CV-441-JED-FHM, 2015 WL 1482508 (N.D. Okla. Mar. 31, 2015), aff'd sub nom. United States v. Wells Fargo Home Mortg., ____ F. App'x ____, 2015 WL 7567269 [*23] (10th Cir. Nov. 25, 2015). 10 The District Court ordered that all transfers of the Beech Property, 111th Street Property, and Aspen Property made to the Green Family Trust were null, void, and without effect. Id., 2015 WL 7567269, at *4. In addition, the District Court ordered that all instruments filed by the Greens, Mr. Heineman, or Mr. Johnson in an attempt to extinguish or diminish the lien rights of the mortgagee banks, including any specific power of attorney and discharge of mortgage, were null, void, and without effect. Id.
IX. Substitutes for Returns
Respondent prepared substitutes for returns under section 6020(b) for petitioner's tax years 2001, 2003, and 2004 stating that petitioner had unreported wage or salary income of $ 152,496, $ 68,444, and $ 28,251 and unreported business income of $ 207, $ 304, and $ 2,320 for 2001, 2003, and 2004, respectively. In addition, the substitute for return for petitioner's 2004 tax year stated that petitioner was subject to self-employment tax of $ 328. These substitutes for returns consisted of Forms 4549, Income Tax Examination Changes, Forms 886-A, Explanation of Items, and Forms 13496, IRC Section [*24] 6020(b) Certification, which were signed by an authorized IRS official or employee.
OPINION
I. Unreported Income
A. Burden of Proof
Generally, the Commissioner's determinations set forth in a notice of deficiency are presumed correct, and the taxpayer bears the burden of showing the determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). When a case involves unreported income, the U.S. Court of Appeals for the Tenth Circuit, to which this case would be appealable absent a stipulation to the contrary, has held that the Commissioner's determination of unreported income is entitled to a presumption of correctness once some substantive evidence is introduced demonstrating that the taxpayer received unreported income. United States v. McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991). Once the Commissioner introduces some substantive evidence linking the taxpayer to the income, the presumption of correctness applies and the burden shifts to the taxpayer to produce substantial evidence overcoming it. Id.
Respondent introduced into evidence Forms W-2 and Forms 1099-MISC for 2001, 2003, and 2004. The record establishes and petitioner admitted at trial that [*25] he received payments as reported for 2001, 2003, and 2004. The Court concludes that respondent has laid the requisite minimal evidentiary foundation for the contested unreported income and that respondent's determinations are entitled to the presumption of correctness.
Section 7491(a) shifts the burden of proof to the Commissioner if the taxpayer produces credible evidence on any factual issues and satisfies the requirements of section 7491(a)(2). Petitioner did not argue for the applicability of section 7491(a) and has not shown that he meets the requirements to shift the burden; therefore, the burden of proof remains his.
B. Gross Income
The notice of deficiency for 2001, 2003, and 2004 was based on substitutes for returns prepared by respondent under section 6020(b). On the basis of the Forms W-2 and Forms 1099-MISC, substitutes for returns were prepared in which respondent determined that petitioner had unreported wage or salary income of $ 152,496, $ 68,444, and $ 28,251 and unreported business income of $ 207, $ 304, and $ 2,320 for 2001, 2003, and 2004, respectively.
Section 61(a)(1) and (2) defines gross income as "all income from whatever source derived", including compensation for services and gross income derived [*26] from business. Wages and salaries are compensation for services that are includible in gross income. See sec. 1.61-2(a), Income Tax Regs.
Petitioner admitted at trial to receiving compensation for services as reported on Forms W-2 and Forms 1099-MISC for 2001, 2003, and 2004. That compensation falls within the definition of gross income under section 61(a). Petitioner has made many unfounded arguments -- including an assertion that wages are not income -- which lead him to his conclusion that he is not liable for Federal income tax, all of which, this Court and the U.S. Court of Appeals for the Tenth Circuit have consistently held, lack even colorable merit and are frivolous. See Lonsdale v. United States, 919 F.2d 1440, 1448 (10th Cir. 1990) (the following arguments, among others, made by the taxpayers were "completely lacking in legal merit and patently frivolous": (1) wages are not income, (2) no statutory authority exists for imposing an income tax on individuals, and (3) the Commissioner has no power or authority to administer the Internal Revenue laws); Aldrich v. Commissioner, T.C. Memo. 2013-201, at * 9 (taxpayer's argument that the "lack of underlying Code of Federal Regulations to support the statutes" nullified the statutes was frivolous); Garber v. Commissioner, T.C. Memo. 2012-47, 2012 WL 570728, at * 2 (taxpayer's claims that the Commissioner was unable to provide him with any section of the Code that would make the taxpayer liable [*27] for Federal income tax and that he was not a withholding agent were frivolous and devoid of any basis in law), aff'd, 500 F. App'x 540 (7th Cir. 2013); Lindberg v. Commissioner, T.C. Memo. 2010-67 (taxpayer's argument that her wages were not taxable because the third-party information returns did not correctly apply the definition of wages in section 3121(a) lacked even considerable merit and was frivolous); Carskadon v. Commissioner, T.C. Memo. 2003-237, 2003 WL 21904166, at * 3 (taxpayers' argument that wages were not income was frivolous where the arguments were tax defier rhetoric "based on mere semantics" and unsupported by the law); Corcoran v. Commissioner, T.C. Memo. 2002-18, 2002 WL 71029, at * 2 (taxpayer's argument that he had no gross income pursuant to section 861 from sources within the United States and without the United States was completely lacking in merit), aff'd, 54 F. App'x 254 (9th Cir. 2002). The Court perceives no need to address petitioner's arguments further; 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, 513 (2011). Accordingly, respondent's determinations with respect to petitioner's unreported income for 2001, 2003, and 2004 are sustained, and [*28] respondent's determination that petitioner is liable for self-employment tax for 2004 is sustained. 11
II. 2002 Deduction Based on Sections 861 and 1341
Deductions and credits are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction or credit claimed on a return. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). As with the unreported income issue, see supra p. 25, petitioner did not argue for the applicability of section 7491(a) and has not shown that he meets the requirements to shift the burden; therefore, the burden of proof remains his.
Respondent processed petitioner's 2002 income tax return but disallowed what petitioner had termed a "claim of right" deduction on his Schedule A of $ 44,761. Petitioner's claimed deduction was equal to the wages he received from PMEC in 2002. In the affidavit attached to his 2002 Form 1040, petitioner stated that the deduction was based on section 1341 and section 1.861-8(a)(5)(i), Income Tax Regs., for "compensation for personal labor that was received as repayment of [*29] a debt". As discussed supra, petitioner's argument is the type of frivolous argument that this Court and the U.S. Court of Appeals for the Tenth Circuit have consistently rejected. See e.g., Lonsdale, 919 F.2d at 1448; Carskadon v. Commissioner, 2003 WL 21904166, at *3; Corcoran v. Commissioner, 2002 WL 71029, at * 2. Accordingly, respondent's disallowance of petitioner's 2002 Schedule A deduction based on sections 861 and 1341 is sustained.
(continued)
"I could be dead wrong on this" - Irwin Schiff
"Do you realize I may even be delusional with respect to my income tax beliefs? " - Irwin Schiff
"Do you realize I may even be delusional with respect to my income tax beliefs? " - Irwin Schiff
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Re: TP Loses His IRA Due To A Warrantless Levy
III. Section 6651(f) Addition to Tax
Respondent determined petitioner was liable for the section 6651(f) fraudulent failure to file addition to tax for 2001, 2003, and 2004.
Section 6651(a)(1) imposes an addition to tax for failure to timely file a Federal income tax return. Section 6651(f) provides that the subsection (a)(1) addition to tax shall be increased from 5% to 15% of the tax required to be shown on the return for each month or fraction thereof for which there is a failure to file a return, up to 75% in the aggregate, where such failure to timely file is fraudulent. In ascertaining whether a taxpayer's failure to timely file was fraudulent under section 6651(f), the Court considers whether the taxpayer (1) failed to timely file a return for the taxable year where there was a tax liability required to be shown on a return (2) because of fraudulent intent. See sec. 6651(a), (b)(1), (f); Clayton v. Commissioner, 102 T.C. 632, 653 (1994); Porter v. Commissioner, T.C. Memo. [*30] 2015-122, at *44. Respondent has the burden of proving these elements by clear and convincing evidence for each year for which fraud is alleged. Sec. 7454(a); Rule 142(b); see Zell v. Commissioner, 763 F.2d 1139, 1142 (10th Cir. 1985), aff'g T.C. Memo. 1984-152; Clayton v. Commissioner, 102 T.C. at 646; Porter v. Commissioner, at *44; Taylor v. Commissioner, T.C. Memo. 1995-269, 1995 WL 363202, at *5, aff'd without published opinion, 108 F.3d 1388, 1997 WL 139744 (10th Cir. 1997).
