Tax Code Is Gibberish So I Don't Owe

[The Observer]

PATRICIA LOUISE HYDE,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

Release Date: MAY 19, 2011

UNITED STATES TAX COURT

Filed May 19, 2011

Patricia Louise Hyde, pro se.

Dessa J. Baker-Inman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Respondent determined a $ 33,498 deficiency in petitioner's 2006 Federal income tax and additions to tax of $ 7,537 under section 6651(a)(1), $ 4,857 under section 6651(a)(2), and $ 1,585 under section 6654(a). 1 After concessions, 2 we decide whether petitioner: (1) Had unreported income in the amounts determined by respondent; (2) is liable for the 10-percent additional tax on early distributions from her individual retirement account (IRA); (3) is liable for self-employment tax on her earnings of nonemployee compensation; (4) is liable for the addition to tax determined by respondent under section 6651(a)(1); (5) is liable for the addition to tax determined by respondent under section 6651(a)(2); and (6) is liable for the addition to tax under section 6654. In addition, we consider whether the Court should sua sponte impose a penalty under section 6673.

FINDINGS OF FACT

No written stipulation of facts was filed in this case. An oral stipulation was made at trial as to one fact: Petitioner lived in Arkansas at the time the petition was filed.

During 2006 petitioner worked as a consultant for Key Apparel Resources, Ltd. (Key Apparel), and Star of India Fashions, Inc. (Star). Petitioner was paid total compensation of $ 92,500 for her services to Key Apparel and Star. Also in 2006 Merrill Lynch Bank and Trust Co. made a taxable distribution of $ 9,166 to petitioner from an IRA. Petitioner was also paid (1) $ 1,297 in dividends from Merrill, Lynch, Pierce, Fenner & Smith, Inc., (2) $ 15 in dividends from Scottrade, Inc., (3) $ 31 in interest from Arvest Bank, and (4) an income tax refund of $ 1,912 from the State of Arkansas Department of Finance and Administration. Petitioner does not dispute having received these payments. 3

Petitioner did not file a Federal income tax return for 2006, and she did not make estimated tax payments. 4 Respondent prepared a substitute for return on petitioner's behalf for 2006 using information reported by third-party payers. See sec. 6020(b)(1). On the basis of that substitute for return, respondent issued to petitioner a notice of deficiency dated January 4, 2010. Attached to the notice of deficiency was Form 4549, Income Tax Examination Changes, on which respondent calculated petitioner's 2006 Federal taxable income as follows:

Adjustment to Income Amount
_____________________________________________________________________

Nonemployee compensation $ 92,500
Taxable distributions from pensions 9,166
Prior year State refund 1,912
Dividend income 1,312
Interest income 31
SE AGI adjustment (6,535)
Standard deduction (5,150)
Exemptions (3,300)
Corrected taxable income/1/ 89,936
____________________________________________________________________________

/1/ Respondent used a filing status of "single".

In response to the notice of deficiency, petitioner petitioned the Court on April 7, 2010. A trial was held on January 11, 2011.

OPINION

I. Validity of the Notice of Deficiency and Substitute for Return

Absent a stipulation to the contrary, an appeal in this case would lie in the U.S. Court of Appeals for the Eighth Circuit. See sec. 7482(b)(1)(A). At trial and on brief petitioner advances a hodgepodge of frivolous and groundless claims that both this Court and the Eighth Circuit have consistently rejected. See, e.g., United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993); Newman v. Schiff, 778 F.2d 460, 467 (8th Cir. 1985); Michael v. Commissioner, T.C. Memo. 2003-26. First, petitioner argues that the notice of deficiency upon which this case is based is invalid because it was based on a substitute for return which petitioner did not authorize to be filed. According to petitioner, respondent was precluded from preparing a substitute for return on her behalf and therefore was unable to make a valid assessment of Federal income tax against her because she did not file a 2006 Form 1040, U.S. Individual Income Tax Return. We reject petitioner's allegation that the notice of deficiency is invalid because it was based on a substitute for return. It is well settled that a substitute for return prepared by the Commissioner under section 6020 is prima facie "good and sufficient for all legal purposes", including to assess Federal income tax liability shown on a substitute for return as due and owing. See sec. 6020(b)(2); United States v. Silkman, 220 F.3d 935, 936 (8th Cir. 2000). That respondent issued the notice of deficiency on the basis of the substitute for return does not, in and of itself, invalidate the notice of deficiency. Petitioner has not offered any credible evidence which would require that we otherwise invalidate the notice of deficiency. 5