A. Whether Petitioner Filed Valid Returns
Because section 6651(f) increases the addition to tax imposed by subsection (a)(1), respondent first must prove that petitioner failed to timely file a required Federal tax return. See sec. 6651(a)(1). Respondent introduced Forms W-2 showing that petitioner earned enough income to require him to make a return for each of the years at issue. See secs. 6011(a), 6012(a)(1)(A). Although petitioner submitted documents purporting to be returns for 2001, 2003, and 2004, respondent determined that those returns were invalid.
The Code does not define what constitutes a valid return. See Appleton v. Commissioner, 140 T.C. 273, 284 (2013). On the basis of the Supreme Court's opinions in Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934), and Florsheim Bros. Drygoods Co. v. United States, 280 U.S. 453 (1930), this Court [*31] has established a four-part test to determine whether a document submitted by a taxpayer is a valid return. In order to qualify as a return, the document must meet the following requirements: (1) the document must contain sufficient data to calculate tax liability; (2) the document must purport to be a return; (3) there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) the taxpayer must execute the return under penalties of perjury. Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986); see Estate of Sanders v. Commissioner, 144 T.C. 63, 78 (2015); Appleton v. Commissioner, 140 T.C. at 284-285. This Court and the U.S. Court of Appeals for the Tenth Circuit have consistently held that a Form 1040 with zeros on every income line is devoid of financial data and is therefore not a valid return. See, e.g., United States v. Melot, 562 F. App'x 646, 651 (10th Cir. 2014); United States v. Rickman, 638 F.2d 182, 184 (10th Cir. 1980) (holding that a document that does not provide information from which a tax can be computed is not a return); Cabirac v. Commissioner, 120 T.C. 163, 169 (2003). Petitioner's second 2001 Form 1040X and Forms 1040 for 2003 and 2004 reported zeros on every income line. Accordingly, petitioner's second 2001 Form 1040X and Forms 1040 for 2003 and 2004 were not valid tax returns.
[*32] Petitioner did not file a Form 1040 for 2001; instead, petitioner filed two Forms 1040X. Although the first 2001 Form 1040X reported AGI of $ 152,705, the return lacked information sufficient to apprise respondent of petitioner's Federal tax liability and misrepresented Social Security tax withheld as Federal income tax withheld. Even if the first 2001 Form 1040X had not misrepresented petitioner's Federal income tax withholding, the return lacked information sufficient to apprise respondent of petitioner's Federal tax liability because it does not contain any information as to the source of income from which tax was purportedly withheld. See United States v. Rickman, 638 F.2d at 184 (where the taxpayer reported zero income, requested a refund of tax withheld, but did not make disclosures from which a tax might be determined, the Court held that the return did not contain information from which a tax could be computed and was not an honest and reasonable attempt to satisfy the requirements of the tax law); Oman v. Commissioner, T.C. Memo. 2010-276, 2010 WL 5209360, at *10 (applying the Beard test, the Court determined that a taxpayer's Form 1040 did not contain sufficient data to calculate tax liability where the return showed $ 6,055 tax withheld but did not contain any information as to income from which such tax was purportedly withheld). Because petitioner's first 2001 Form 1040X did not [*33] contain sufficient data to calculate the tax liability, it was not a valid tax return. See Rickman, 638 F.2d at 184; Beard v. Commissioner, 82 T.C. at 777.
Respondent has clearly and convincingly proven that petitioner had an obligation to file timely income tax returns showing tax liabilities for 2001, 2003, and 2004, and failed to do so. 12
B. Whether Petitioner's Failure to File Was Fraudulent
In determining whether a taxpayer had the requisite fraudulent intent for imposition of the section 6651(f) addition to tax, the Court considers the same elements that it considers in imposing the fraud penalty under section 6663 and former section 6653(b)(1). Clayton v. Commissioner, 102 T.C. at 653. Fraud is established by proving that a taxpayer intended to evade tax believed to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of tax. Zell v. Commissioner, 763 F.2d at 1142-1143; Clayton v. Commissioner, 102 T.C. at 647. The existence of fraudulent intent is determined by looking at the entire record and the taxpayer's conduct. See DiLeo v. Commissioner, 96 T.C. [*34] 858, 874 (1991), aff'd, 959 F.2d 16 (2d Cir. 1992); Taylor v. Commissioner, 1995 WL 363202, at * 5. Fraud is never presumed and must be proven by independent evidence. Zell v. Commissioner, 763 F.2d at 1143; Beaver v. Commissioner, 55 T.C. 85, 92 (1970); Taylor v. Commissioner, 1995 WL 363202, at *5. Fraud need not be established by direct evidence, which is rarely available, but may be proved by circumstantial evidence and reasonable inferences drawn from the facts. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992); Taylor v. Commissioner, 1995 WL 363202, at *5.
In determining whether there was fraudulent intent, the Court will look at a nonexclusive list of factors, or "badges of fraud." See Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), aff'g T.C. Memo. 1984-601; Niedringhaus v. Commissioner, 99 T.C. at 211; Recklitis v. Commissioner, 91 T.C. 874, 910 (1998); Taylor v. Commissioner, 1995 WL 363202, at *5. These factors include: (1) failing to file income tax returns; (2) filing false documents, including false income tax returns; (3) understating income; (4) concealing income or assets; (5) engaging in illegal activity; (6) failing to cooperate with tax authorities; and (7) asserting frivolous arguments and objections to the tax laws. Bradford v. Commissioner, 796 F.2d at 307; Niedringhaus v. Commissioner, 99 T.C. at 211; Taylor v. Commissioner, 1995 WL 363202, at *5. While no single factor is [*35] determinative for establishing fraud, the existence of several "badges of fraud" may constitute compelling circumstantial evidence of fraud. Bradford v. Commissioner, 796 F.2d at 307-308; Niedringhaus v. Commissioner, 99 T.C. at 211; Taylor v. Commissioner, 1995 WL 363202, at *5. The U.S. Court of Appeals for the Tenth Circuit has held that willful refusal to file or the filing of protest returns is not by itself enough to justify fraud penalties; rather, when a taxpayer fails to file a return, he is not liable for fraud penalties unless he commits some affirmative act of concealment or misrepresentation. Zell v. Commissioner, 763 F.2d at 1146.
Petitioner's behavior exhibits many of the badges listed above.
(1) Failing To File Income Tax Returns
While the mere failure to file a return, standing alone, is not sufficient to support a finding of fraud, see id., an extended pattern of failing to file returns is a badge of fraud and may be persuasive circumstantial evidence of the intent to evade tax. See Bradford v. Commissioner, 796 F.2d at 308; Petzholdt v. Commissioner, 92 T.C. 661, 701 (1989). Petitioner failed to file valid Federal [*36] income tax returns for 2001, 2003, and 2004, as discussed supra. This factor weighs against petitioner for 2001, 2003, and 2004.
(2) Filing False Documents
Filing false documents with the IRS constitutes an "affirmative act" of misrepresentation sufficient to justify the fraud penalty. Zell v. Commissioner, 763 F.2d at 1146. Petitioner filed false documents with the IRS for 2001, 2003, and 2004. For each year, petitioner submitted an invalid Form 1040 or Form 1040X and submitted false Forms 4852 reporting zero wages after unsuccessfully attempting to persuade PMEC to submit false Forms W-2. Not only did petitioner attempt to evade income tax by filing false returns, but each year he attempted to have Social Security and Medicare tax erroneously refunded to him by reporting those amounts as income tax withholding. This factor weighs against petitioner for 2001, 2003, and 2004.
(3) Understating Income
A pattern of substantially underreporting income for several years is strong evidence of fraud, particularly if the understatements are not due to innocent mistake or are not otherwise satisfactorily explained. See Holland v. United States, 348 U.S. 121, 137-139 (1954); Spies v. United States, 317 U.S. 492, 499 (1943); Marcus v. Commissioner, 70 T.C. 562, 577 (1978), aff'd without [*37] published opinion, 621 F.2d 439 (5th Cir. 1980); Taylor v. Commissioner, 1995 WL 363202, at *6. Petitioner admitted that he received all amounts that were reported on his Forms W-2 and Forms 1099-MISC, yet he either reported zero income or attempted to "zero out" his income by claiming deductions in amounts equal to his income under the frivolous "claim of right". This factor weighs against petitioner for 2001, 2003, and 2004.
(4) Concealing Income and Assets
An intent to evade tax may be inferred from "concealment of assets or covering up sources of income." Spies, 317 U.S. at 499. Concealing assets coupled with a failure to file tax returns is a strong indication of fraud. Freidus v. Commissioner, T.C. Memo. 1999-195, 1999 WL 391919, at *10. A taxpayer's use of nominee corporations is evidence of asset concealment. See Bennett v. Commissioner, T.C. Memo. 2014-256, at *12 (finding a taxpayer liable for the section 6651(f) addition to tax where he adopted various means of concealing income by diverting income to nominees); Lain v. Commissioner, T.C. Memo. 2012-99, 2012 WL 1129851, at *5 ("Placing title to assets in the name of a nominee evidences a taxpayer's fraudulent intent."); DeVries v. Commissioner, T.C. Memo. 2011-185, 2011 WL 3418248, at *7 (finding that placing title to assets in the name of nominees evidences that the taxpayer's failure to file tax [*38] returns was done with fraudulent intent for the taxpayer to be subject to the section 6651(f) addition to tax); Freidus v. Commissioner, 1999 WL 391919, at * 11 (finding that the taxpayer used corporate accounts as mere repositories for proceeds derived from the taxpayer's income-producing activities); Jones v. Commissioner, T.C. Memo. 1994-230, (finding that a taxpayer's use of alter ego corporations to conduct personal as well as business transactions was evidence of asset concealment), aff'd without published opinion, 68 F.3d 460 (4th Cir. 1995). A nominee is an entity or individual who holds bare legal title to assets owned by another entity or individual. See Oxford Capital Corp v. United States, 211 F.3d 280, 284 (5th Cir. 2000); DeVries v. Commissioner, 2011 WL 3418248, at *7.
Perhaps most damning to petitioner, respondent introduced clear and convincing evidence that petitioner went to great lengths to affirmatively act to conceal income and assets. Petitioner used at least two corporate nominee bank accounts -- the Braechele and Theocentric accounts -- to conceal personal income.
Respondent introduced clear and convincing evidence in the form of bank records showing that much of petitioner's income flowed into and then out of the Braechele and Theocentric accounts. The Braechele and Theocentric accounts, however, were nothing more than corporate nominees; all income and expenses flowing therefrom were chargeable to petitioner. Petitioner would either deposit [*39] personal income directly into one of the corporate nominee accounts or deposit income into his personal account or an account held in the names of his wife and daughter and then make a separate payment from his personal account or his wife and daughter's account to one of the corporate nominee accounts. Perhaps most alarming and the strongest evidence of petitioner's intent to conceal income and assets is the fact that petitioner received and had unfettered discretion to use blank checks in the name of Braechele that were pre-signed by Mr. Reed. Petitioner used those checks to pay the personal expenses of himself and his family. In other words, petitioner deliberately funneled his income into Braechele with the expectation that it would come out of the funnel without being able to be traced back to him. The Braechele account as structured and operated by petitioner is the scheme devised by Mr. Reed; the same scheme that lead Mr. Reed to plead guilty to conspiracy to defraud the United States, aggravated identity theft, and evasion of payment of tax. Petitioner has not attempted to argue that a legitimate business purpose exists for either the Braechele or Theocentric accounts; to the contrary, petitioner openly admitted at trial that the Braechele account was his personal account. On the basis of the evidence presented to the Court, respondent has convincingly established that petitioner created at least the Braechele and Theocentric accounts for the purpose of concealing his personal [*40] income under the guise of corporate nominees Braechele (and Mr. Reed) and Theocentric in 2001, 2003, and 2004. 13 This factor weighs against petitioner for 2001, 2003, and 2004.
In addition to concealing income in corporate nominee bank accounts, petitioner used corporate nominees to conceal assets. The Court has previously held that placing title to assets in the name of nominees evidences fraudulent intent for a taxpayer to be subject to the section 6651(f) addition to tax. See DeVries v. Commissioner, 2011 WL 3418248, at *7; Leggett v. Commissioner, T.C. Memo. 1999-100, aff'd without published opinion, 221 F.3d 1357 (11th Cir. 2000). Petitioner purported to transfer the Beech Property, 111th Street Property, and Aspen Property between himself and several nominee corporations in attempt to conceal the properties. These properties, valued at $ 165,000, $ 140,000, and $ 85,000, respectively, were purportedly transferred several times for consideration not exceeding $ 121 on any transfer. Often times petitioner or his wife signed on [*41] behalf the various entities, indicating that petitioner still controlled the use and disposition of the properties. Petitioner has not presented any evidence or advanced any argument to rebut respondent's assertion that petitioner used Beach Properties, Braechele, Future Resources, Theocentric, and the Green Family Trust as nominees to conceal his personal assets. This factor weighs against petitioner.
(5) Engaging in Illegal Activity
Engaging in an illegal activity is a badge of fraud. See Niedringhaus v. Commissioner, 99 T.C. at 211. In 2004 petitioner participated in an illegal mortgage elimination scheme by creating the Green Family Trust and then transferring the Aspen Property to the Green Family Trust. After the transfer the "trustees", purporting to be the attorney-in-fact for the lender, then caused a "Specific Power of Attorney" and "Discharge of Mortgage" to be delivered to the recorders office and requested a discharge of mortgage on the Aspen Property. This scheme, as structured and operated by petitioner, is the same scheme for which Mr. Heineman and Mr. Johnson, the "trustees" of the Green Family Trust, were convicted for fraud. This factor weighs against petitioner for 2004.
(6) Failing To Cooperate With Tax Authorities
Failure to cooperate with revenue agents during an audit is a badge of fraud. See Zell v. Commissioner, 763 F.2d at 1146; Grosshandler v. Commissioner, 75 [*42] T.C. 1, 19-20 (1980); Taylor v. Commissioner, 1997 WL 139744, at *4. The Court has previously held that attempting to circumvent the Commissioner's efforts to obtain records when he has issued a summons evinces a fraudulent intent. See Porter v. Commissioner, at *58-*59. Petitioner failed to appear at three scheduled appointments and attempted to impede RA Jeffers' examination, first by refusing to submit documents that she requested, then by asserting frivolous legal arguments, and finally by urging Bank of America to refuse to comply with her summons of the Braechele account records. This factor weighs against petitioner.
(7) Asserting Frivolous Arguments
Frivolous, irrelevant, and meritless arguments, coupled with affirmative acts designed to evade Federal income tax, support a finding of fraud. See Kotmair v. Commissioner, 86 T.C. 1253, 1259-1261 (1986); Porter v. Commissioner, at *58. Not only did petitioner assert frivolous arguments to RA Jeffers, but, as discussed supra, petitioner has consistently maintained those arguments to the Court in this case and has previously raised frivolous arguments in other cases before the Court. See, e.g., Green v. Commissioner, 608 F. App'x 671 (10th Cir. 2015). The Court has previously warned petitioner that if he continued to assert frivolous arguments, [*43] the Court would impose the section 6673 penalty. See id. This factor weighs against petitioner.
E. Conclusion
Taking the entire record into account, the Court concludes that petitioner's failure to file timely tax returns for 2001, 2003, and 2004 was fraudulent. Although petitioner submitted Forms 1040 or 1040X for 2001, 2003, and 2004, none of those documents were valid returns. Petitioner's failure to file a valid return for each year was deliberate and intended to conceal the fact that he had income subject to tax. Respondent has proven fraudulent intent by showing that petitioner committed affirmative acts of concealment or misrepresentation with respect to each year. See Zell v. Commissioner, 763 F.2d at 1146. Petitioner is therefore liable for the addition to tax under section 6651(f) for 2001, 2003, and 2004. Since petitioner is liable under section 6651(f), there is no need to discuss respondent's alternative position that petitioner is liable under subsection (a)(1).
IV. Section 6663 Civil Fraud Penalty
Respondent determined that petitioner is liable for the section 6663 civil fraud penalty for 2002.