Second, petitioner argues that the notice of deficiency is invalid because the substitute for return respondent prepared does not comply with the Paperwork Reduction Act of 1980 (PRA), Pub. L. 96-511, 94 Stat. 2812. Similar arguments concerning the duty to file a tax return and the PRA have been consistently recognized as frivolous. See, e.g., Pitts v. Commissioner, T.C. Memo. 2010-101; Wolcott v. Commissioner, T.C. Memo. 2007-315; Dodge v. Commissioner, T.C. Memo. 2007-236, affd. 317 Fed. Appx. 581 (8th Cir. 2009). We thus reject petitioner's argument that the PRA invalidates her notice of deficiency.

Third, petitioner argues that she is not liable for Federal income tax because the tax laws are incomprehensible to her. While we recognize that the tax laws are complex, we have consistently held that complexity alone does not relieve a taxpayer of his or her duty to file a Federal income tax return and pay any tax determined on that return to be due and owing. See, e.g., Cook v. Commissioner, T.C. Memo. 2010-137. Petitioner filed a Federal income tax return for 2005, which suggests to us that she was aware of her filing obligation for 2006. Moreover, she earned significant income in 2006, and we believe that she possesses the resources to seek out the advice of a professional tax adviser to aid in her comprehension of the tax laws. Petitioner made no apparent effort to determine her tax liability for 2006, and she cannot now claim harbor from her liability under the pretense that the tax laws are too complex.

Petitioner's remaining arguments are unintelligible shopworn tax-protester rhetoric which we have considered and now reject as baseless. We do not devote any more time to these arguments because to do so might suggest that they have merit. Accord Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984).

II. Unreported Income

As a general rule, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving these determinations erroneous in order to prevail. See Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933); Jones v. Commissioner, T.C. Memo. 1994-230, affd. 68 F.3d 430 (4th Cir. 1995). As relevant here, two statutory provisions modify the general rule. First, section 6201(d) provides that if a taxpayer asserts a reasonable dispute with regard to income reported on an information return and has fully cooperated with the Commissioner, then the Commissioner must supplement the information return with additional reasonable and probative information. Second, section 7491(a) provides that the burden of proof as to factual matters may shift to the Commissioner under certain circumstances. Petitioner has not alleged that sections 6201(d) or 7491(a) apply to this case. Nor do we find that she has fully cooperated with respondent, see sec. 6201(d), or established her compliance with the substantiation and recordkeeping requirements of the Code, see sec. 7491(a)(2)(A) and (B). Accordingly, petitioner bears the burden of proof.

Gross income includes all income from whatever source derived, unless otherwise specifically excluded. Sec. 61(a). The definition of gross income broadly includes any instance of undeniable accessions to wealth, clearly realized, and over which the taxpayer has complete dominion and control. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955). Specifically included in gross income are compensation for services, interest, dividends, and distributions from an IRA. See secs. 61(a)(1), (4), (7), 72(a); see also sec. 402(a). State income tax refunds are also includable in gross income under the "tax benefit rule". See Francisco v. Commissioner, 119 T.C. 317, 333-334 (2002), affd. 370 F.3d 1228 (D.C. Cir. 2004).