Section 6663(a) imposes a penalty equal to 75% of a taxpayer's underpayment of Federal income tax that is due to fraud. An "underpayment" for [*44] purposes of the section 6663 civil fraud penalty is, in general, the excess of the amount of tax due over the amount of tax shown on the return. Sec. 6664(a); see Mohamed v. Commissioner, T.C. Memo. 2013-255, at *19. If any portion of the underpayment is attributable to fraud, the entire underpayment will be treated as attributable to fraud unless the taxpayer establishes by a preponderance of the evidence that part of the underpayment is not due to fraud. Sec. 6663(b). In other words, the section 6663 fraud penalty consists of two elements: (1) the existence of an underpayment, and (2) fraudulent intent with respect to some portion of the underpayment. DiLeo v. Commissioner, 96 T.C. at 873. To establish fraud, the Commissioner must prove both elements with clear and convincing evidence. Sec. 7454; Rule 142(b); DiLeo v. Commissioner, 96 T.C. at 873; Taylor v. Commissioner, 1995 WL 363202, at *5.
As discussed supra, petitioner was not entitled to a deduction for what he termed a "claim of right" for 2002; thus an underpayment existed. Respondent clearly and convincingly established the first element of the section 6663 civil fraud penalty.
As discussed supra, in determining whether a taxpayer had the requisite fraudulent intent for imposition of the section 6651(f) addition to tax, the Court considers the same elements that it considers in imposing the fraud penalty under [*45] section 6663 and former section 6653(b)(1). Clayton v. Commissioner, 102 T.C. at 653. Respondent has introduced clear and convincing evidence that many of the badges of fraud that were present in 2001, 2003, and 2004, discussed supra, were present in 2002 with respect to at least some portion of the 2002 underpayment, thereby proving the second element of fraud. For example, although petitioner filed a valid Form 1040 for 2002, 14 he attempted to zero out his income under the frivolous "claim of right". As he had for 2001, 2003, and 2004, petitioner filed a self-prepared Form 4852 for 2002 showing zero wages after failing to convince PMEC to file a false Form W-2. Although he had not done so for 2001, 2003, and 2004, petitioner submitted a false Form W-4 to his employer for 2002 claiming to be exempt from tax. This Court and the U.S. Court of Appeals for the Tenth Circuit have held that filing a false Form W-4 is an affirmative act of misrepresentation and thus evidence of fraud. See Zell v. Commissioner, 763 F.2d at 1146 (holding that where a taxpayer had not merely failed to file a return but also filed false Forms W-4, thus committing an "affirmative act" of misrepresentation, imposition of fraud penalty was justified); [*46] Nix v. Commissioner, T.C. Memo. 2012-304, at *11 (filing a false Form W-4 is circumstantial evidence of fraud), aff'd, 553 F. App'x 960 (11th Cir. 2014); Teeters v. Commissioner, T.C. Memo. 2010-244 (where the Commissioner has shown substantial amounts of unreported income on which the withholding has been reduced by submission of a false Form W-4, fraud has been established by clear and convincing evidence). In addition, respondent introduced evidence in the form of bank statements for 2002 to clearly establish that the Braechele and Theocentric accounts were nothing more than corporate nominees through which petitioner concealed his income. See supra pp. 36-39.
On the basis of the entire record, the Court concludes that petitioner is liable for the civil fraud penalty under section 6663 for 2002. Since petitioner is liable under section 6663, the Court will not discuss respondent's alternative position that petitioner is liable for an accuracy-related penalty under section 6662(a).
V. Section 6651(a)(2) Addition to Tax
Respondent determined that petitioner is liable for additions to tax under section 6651(a)(2) for failure to timely pay his 2001, 2003, and 2004 tax liabilities.
Section 6651(a)(2) provides for an addition to tax of 0.5% per month up to 25% for failure to pay the amounts shown on a return unless it is shown that the [*47] failure is due to reasonable cause and not due to willful neglect. Section 7491(c) provides that the Commissioner bears the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount.
To satisfy his burden of production, respondent must produce sufficient evidence that petitioner filed returns showing tax liabilities for the years at issue. See Wheeler v. Commissioner, 127 T.C. 200, 210 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008). A return prepared by the Commissioner in accordance with section 6020(b) is treated as the return filed by the taxpayer for the purpose of determining the amount of the addition under section 6651(a)(2). Sec. 6651(g)(2); Wheeler v. Commissioner, 127 T.C. at 208-209.
Respondent has the burden of proving that substitutes for returns satisfying the requirements of section 6020(b) were submitted. See Cabirac v. Commissioner, 120 T.C. at 170; Gleason v. Commissioner, T.C. Memo. 2011-154, 2011 WL 2600917, at *12; see also Wheeler v. Commissioner, 127 T.C. at 210. To constitute a section 6020(b) substitute for return, "the return must be subscribed, it must contain sufficient information from which to compute the taxpayer's tax liability, and the return form and any attachments must purport to be a 'return'". Rader v. Commissioner, 143 T.C. 376, 382 (2014) (quoting Spurlock [*48] v. Commissioner, T.C. Memo. 2003-124, 2003 WL 1987156, at *10), aff'd, 616 F. App'x 391 (10th Cir. 2015). The Court has held that the requirements of section 6020(b) have been met where the substitutes for returns consist of Forms 4549-A, Forms 886-A, and Forms 13496. See Rader v. Commissioner, 143 T.C. at 382; Gleason v. Commissioner, 2011 WL 2600917, at *12.
Petitioner's substitutes for returns included Forms 4549-A, Forms 886-A, and Forms 13496. 15 Further, the substitutes for returns purport to be "section 6020(b) returns", contain the information necessary to calculate petitioner's liabilities, and are subscribed. Petitioner's substitutes for returns constitute valid section 6020(b) returns deemed to have been filed by petitioner for purposes of section 6651(a)(2). Accordingly, respondent has satisfied his burden.
Once the Commissioner meets his burden, the burden of proof is with the taxpayer to show that the additions to tax that the Commissioner determined in the notice of deficiency should not be imposed. See Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Petitioner's burden requires that he prove that his failure to timely pay his Federal income tax was due to reasonable cause and was not due to willful neglect. See sec. 6651(a)(2).
[*49] Petitioner did not pay any of his tax liabilities for 2001, 2003, and 2004. Petitioner has failed to present any evidence that would establish that his failure to pay was due to reasonable cause, and instead he has sought to rely on unreasonable and unsupportable arguments. Accordingly, petitioner is liable for the addition to tax under section 6651(a)(2) for 2001, 2003, and 2004.
VI. Section 6654 Addition to Tax
Respondent determined that petitioner is liable for an addition to tax under section 6654(a) for failure to pay estimated income tax for 2001.
Section 6654(a), (b), and (c) imposes an addition to tax on an individual taxpayer who underpays at least one of four required installments of estimated tax. The addition to tax is calculated with reference to four installment payments each equal to 25% of the required annual payment. Sec. 6654(c)(1), (d)(1)(A). The "required annual payment" is the lesser of (1) 90% of the tax shown on the return for the taxable year (or, if no return is filed, 90% of the tax for such year), or (2) 100% of the tax shown on the taxpayer's return for the preceding taxable year. Sec. 6654(d)(1)(B). Option (2) does not apply where a taxpayer has not filed a return for the preceding taxable year. Id. cl. (ii).
The Commissioner has the burden of production with respect to the section 6654 addition to tax. Sec. 7491(c). To satisfy his burden of production under [*50] section 7491(c), the Commissioner must produce evidence establishing that the taxpayer had a "required annual payment" as defined in section 6654(d)(1)(B). Wheeler v. Commissioner, 127 T.C. at 211-212. This burden requires the Commissioner to produce evidence that allows the Court to determine the amount of the required annual payment. See sec. 6654(d)(1)(B)(i) and (ii); Wheeler v. Commissioner, 127 T.C. at 212. To determine the amount of petitioner's required annual payment for 2001, the Court must know whether petitioner filed a return for the preceding taxable year (2000) and, if so, the amount of "tax shown" on that return. See sec. 6654(d)(1)(B)(ii). Thus, the Commissioner must introduce evidence showing whether petitioner filed a return for 2000 and, if he did, the amount of "tax shown" on that return. See id.
On the basis of the record, the Court concludes that respondent has not met his burden of production. Therefore, petitioner is not liable for the section 6654(a) addition to tax for 2001.
The Court has considered all of the arguments made by the parties and to the extent they are not addressed herein, they are considered unnecessary, moot, irrelevant, or without merit.
[*51] To reflect the foregoing,
An appropriate decision will be entered.
FOOTNOTES:
/1/ Respondent conceded that petitioner is not liable for an addition to tax under sec. 6654 for 2003.
/2/ Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
/3/ The Local Oklahoma Bank lists itself as the "International Bank of Commerce" on its bank records. The Court will refer to the bank as "Local Oklahoma Bank".
/4/ Respondent introduced into evidence the bank records for petitioner's personal account for 2001, 2002, and 2003; the 2004 bank records were not introduced into evidence.
/5/ Respondent introduced into evidence the bank records for the account held in the names of petitioner's wife and daughter for 2001, 2002, and 2003; the 2004 bank records were not introduced into evidence.
/6/ Respondent introduced into evidence the bank records for the Theocentric account for 2002 and 2003; the 2004 bank records were not introduced into evidence.
/7/ Historically, a "corporation sole" is a succession of persons holding an ecclesiastical or monarchial office. See Gardner v. Commissioner, 145 T.C. ____, ____ (slip op. at 7) (Aug. 26, 2015) (citing Black's Law Dictionary 342 (7th ed. 1999), and Bryan A. Garner, A Dictionary of Modern Legal Usage 225 (2d ed. 1995)). Corporations sole are authorized under the laws of some States to enable religious leaders to hold property and conduct business for the benefit of the religious entity, as opposed to the benefit of the officeholder himself. See id. (citing Rev. Rul. 2004-41, 2004-1 C.B. 845). The record does not reflect whether petitioner actually took the steps necessary to organize Theocentric as a corporation sole under the laws of any State.
/8/ Respondent introduced into evidence the bank records for the Braechele account for 2001, 2002, 2003, and 2004.
/9/ The Court is aware of the different spellings -- Beech and Beach -- that are used for the Beech Property, which is on Beech Street, and the entity Beach Properties. There is no evidence in the record as to whether "Beach Properties" is a real business entity.
/10/ The Court takes judicial notice of the U.S. District Court for the Northern District of Oklahoma's decision and the U.S. Court of Appeals for the Tenth Circuit's affirmation.
/11/ On the basis of petitioner's business income of $ 2,320 in 2004, respondent determined that petitioner is liable for self-employment tax of $ 328 for 2004, taking into account the deduction allowed by sec. 164. See sec. 1401. Petitioner did not challenge this determination in his petition.
/12/ Because sec. 6651(f) is keyed to subsec. (a)(1), a taxpayer cannot be liable for a subsec. (f) addition to tax if the failure to file is due to reasonable cause and not willful neglect. See sec. 6651(a)(1); Mohamed v. Commissioner, T.C. Memo. 2013-255, at *22-*23. Petitioner bears the burden of proof with regard to the "reasonable cause" exception of sec. 6651(a)(1), see Higbee v. Commissioner, 116 T.C. 438, 447 (2001), and he did not meet this burden.
/13/ Even though respondent did not introduce into evidence the 2004 bank records for petitioner's personal account, the account held in the names of petitioner's wife and daughter, and the Theocentric account, the 2004 bank records for the Braechele account, along with petitioner's admissions during trial, establish that petitioner continued to pay personal expenses out of the Braechele account during 2004. Accordingly, respondent convincingly established that the Braechele account continued to be nothing more than a nominee bank account during 2004.
/14/ In contrast to petitioner's first Form 1040X for 2001, petitioner's Form 1040 for 2002 -- which respondent accepted as a valid return -- was submitted on the proper form and specified the source -- income from wages -- of petitioner's income and withholding. Accordingly, the Form 1040 for 2002 contained sufficient data to calculate tax liability.
/15/ The forms contain petitioner's name and address. Petitioner's taxpayer identification number (e.g., Social Security number) has been redacted in accordance with Rule 27(a).
Respondent determined petitioner was liable for the section 6651(f) fraudulent failure to file addition to tax for 2001, 2003, and 2004.
Section 6651(a)(1) imposes an addition to tax for failure to timely file a Federal income tax return. Section 6651(f) provides that the subsection (a)(1) addition to tax shall be increased from 5% to 15% of the tax required to be shown on the return for each month or fraction thereof for which there is a failure to file a return, up to 75% in the aggregate, where such failure to timely file is fraudulent. In ascertaining whether a taxpayer's failure to timely file was fraudulent under section 6651(f), the Court considers whether the taxpayer (1) failed to timely file a return for the taxable year where there was a tax liability required to be shown on a return (2) because of fraudulent intent. See sec. 6651(a), (b)(1), (f); Clayton v. Commissioner, 102 T.C. 632, 653 (1994); Porter v. Commissioner, T.C. Memo. [*30] 2015-122, at *44. Respondent has the burden of proving these elements by clear and convincing evidence for each year for which fraud is alleged. Sec. 7454(a); Rule 142(b); see Zell v. Commissioner, 763 F.2d 1139, 1142 (10th Cir. 1985), aff'g T.C. Memo. 1984-152; Clayton v. Commissioner, 102 T.C. at 646; Porter v. Commissioner, at *44; Taylor v. Commissioner, T.C. Memo. 1995-269, 1995 WL 363202, at *5, aff'd without published opinion, 108 F.3d 1388, 1997 WL 139744 (10th Cir. 1997).
A. Whether Petitioner Filed Valid Returns
Because section 6651(f) increases the addition to tax imposed by subsection (a)(1), respondent first must prove that petitioner failed to timely file a required Federal tax return. See sec. 6651(a)(1). Respondent introduced Forms W-2 showing that petitioner earned enough income to require him to make a return for each of the years at issue. See secs. 6011(a), 6012(a)(1)(A). Although petitioner submitted documents purporting to be returns for 2001, 2003, and 2004, respondent determined that those returns were invalid.
The Code does not define what constitutes a valid return. See Appleton v. Commissioner, 140 T.C. 273, 284 (2013). On the basis of the Supreme Court's opinions in Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934), and Florsheim Bros. Drygoods Co. v. United States, 280 U.S. 453 (1930), this Court [*31] has established a four-part test to determine whether a document submitted by a taxpayer is a valid return. In order to qualify as a return, the document must meet the following requirements: (1) the document must contain sufficient data to calculate tax liability; (2) the document must purport to be a return; (3) there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) the taxpayer must execute the return under penalties of perjury. Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986); see Estate of Sanders v. Commissioner, 144 T.C. 63, 78 (2015); Appleton v. Commissioner, 140 T.C. at 284-285. This Court and the U.S. Court of Appeals for the Tenth Circuit have consistently held that a Form 1040 with zeros on every income line is devoid of financial data and is therefore not a valid return. See, e.g., United States v. Melot, 562 F. App'x 646, 651 (10th Cir. 2014); United States v. Rickman, 638 F.2d 182, 184 (10th Cir. 1980) (holding that a document that does not provide information from which a tax can be computed is not a return); Cabirac v. Commissioner, 120 T.C. 163, 169 (2003). Petitioner's second 2001 Form 1040X and Forms 1040 for 2003 and 2004 reported zeros on every income line. Accordingly, petitioner's second 2001 Form 1040X and Forms 1040 for 2003 and 2004 were not valid tax returns.
[*32] Petitioner did not file a Form 1040 for 2001; instead, petitioner filed two Forms 1040X. Although the first 2001 Form 1040X reported AGI of $ 152,705, the return lacked information sufficient to apprise respondent of petitioner's Federal tax liability and misrepresented Social Security tax withheld as Federal income tax withheld. Even if the first 2001 Form 1040X had not misrepresented petitioner's Federal income tax withholding, the return lacked information sufficient to apprise respondent of petitioner's Federal tax liability because it does not contain any information as to the source of income from which tax was purportedly withheld. See United States v. Rickman, 638 F.2d at 184 (where the taxpayer reported zero income, requested a refund of tax withheld, but did not make disclosures from which a tax might be determined, the Court held that the return did not contain information from which a tax could be computed and was not an honest and reasonable attempt to satisfy the requirements of the tax law); Oman v. Commissioner, T.C. Memo. 2010-276, 2010 WL 5209360, at *10 (applying the Beard test, the Court determined that a taxpayer's Form 1040 did not contain sufficient data to calculate tax liability where the return showed $ 6,055 tax withheld but did not contain any information as to income from which such tax was purportedly withheld). Because petitioner's first 2001 Form 1040X did not [*33] contain sufficient data to calculate the tax liability, it was not a valid tax return. See Rickman, 638 F.2d at 184; Beard v. Commissioner, 82 T.C. at 777.