On the basis of third-party information, respondent determined that in 2006 petitioner received $ 92,500 in compensation for services, $ 31 in interest, $ 15 in dividends, $ 9,166 in taxable distributions from an IRA, and an income tax refund of $ 1,912 from the State of Arkansas. Respondent introduced these information returns at trial and prepared the substitute for return on the basis of those returns. Petitioner has not produced any credible evidence to dispute the receipt of any of the income she received in 2006. Therefore, we sustain respondent's determination that petitioner had $ 104,921 in unreported income in 2006.

III. 10-Percent Additional Tax for IRA Distribution

Section 72(t)(1) imposes a 10-percent additional tax on the amount of any early distribution from a qualified retirement plan unless that distribution satisfies any of the exceptions enumerated in section 72(t)(2)(A). An IRA is a qualified retirement plan to which section 72(t)(1) applies. See secs. 408(a), 4974(c)(4). Respondent introduced evidence at trial from third-party payers which established that petitioner received gross distributions of $ 183,007 from an IRA and that $ 9,166 of that amount was taxable to her. Petitioner has not asserted any reasonable dispute with regard to her receipt of the early distribution from the IRA. See sec. 6201(d). Nor has she established her entitlement to any of the section 72(t)(2)(A) exceptions. See Bunney v. Commissioner, 114 T.C. 259, 265-266 (2000). Accordingly, we hold that petitioner is liable for the section 72(t)(1) 10-percent additional tax on the distribution she received from the IRA.

IV. Self-Employment Tax

Respondent determined that the nonemployee compensation petitioner earned from Key Apparel and Star was subject to self-employment tax and that she was entitled to a deduction for one-half of the self-employment tax to be paid. Section 1401 imposes a tax on the self-employment income of every individual. See sec. 1401(a) and (b); Schelble v. Commissioner, 130 F.3d 1388, 1391 (10th Cir. 1997), affg. T.C. Memo. 1996-269. Self-employment income includes the net earnings from self-employment derived by an individual during the taxable year. Sec. 1402(b). The term "net earnings from self-employment" means the gross income derived by an individual from the carrying on of any trade or business, reduced by the deductions attributable to that trade or business. Sec. 1402(a); sec. 1.1402(a)-1, Income Tax Regs. Section 164(f) allows a taxpayer to deduct one-half of the self-employment tax imposed by section 1401.

Petitioner received $ 92,500 in nonemployee compensation in her capacity as a consultant for Key Apparel and Star. Respondent determined the amount of that income from information returns provided by Key Apparel and Star and calculated the amount of self-employment tax and corresponding deduction using Schedule SE, Self-Employment Tax. We agree with respondent's determination that petitioner is liable for self-employment tax on the nonemployee compensation she earned. Accordingly, we hold that amounts Key Apparel and Star paid to petitioner as nonemployee compensation are self-employment income subject to $ 13,070 of tax as respondent calculated under section 1401. We also hold that petitioner may deduct $ 6,535 under section 164(f).

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

Section 6651(a)(1) imposes an addition to tax for failure to file a required return by its extended due date, unless the taxpayer demonstrates that the failure to file was due to reasonable cause and not due to willful neglect. The addition to tax equals 5 percent for each month that the return is late, but may not exceed 25 percent in total. Sec. 6651(a)(1). The Commissioner bears the burden of production with respect to a taxpayer's liability for an addition to tax under section 6651(a)(1). See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Petitioner, however, bears the burden of proving her entitlement to the reasonable cause exception of section 6651(a)(1). See Higbee v. Commissioner, supra at 447. To demonstrate the existence of "reasonable cause", petitioner must establish that she exercised ordinary business care and prudence but was still unable to file the 2006 return by the extended due date. See United States v. Boyle, 469 U.S. 241, 246 (1985); sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect connotes a taxpayer's "conscious, intentional failure or reckless indifference" to timely file a return. United States v. Boyle, supra at 245.