Respondent has clearly and convincingly proven that petitioner had an obligation to file timely income tax returns showing tax liabilities for 2001, 2003, and 2004, and failed to do so. 12
B. Whether Petitioner's Failure to File Was Fraudulent
In determining whether a taxpayer had the requisite fraudulent intent for imposition of the section 6651(f) addition to tax, the Court considers the same elements that it considers in imposing the fraud penalty under section 6663 and former section 6653(b)(1). Clayton v. Commissioner, 102 T.C. at 653. Fraud is established by proving that a taxpayer intended to evade tax believed to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of tax. Zell v. Commissioner, 763 F.2d at 1142-1143; Clayton v. Commissioner, 102 T.C. at 647. The existence of fraudulent intent is determined by looking at the entire record and the taxpayer's conduct. See DiLeo v. Commissioner, 96 T.C. [*34] 858, 874 (1991), aff'd, 959 F.2d 16 (2d Cir. 1992); Taylor v. Commissioner, 1995 WL 363202, at * 5. Fraud is never presumed and must be proven by independent evidence. Zell v. Commissioner, 763 F.2d at 1143; Beaver v. Commissioner, 55 T.C. 85, 92 (1970); Taylor v. Commissioner, 1995 WL 363202, at *5. Fraud need not be established by direct evidence, which is rarely available, but may be proved by circumstantial evidence and reasonable inferences drawn from the facts. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992); Taylor v. Commissioner, 1995 WL 363202, at *5.
In determining whether there was fraudulent intent, the Court will look at a nonexclusive list of factors, or "badges of fraud." See Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), aff'g T.C. Memo. 1984-601; Niedringhaus v. Commissioner, 99 T.C. at 211; Recklitis v. Commissioner, 91 T.C. 874, 910 (1998); Taylor v. Commissioner, 1995 WL 363202, at *5. These factors include: (1) failing to file income tax returns; (2) filing false documents, including false income tax returns; (3) understating income; (4) concealing income or assets; (5) engaging in illegal activity; (6) failing to cooperate with tax authorities; and (7) asserting frivolous arguments and objections to the tax laws. Bradford v. Commissioner, 796 F.2d at 307; Niedringhaus v. Commissioner, 99 T.C. at 211; Taylor v. Commissioner, 1995 WL 363202, at *5. While no single factor is [*35] determinative for establishing fraud, the existence of several "badges of fraud" may constitute compelling circumstantial evidence of fraud. Bradford v. Commissioner, 796 F.2d at 307-308; Niedringhaus v. Commissioner, 99 T.C. at 211; Taylor v. Commissioner, 1995 WL 363202, at *5. The U.S. Court of Appeals for the Tenth Circuit has held that willful refusal to file or the filing of protest returns is not by itself enough to justify fraud penalties; rather, when a taxpayer fails to file a return, he is not liable for fraud penalties unless he commits some affirmative act of concealment or misrepresentation. Zell v. Commissioner, 763 F.2d at 1146.
Petitioner's behavior exhibits many of the badges listed above.
(1) Failing To File Income Tax Returns
While the mere failure to file a return, standing alone, is not sufficient to support a finding of fraud, see id., an extended pattern of failing to file returns is a badge of fraud and may be persuasive circumstantial evidence of the intent to evade tax. See Bradford v. Commissioner, 796 F.2d at 308; Petzholdt v. Commissioner, 92 T.C. 661, 701 (1989). Petitioner failed to file valid Federal [*36] income tax returns for 2001, 2003, and 2004, as discussed supra. This factor weighs against petitioner for 2001, 2003, and 2004.
(2) Filing False Documents
Filing false documents with the IRS constitutes an "affirmative act" of misrepresentation sufficient to justify the fraud penalty. Zell v. Commissioner, 763 F.2d at 1146. Petitioner filed false documents with the IRS for 2001, 2003, and 2004. For each year, petitioner submitted an invalid Form 1040 or Form 1040X and submitted false Forms 4852 reporting zero wages after unsuccessfully attempting to persuade PMEC to submit false Forms W-2. Not only did petitioner attempt to evade income tax by filing false returns, but each year he attempted to have Social Security and Medicare tax erroneously refunded to him by reporting those amounts as income tax withholding. This factor weighs against petitioner for 2001, 2003, and 2004.
(3) Understating Income
A pattern of substantially underreporting income for several years is strong evidence of fraud, particularly if the understatements are not due to innocent mistake or are not otherwise satisfactorily explained. See Holland v. United States, 348 U.S. 121, 137-139 (1954); Spies v. United States, 317 U.S. 492, 499 (1943); Marcus v. Commissioner, 70 T.C. 562, 577 (1978), aff'd without [*37] published opinion, 621 F.2d 439 (5th Cir. 1980); Taylor v. Commissioner, 1995 WL 363202, at *6. Petitioner admitted that he received all amounts that were reported on his Forms W-2 and Forms 1099-MISC, yet he either reported zero income or attempted to "zero out" his income by claiming deductions in amounts equal to his income under the frivolous "claim of right". This factor weighs against petitioner for 2001, 2003, and 2004.
(4) Concealing Income and Assets
An intent to evade tax may be inferred from "concealment of assets or covering up sources of income." Spies, 317 U.S. at 499. Concealing assets coupled with a failure to file tax returns is a strong indication of fraud. Freidus v. Commissioner, T.C. Memo. 1999-195, 1999 WL 391919, at *10. A taxpayer's use of nominee corporations is evidence of asset concealment. See Bennett v. Commissioner, T.C. Memo. 2014-256, at *12 (finding a taxpayer liable for the section 6651(f) addition to tax where he adopted various means of concealing income by diverting income to nominees); Lain v. Commissioner, T.C. Memo. 2012-99, 2012 WL 1129851, at *5 ("Placing title to assets in the name of a nominee evidences a taxpayer's fraudulent intent."); DeVries v. Commissioner, T.C. Memo. 2011-185, 2011 WL 3418248, at *7 (finding that placing title to assets in the name of nominees evidences that the taxpayer's failure to file tax [*38] returns was done with fraudulent intent for the taxpayer to be subject to the section 6651(f) addition to tax); Freidus v. Commissioner, 1999 WL 391919, at * 11 (finding that the taxpayer used corporate accounts as mere repositories for proceeds derived from the taxpayer's income-producing activities); Jones v. Commissioner, T.C. Memo. 1994-230, (finding that a taxpayer's use of alter ego corporations to conduct personal as well as business transactions was evidence of asset concealment), aff'd without published opinion, 68 F.3d 460 (4th Cir. 1995). A nominee is an entity or individual who holds bare legal title to assets owned by another entity or individual. See Oxford Capital Corp v. United States, 211 F.3d 280, 284 (5th Cir. 2000); DeVries v. Commissioner, 2011 WL 3418248, at *7.
Perhaps most damning to petitioner, respondent introduced clear and convincing evidence that petitioner went to great lengths to affirmatively act to conceal income and assets. Petitioner used at least two corporate nominee bank accounts -- the Braechele and Theocentric accounts -- to conceal personal income.
Respondent introduced clear and convincing evidence in the form of bank records showing that much of petitioner's income flowed into and then out of the Braechele and Theocentric accounts. The Braechele and Theocentric accounts, however, were nothing more than corporate nominees; all income and expenses flowing therefrom were chargeable to petitioner. Petitioner would either deposit [*39] personal income directly into one of the corporate nominee accounts or deposit income into his personal account or an account held in the names of his wife and daughter and then make a separate payment from his personal account or his wife and daughter's account to one of the corporate nominee accounts. Perhaps most alarming and the strongest evidence of petitioner's intent to conceal income and assets is the fact that petitioner received and had unfettered discretion to use blank checks in the name of Braechele that were pre-signed by Mr. Reed. Petitioner used those checks to pay the personal expenses of himself and his family. In other words, petitioner deliberately funneled his income into Braechele with the expectation that it would come out of the funnel without being able to be traced back to him. The Braechele account as structured and operated by petitioner is the scheme devised by Mr. Reed; the same scheme that lead Mr. Reed to plead guilty to conspiracy to defraud the United States, aggravated identity theft, and evasion of payment of tax. Petitioner has not attempted to argue that a legitimate business purpose exists for either the Braechele or Theocentric accounts; to the contrary, petitioner openly admitted at trial that the Braechele account was his personal account. On the basis of the evidence presented to the Court, respondent has convincingly established that petitioner created at least the Braechele and Theocentric accounts for the purpose of concealing his personal [*40] income under the guise of corporate nominees Braechele (and Mr. Reed) and Theocentric in 2001, 2003, and 2004. 13 This factor weighs against petitioner for 2001, 2003, and 2004.
In addition to concealing income in corporate nominee bank accounts, petitioner used corporate nominees to conceal assets. The Court has previously held that placing title to assets in the name of nominees evidences fraudulent intent for a taxpayer to be subject to the section 6651(f) addition to tax. See DeVries v. Commissioner, 2011 WL 3418248, at *7; Leggett v. Commissioner, T.C. Memo. 1999-100, aff'd without published opinion, 221 F.3d 1357 (11th Cir. 2000). Petitioner purported to transfer the Beech Property, 111th Street Property, and Aspen Property between himself and several nominee corporations in attempt to conceal the properties. These properties, valued at $ 165,000, $ 140,000, and $ 85,000, respectively, were purportedly transferred several times for consideration not exceeding $ 121 on any transfer. Often times petitioner or his wife signed on [*41] behalf the various entities, indicating that petitioner still controlled the use and disposition of the properties. Petitioner has not presented any evidence or advanced any argument to rebut respondent's assertion that petitioner used Beach Properties, Braechele, Future Resources, Theocentric, and the Green Family Trust as nominees to conceal his personal assets. This factor weighs against petitioner.
(5) Engaging in Illegal Activity
Engaging in an illegal activity is a badge of fraud. See Niedringhaus v. Commissioner, 99 T.C. at 211. In 2004 petitioner participated in an illegal mortgage elimination scheme by creating the Green Family Trust and then transferring the Aspen Property to the Green Family Trust. After the transfer the "trustees", purporting to be the attorney-in-fact for the lender, then caused a "Specific Power of Attorney" and "Discharge of Mortgage" to be delivered to the recorders office and requested a discharge of mortgage on the Aspen Property. This scheme, as structured and operated by petitioner, is the same scheme for which Mr. Heineman and Mr. Johnson, the "trustees" of the Green Family Trust, were convicted for fraud. This factor weighs against petitioner for 2004.
(6) Failing To Cooperate With Tax Authorities
Failure to cooperate with revenue agents during an audit is a badge of fraud. See Zell v. Commissioner, 763 F.2d at 1146; Grosshandler v. Commissioner, 75 [*42] T.C. 1, 19-20 (1980); Taylor v. Commissioner, 1997 WL 139744, at *4. The Court has previously held that attempting to circumvent the Commissioner's efforts to obtain records when he has issued a summons evinces a fraudulent intent. See Porter v. Commissioner, at *58-*59. Petitioner failed to appear at three scheduled appointments and attempted to impede RA Jeffers' examination, first by refusing to submit documents that she requested, then by asserting frivolous legal arguments, and finally by urging Bank of America to refuse to comply with her summons of the Braechele account records. This factor weighs against petitioner.
(7) Asserting Frivolous Arguments
Frivolous, irrelevant, and meritless arguments, coupled with affirmative acts designed to evade Federal income tax, support a finding of fraud. See Kotmair v. Commissioner, 86 T.C. 1253, 1259-1261 (1986); Porter v. Commissioner, at *58. Not only did petitioner assert frivolous arguments to RA Jeffers, but, as discussed supra, petitioner has consistently maintained those arguments to the Court in this case and has previously raised frivolous arguments in other cases before the Court. See, e.g., Green v. Commissioner, 608 F. App'x 671 (10th Cir. 2015). The Court has previously warned petitioner that if he continued to assert frivolous arguments, [*43] the Court would impose the section 6673 penalty. See id. This factor weighs against petitioner.
E. Conclusion
Taking the entire record into account, the Court concludes that petitioner's failure to file timely tax returns for 2001, 2003, and 2004 was fraudulent. Although petitioner submitted Forms 1040 or 1040X for 2001, 2003, and 2004, none of those documents were valid returns. Petitioner's failure to file a valid return for each year was deliberate and intended to conceal the fact that he had income subject to tax. Respondent has proven fraudulent intent by showing that petitioner committed affirmative acts of concealment or misrepresentation with respect to each year. See Zell v. Commissioner, 763 F.2d at 1146. Petitioner is therefore liable for the addition to tax under section 6651(f) for 2001, 2003, and 2004. Since petitioner is liable under section 6651(f), there is no need to discuss respondent's alternative position that petitioner is liable under subsection (a)(1).
IV. Section 6663 Civil Fraud Penalty
Respondent determined that petitioner is liable for the section 6663 civil fraud penalty for 2002.
Section 6663(a) imposes a penalty equal to 75% of a taxpayer's underpayment of Federal income tax that is due to fraud. An "underpayment" for [*44] purposes of the section 6663 civil fraud penalty is, in general, the excess of the amount of tax due over the amount of tax shown on the return. Sec. 6664(a); see Mohamed v. Commissioner, T.C. Memo. 2013-255, at *19. If any portion of the underpayment is attributable to fraud, the entire underpayment will be treated as attributable to fraud unless the taxpayer establishes by a preponderance of the evidence that part of the underpayment is not due to fraud. Sec. 6663(b). In other words, the section 6663 fraud penalty consists of two elements: (1) the existence of an underpayment, and (2) fraudulent intent with respect to some portion of the underpayment. DiLeo v. Commissioner, 96 T.C. at 873. To establish fraud, the Commissioner must prove both elements with clear and convincing evidence. Sec. 7454; Rule 142(b); DiLeo v. Commissioner, 96 T.C. at 873; Taylor v. Commissioner, 1995 WL 363202, at *5.
As discussed supra, petitioner was not entitled to a deduction for what he termed a "claim of right" for 2002; thus an underpayment existed. Respondent clearly and convincingly established the first element of the section 6663 civil fraud penalty.
As discussed supra, in determining whether a taxpayer had the requisite fraudulent intent for imposition of the section 6651(f) addition to tax, the Court considers the same elements that it considers in imposing the fraud penalty under [*45] section 6663 and former section 6653(b)(1). Clayton v. Commissioner, 102 T.C. at 653. Respondent has introduced clear and convincing evidence that many of the badges of fraud that were present in 2001, 2003, and 2004, discussed supra, were present in 2002 with respect to at least some portion of the 2002 underpayment, thereby proving the second element of fraud. For example, although petitioner filed a valid Form 1040 for 2002, 14 he attempted to zero out his income under the frivolous "claim of right". As he had for 2001, 2003, and 2004, petitioner filed a self-prepared Form 4852 for 2002 showing zero wages after failing to convince PMEC to file a false Form W-2. Although he had not done so for 2001, 2003, and 2004, petitioner submitted a false Form W-4 to his employer for 2002 claiming to be exempt from tax. This Court and the U.S. Court of Appeals for the Tenth Circuit have held that filing a false Form W-4 is an affirmative act of misrepresentation and thus evidence of fraud. See Zell v. Commissioner, 763 F.2d at 1146 (holding that where a taxpayer had not merely failed to file a return but also filed false Forms W-4, thus committing an "affirmative act" of misrepresentation, imposition of fraud penalty was justified); [*46] Nix v. Commissioner, T.C. Memo. 2012-304, at *11 (filing a false Form W-4 is circumstantial evidence of fraud), aff'd, 553 F. App'x 960 (11th Cir. 2014); Teeters v. Commissioner, T.C. Memo. 2010-244 (where the Commissioner has shown substantial amounts of unreported income on which the withholding has been reduced by submission of a false Form W-4, fraud has been established by clear and convincing evidence). In addition, respondent introduced evidence in the form of bank statements for 2002 to clearly establish that the Braechele and Theocentric accounts were nothing more than corporate nominees through which petitioner concealed his income. See supra pp. 36-39.
On the basis of the entire record, the Court concludes that petitioner is liable for the civil fraud penalty under section 6663 for 2002. Since petitioner is liable under section 6663, the Court will not discuss respondent's alternative position that petitioner is liable for an accuracy-related penalty under section 6662(a).
V. Section 6651(a)(2) Addition to Tax
Respondent determined that petitioner is liable for additions to tax under section 6651(a)(2) for failure to timely pay his 2001, 2003, and 2004 tax liabilities.
Section 6651(a)(2) provides for an addition to tax of 0.5% per month up to 25% for failure to pay the amounts shown on a return unless it is shown that the [*47] failure is due to reasonable cause and not due to willful neglect. Section 7491(c) provides that the Commissioner bears the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount.
To satisfy his burden of production, respondent must produce sufficient evidence that petitioner filed returns showing tax liabilities for the years at issue. See Wheeler v. Commissioner, 127 T.C. 200, 210 (2006), aff'd, 521 F.3d 1289 (10th Cir. 2008). A return prepared by the Commissioner in accordance with section 6020(b) is treated as the return filed by the taxpayer for the purpose of determining the amount of the addition under section 6651(a)(2). Sec. 6651(g)(2); Wheeler v. Commissioner, 127 T.C. at 208-209.