Petitioner concedes that she never filed a Form 1040 for 2006. 6 Respondent has therefore met his burden of production as to the section 6651(a)(1) addition to tax. Petitioner has not offered any credible reason for her failure to file her 2006 return, nor has she produced any evidence to establish the existence of reasonable cause on her part. To the contrary, petitioner's frivolous tax-protester rhetoric leads us to conclude that her failure to file her 2006 return was in fact conscious, intentional, and recklessly indifferent. Therefore, we hold petitioner liable for an addition to tax under section 6651(a)(1).
VI. Section 6651(a)(2) Addition to Tax

Section 6651(a)(2) generally imposes an addition to tax for a failure to timely pay the amount of tax shown as due on a Federal income tax return. Although petitioner did not file a valid 2006 Federal income tax return, respondent prepared a substitute for return on her behalf under section 6020(b). It is well settled that a substitute for return is treated as a return filed by the taxpayer for purposes of section 6651(a)(2). See sec. 6651(g)(2); see also Wheeler v. Commissioner, 127 T.C. 200, 208-209 (2006), affd. 521 F.3d 1289 (10th Cir. 2008); Oman v. Commissioner, T.C. Memo. 2010-276.

At trial respondent introduced a copy of the substitute for return which was prepared on behalf of petitioner and certified that the substitute for return was valid under section 6020(b). Respondent also included a copy of the Form 4549 on which petitioner's income tax liability was based and account transcripts which proved that petitioner had no withholdings or estimated tax payments against her 2006 tax liability. Accordingly, we find that respondent produced sufficient evidence that petitioner is liable for an addition to tax under section 6651(a)(2).

Petitioner does not allege that her failure to pay was due to reasonable cause and not willful neglect. See sec. 6651(a)(2). Nor did she establish that she exercised ordinary business care or that she would have suffered undue hardship if made to pay her tax liability. See sec. 301.6651-1(c)(1), Proced. & Admin. Regs. To the contrary, petitioner appears to have been reckless in her decision not to pay her 2006 taxes even though she earned more than $ 100,000 that year. Therefore, we hold that petitioner is liable for an addition to tax under section 6651(a)(2).

VII. Section 6654 Addition to Tax

Section 6654(a) imposes an addition to tax on an individual who underpays his or her estimated tax. That addition to tax is calculated with reference to four required installment payments of the taxpayer's estimated tax liability. Sec. 6654(c)(1); Wheeler v. Commissioner, supra at 210. Each required installment of estimated tax must equal 25 percent of the "required annual payment" to avoid an addition to tax under section 6654. Sec. 6654(d)(1)(A). As relevant here, the required annual payment is equal to the lesser of (i) 90 percent of the tax shown on the taxpayer's return for that year (or, if no return is filed, 90 percent of the tax due for such year), or (ii) 100 percent of the tax shown on the taxpayer's return for the preceding taxable year. Sec. 6654(d)(1)(B). Respondent bears the burden of proving that imposition of the section 6654 addition to tax is appropriate.

At trial respondent introduced evidence which proved that petitioner was required to file a Federal income tax return for 2006, that she did not file a 2006 return, and that she did not make any estimated tax payments or have income tax withheld for 2006. That evidence included a copy of petitioner's 2005 Federal income tax return which showed total tax due of $ 330. The substitute for return which respondent prepared on behalf of petitioner for 2006 showed total tax due of $ 33,498. Ninety percent of petitioner's 2006 tax liability is $ 30,148. Thus, petitioner's required annual payment for 2006 was $ 330; i.e., the lesser of 90 percent of her 2006 tax liability and 100 percent of her 2005 tax liability. Petitioner does not assert, and we do not find, that any of the statutory exceptions in section 6654(e) apply to eliminate petitioner's liability for an addition to tax under section 6654(a). Accordingly, we hold that petitioner is liable for an addition to tax under section 6654 for 2006 based on a required annual payment of $ 330. 7

VIII. Section 6673 Sanction Awarded by the Court

We now consider sua sponte whether to impose a penalty against petitioner pursuant to section 6673(a)(1). That section allows the Court to impose upon a taxpayer a penalty of up to $ 25,000 whenever it appears that the taxpayer instituted or maintained a proceeding primarily for delay or that the taxpayer's position is frivolous or groundless. See Pierson v. Commissioner, 115 T.C. 576, 581 (2000).