Respondent has the burden of proving that substitutes for returns satisfying the requirements of section 6020(b) were submitted. See Cabirac v. Commissioner, 120 T.C. at 170; Gleason v. Commissioner, T.C. Memo. 2011-154, 2011 WL 2600917, at *12; see also Wheeler v. Commissioner, 127 T.C. at 210. To constitute a section 6020(b) substitute for return, "the return must be subscribed, it must contain sufficient information from which to compute the taxpayer's tax liability, and the return form and any attachments must purport to be a 'return'". Rader v. Commissioner, 143 T.C. 376, 382 (2014) (quoting Spurlock [*48] v. Commissioner, T.C. Memo. 2003-124, 2003 WL 1987156, at *10), aff'd, 616 F. App'x 391 (10th Cir. 2015). The Court has held that the requirements of section 6020(b) have been met where the substitutes for returns consist of Forms 4549-A, Forms 886-A, and Forms 13496. See Rader v. Commissioner, 143 T.C. at 382; Gleason v. Commissioner, 2011 WL 2600917, at *12.
Petitioner's substitutes for returns included Forms 4549-A, Forms 886-A, and Forms 13496. 15 Further, the substitutes for returns purport to be "section 6020(b) returns", contain the information necessary to calculate petitioner's liabilities, and are subscribed. Petitioner's substitutes for returns constitute valid section 6020(b) returns deemed to have been filed by petitioner for purposes of section 6651(a)(2). Accordingly, respondent has satisfied his burden.
Once the Commissioner meets his burden, the burden of proof is with the taxpayer to show that the additions to tax that the Commissioner determined in the notice of deficiency should not be imposed. See Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Petitioner's burden requires that he prove that his failure to timely pay his Federal income tax was due to reasonable cause and was not due to willful neglect. See sec. 6651(a)(2).
[*49] Petitioner did not pay any of his tax liabilities for 2001, 2003, and 2004. Petitioner has failed to present any evidence that would establish that his failure to pay was due to reasonable cause, and instead he has sought to rely on unreasonable and unsupportable arguments. Accordingly, petitioner is liable for the addition to tax under section 6651(a)(2) for 2001, 2003, and 2004.
VI. Section 6654 Addition to Tax
Respondent determined that petitioner is liable for an addition to tax under section 6654(a) for failure to pay estimated income tax for 2001.
Section 6654(a), (b), and (c) imposes an addition to tax on an individual taxpayer who underpays at least one of four required installments of estimated tax. The addition to tax is calculated with reference to four installment payments each equal to 25% of the required annual payment. Sec. 6654(c)(1), (d)(1)(A). The "required annual payment" is the lesser of (1) 90% of the tax shown on the return for the taxable year (or, if no return is filed, 90% of the tax for such year), or (2) 100% of the tax shown on the taxpayer's return for the preceding taxable year. Sec. 6654(d)(1)(B). Option (2) does not apply where a taxpayer has not filed a return for the preceding taxable year. Id. cl. (ii).
The Commissioner has the burden of production with respect to the section 6654 addition to tax. Sec. 7491(c). To satisfy his burden of production under [*50] section 7491(c), the Commissioner must produce evidence establishing that the taxpayer had a "required annual payment" as defined in section 6654(d)(1)(B). Wheeler v. Commissioner, 127 T.C. at 211-212. This burden requires the Commissioner to produce evidence that allows the Court to determine the amount of the required annual payment. See sec. 6654(d)(1)(B)(i) and (ii); Wheeler v. Commissioner, 127 T.C. at 212. To determine the amount of petitioner's required annual payment for 2001, the Court must know whether petitioner filed a return for the preceding taxable year (2000) and, if so, the amount of "tax shown" on that return. See sec. 6654(d)(1)(B)(ii). Thus, the Commissioner must introduce evidence showing whether petitioner filed a return for 2000 and, if he did, the amount of "tax shown" on that return. See id.
On the basis of the record, the Court concludes that respondent has not met his burden of production. Therefore, petitioner is not liable for the section 6654(a) addition to tax for 2001.
The Court has considered all of the arguments made by the parties and to the extent they are not addressed herein, they are considered unnecessary, moot, irrelevant, or without merit.
[*51] To reflect the foregoing,
An appropriate decision will be entered.
FOOTNOTES:
/1/ Respondent conceded that petitioner is not liable for an addition to tax under sec. 6654 for 2003.
/2/ Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
/3/ The Local Oklahoma Bank lists itself as the "International Bank of Commerce" on its bank records. The Court will refer to the bank as "Local Oklahoma Bank".
/4/ Respondent introduced into evidence the bank records for petitioner's personal account for 2001, 2002, and 2003; the 2004 bank records were not introduced into evidence.
/5/ Respondent introduced into evidence the bank records for the account held in the names of petitioner's wife and daughter for 2001, 2002, and 2003; the 2004 bank records were not introduced into evidence.
/6/ Respondent introduced into evidence the bank records for the Theocentric account for 2002 and 2003; the 2004 bank records were not introduced into evidence.
/7/ Historically, a "corporation sole" is a succession of persons holding an ecclesiastical or monarchial office. See Gardner v. Commissioner, 145 T.C. ____, ____ (slip op. at 7) (Aug. 26, 2015) (citing Black's Law Dictionary 342 (7th ed. 1999), and Bryan A. Garner, A Dictionary of Modern Legal Usage 225 (2d ed. 1995)). Corporations sole are authorized under the laws of some States to enable religious leaders to hold property and conduct business for the benefit of the religious entity, as opposed to the benefit of the officeholder himself. See id. (citing Rev. Rul. 2004-41, 2004-1 C.B. 845). The record does not reflect whether petitioner actually took the steps necessary to organize Theocentric as a corporation sole under the laws of any State.
/8/ Respondent introduced into evidence the bank records for the Braechele account for 2001, 2002, 2003, and 2004.
/9/ The Court is aware of the different spellings -- Beech and Beach -- that are used for the Beech Property, which is on Beech Street, and the entity Beach Properties. There is no evidence in the record as to whether "Beach Properties" is a real business entity.
/10/ The Court takes judicial notice of the U.S. District Court for the Northern District of Oklahoma's decision and the U.S. Court of Appeals for the Tenth Circuit's affirmation.
/11/ On the basis of petitioner's business income of $ 2,320 in 2004, respondent determined that petitioner is liable for self-employment tax of $ 328 for 2004, taking into account the deduction allowed by sec. 164. See sec. 1401. Petitioner did not challenge this determination in his petition.
/12/ Because sec. 6651(f) is keyed to subsec. (a)(1), a taxpayer cannot be liable for a subsec. (f) addition to tax if the failure to file is due to reasonable cause and not willful neglect. See sec. 6651(a)(1); Mohamed v. Commissioner, T.C. Memo. 2013-255, at *22-*23. Petitioner bears the burden of proof with regard to the "reasonable cause" exception of sec. 6651(a)(1), see Higbee v. Commissioner, 116 T.C. 438, 447 (2001), and he did not meet this burden.
/13/ Even though respondent did not introduce into evidence the 2004 bank records for petitioner's personal account, the account held in the names of petitioner's wife and daughter, and the Theocentric account, the 2004 bank records for the Braechele account, along with petitioner's admissions during trial, establish that petitioner continued to pay personal expenses out of the Braechele account during 2004. Accordingly, respondent convincingly established that the Braechele account continued to be nothing more than a nominee bank account during 2004.
/14/ In contrast to petitioner's first Form 1040X for 2001, petitioner's Form 1040 for 2002 -- which respondent accepted as a valid return -- was submitted on the proper form and specified the source -- income from wages -- of petitioner's income and withholding. Accordingly, the Form 1040 for 2002 contained sufficient data to calculate tax liability.
/15/ The forms contain petitioner's name and address. Petitioner's taxpayer identification number (e.g., Social Security number) has been redacted in accordance with Rule 27(a).
"I could be dead wrong on this" - Irwin Schiff
"Do you realize I may even be delusional with respect to my income tax beliefs? " - Irwin Schiff
"Do you realize I may even be delusional with respect to my income tax beliefs? " - Irwin Schiff
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Re: TP Loses His IRA Due To A Warrantless Levy
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The Honorable Judge Roy Bean
The world is a car and you're a crash-test dummy.
The Devil Makes Three
The world is a car and you're a crash-test dummy.
The Devil Makes Three