The record is clear that petitioner's positions in this proceeding are frivolous and groundless. Petitioner was warned at trial that she could be sanctioned under section 6673 for asserting frivolous and groundless claims. Petitioner ignored those warnings by maintaining similar frivolous arguments on brief. We therefore believe that sanctions are appropriate. See, e.g., Randall v. Commissioner, T.C. Memo. 2008-138; Avery v. Commissioner, T.C. Memo. 2007-60, affd. 399 Fed. Appx. 195 (9th Cir. 2010). Pursuant to section 6673(a)(1), we impose against petitioner a penalty of $ 3,000.

We have considered all arguments raised by petitioner, and to the extent not discussed herein we conclude that they are irrelevant, moot, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

FOOTNOTES:

/1/ Section references are to the applicable version of the Internal Revenue Code (Code), and Rule references are to the Tax Court Rules of Practice and Procedure. Some dollar amounts are rounded.

/2/ Respondent concedes that the sec. 6654 addition to tax was improperly calculated by determining such addition on the basis of a required annual payment of $ 30,148. Respondent contends, and we agree, that such an addition should have been calculated on the basis of a required annual payment of $ 330.

/3/ We found petitioner's testimony at trial regarding these payments to be evasive. She attempted to avoid answering basic questions on whether she had received that income or stated that she did not know whether she had received that income.

/4/ Petitioner submitted a "Tax Statement" for 2006 which did not comply with the requirements of sec. 6011(a). See sec. 1.6011-1(b), Income Tax Regs.

/5/ At trial, petitioner attempted to introduce numerous documents into evidence which we declined to admit because we found that they were irrelevant, inadmissible hearsay, unable to be authenticated, or some combination thereof. Petitioner also objected on the grounds of hearsay to evidence respondent submitted. We considered all of petitioner's objections and overruled those objections because we found respondent's proffered evidence to be relevant and properly authenticated. See Fed. R. Evid. 803(6), (8), 902(1), (11).

/6/ The "Tax Statement" petitioner filed in 2006 is not a valid tax return because it consists entirely of zeros and does not contain sufficient information for the Internal Revenue Service to calculate her Federal income tax liability. See United States v. Grabinski, 727 F.2d 681, 687 (8th Cir. 1984); Cabirac v. Commissioner, 120 T.C. 163, 169 (2003); Holmes v. Commissioner, T.C. Memo. 2011-31.

/7/ The amount of the sec. 6654 addition to tax is to be determined by the parties in their Rule 155 calculations. See Arnold v. Commissioner, T.C. Memo. 2008-228.

[Quixote]

First, petitioner argues that the notice of deficiency upon which this case is based is invalid because it was based on a substitute for return which petitioner did not authorize to be filed.

This argument is more bizarre than it first appears.

(b) Execution of return by Secretary
(1) Authority of Secretary to execute return
If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise.
(2) Status of returns
Any return so made and subscribed by the Secretary shall be prima facie good and sufficient for all legal purposes.

IRC 6020(b) (emphasis added)

6020(b), if taken literally, would allow the IRS to assess the tax shown on the substitute for return (SFR) without the need for a notice of deficiency. I don't know if the courts have decided that 6020(b) does not mean exactly what it says, or if the IRS is just being cautious when it sends NODs on SFR assessments.

[Famspear]

.......

Any return so made and subscribed by the Secretary shall be prima facie good and sufficient for all legal purposes.

IRC 6020(b) (emphasis added)

6020(b), if taken literally, would allow the IRS to assess the tax shown on the substitute for return (SFR) without the need for a notice of deficiency. I don't know if the courts have decided that 6020(b) does not mean exactly what it says, or if the IRS is just being cautious when it sends NODs on SFR assessments.

I've wondered about this very thing, too.

But, to split hairs, maybe the phrase "for all legal purposes" arguably does not mean that the IRS can thereby circumvent the deficiency procedures. The amount of tax shown on the 6020(b) return, arguably, is simply an amount of tax shown by the Secretary of the Treasury or his delegate, NOT "the amount shown as the tax by the taxpayer" under section 6211(a)(1)(A).

The amount shown as tax on the 6020(b) return is (at least, according to the IRS) the "tax imposed by subtitle A....." under the first "flush" part of the text of 6211(a), but that amount is NOT the same as "the amount shown as the tax by the taxpayer upon his return" under section 6211(a)(1)(A) (whether the taxpayer filed a return or not). Thus, the arithmetical calculation of the "deficiency" is such that the amount computed by the IRS under the first "flush" part of 6211(a) is a certain positive number, while the amount under 6211(a)(1)(A) is zero, or some other number computed by the taxpayer, that is less than the aforementioned IRS figure.

In other words, the "excess" amount under 6211(a) is still an amount greater than zero -- which in turn means that there is a deficiency as defined in 6211, which in turn means that the IRS must follow the deficiency procedures (and therefore, generally, cannot assess the tax immediately).

In the statutes, words like "all" and "any" are sometimes interpreted by the courts to mean, well, something less than "all" or "any".

Check this out, from the U.S. Bankruptcy Code, at 11 USC section 505(a)(1):

Except as provided in paragraph (2) of this subsection, the court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

If read literally and most expansively, this provision would empower any bankruptcy court in any case whatsoever to determine the amount of ANY tax -- even the tax of a person who had no connection to the case. Of course, the courts would not interpret the statute that way. They would interpret "any tax" in this statute to mean something like "any tax of the debtor or the bankruptcy estate to which the case relates".

Still, I agree with Quixote's point: there is some ambiguity with 6020(b), and I don't recall whether a court has ever addressed it.

[LPC]

/4/ Petitioner submitted a "Tax Statement" for 2006 which did not comply with the requirements of sec. 6011(a). See sec. 1.6011-1(b), Income Tax Regs.

[...]

/6/ The "Tax Statement" petitioner filed in 2006 is not a valid tax return because it consists entirely of zeros and does not contain sufficient information for the Internal Revenue Service to calculate her Federal income tax liability. See United States v. Grabinski, 727 F.2d 681, 687 (8th Cir. 1984); Cabirac v. Commissioner, 120 T.C. 163, 169 (2003); Holmes v. Commissioner, T.C. Memo. 2011-31.

I haven't seen the "tax statement" gambit in a while. I wonder which scammer/nutcase Hyde got the idea from?

[ASITStands]

.......

Any return so made and subscribed by the Secretary shall be prima facie good and sufficient for all legal purposes.

IRC 6020(b) (emphasis added)

6020(b), if taken literally, would allow the IRS to assess the tax shown on the substitute for return (SFR) without the need for a notice of deficiency. I don't know if the courts have decided that 6020(b) does not mean exactly what it says, or if the IRS is just being cautious when it sends NODs on SFR assessments.

I've wondered about this very thing, too.

But, to split hairs ....

Point of clarification (maybe) or perhaps splitting more hairs:

Substitute(s) for Return are not perfected until AFTER Deficiency Procedures.

In other words, the issuance of a Notice of Deficiency, as a part of Deficiency Procedures conducted by Examination, is the initial step in finalizing the Substitute for Return.

The taxpayer has an opportunity AT the Notice of Deficiency to do one of three things:

(1) agree with the deficiency and sign Waiver (Form 5564),
(2) submit his own returns or
(3) dispute the Notice of Deficiency in Tax Court.

The outcome of those events determines the assessments made by the exercise at 6020(b), with assessment coming 90 days AFTER the final determination of the Notice of Deficiency.

That's to preclude the 90 days limitation on appealing a Tax Court determination.

Again. Maybe this clarifies or maybe it splits more hairs.

The argument that the Notice of Deficiency is based on a Substitute Return is backwards. It's the Substitute for Return that's based on the Notice of Deficiency. A fundamental difference.

[fortinbras]

The tax code may be (what the hell, it is) hard to read, but the IRS instructions that accompany the Form 1040 are fairly clear, and courts have held that this is enough to make the taxpayers liable for noncompliance with those instructions.

[ASITStands]

The tax code may be (what the hell, it is) hard to read, but the IRS instructions that accompany the Form 1040 are fairly clear, and courts have held that this is enough to make the taxpayers liable for noncompliance with those instructions.

True enough!

However, there's enough reason to distrust government that tax protester theories, and other conspiracy theories, can abound, and most of it is created by government itself.

There's a general idea among the populace that the government has lied to them, and frankly, neither the Executive, Legislative or Judicial have done enough to dispel that idea.

Given enough crazy readings of tax law, and you have a full-blown protester community.

[LPC]

The Tax Court has been affirmed by the 8th Circuit, but without any additional sanctions.

Patricia Louise Hyde v. Commissioner, No. 12-1179 (8th Cir. 7/2/2012)

PATRICIA LOUISE HYDE,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

Submitted: June 28, 2012

Filed: July 2, 2012

Before WOLLMAN, MELLOY, and SMITH, Circuit Judges.

PER CURIAM.

Patricia Louise Hyde appeals the tax court's1 decision upholding the Commissioner of Internal Revenue's determination that she was liable for an income tax deficiency and additions for tax year 2006, assessing her liabilities, and imposing a 26 U.S.C. § 6673 penalty for asserting frivolous and groundless arguments. She also appeals the tax court's denial of her motion, under Tax Court Rule 162, to vacate its decision.

After careful review, we agree with the tax court's decision upholding Hyde's 2006 liabilities. See Campbell v. Comm'r, 164 F.3d 1140, 1142 (8th Cir. 1999) (tax court's findings of fact are reviewed for clear error, and its legal conclusions are reviewed de novo). We also find no abuse of discretion in the tax court's imposition of the section 6673 penalty, see May v. Comm'r, 752 F.2d 1301, 1304-05 (8th Cir. 1985) (standard of review), or in the tax court's denial of her Rule 162 motion.

Accordingly, we affirm. See 8th Cir. R. 47B.

FOOTNOTE

1 The Honorable David Laro, United States Tax Court Judge.

END OF FOOTNOTE

[LPC]

After careful review,

I suspect that's an exaggeration.

[wserra]

He used . . . sarcasm.

[fortinbras]

The May 19, 2011 Tax Code decision is cited as T.C.Memo 2011-104.

Altho there is no explicit reference to the particular lower court decision, it appears that this decision was affirmed by the 8th Circuit, yesterday, July 2nd 2012.

[LPC]

And now the Supreme Court has denied certiorari. Hyde v. Commissioner, No. 12-676 (U.S.S.C. 1/7/2013).

According to Tax Analysts, the certiorari petition argued that Hyde was denied due process, that the Tax Court abused its discretion by imposing the frivolous argument penalty, and that Hyde wasn't required to file a Form 1040.

[The Observer]

ROBERT F. BATSCH, ET AL.,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

Release Date: JULY 26, 2016

UNITED STATES TAX COURT

Filed July 26, 2016

Robert F. Batsch, pro se.

Patricia Hyde, pro se.

H. Elizabeth H. Downs and Jamie M. Stipek, for respondent.

[*2] MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: Respondent determined deficiencies and additions to tax as follows:

Robert F. Batsch, Docket Nos. 28568-13 and 10638-14

Additions to tax
_______________________________________

Sec. Sec. Sec.
Year Deficiency 6651(f) 6651(a)(2) 6654
_____________________________________________________________________

2007 $ 35,534.89 $ 25,762.80 $ 8,883.72 $ 1,617.29
2008 23,070.00 16,725.75 5,767.50 741.40
2009 18,971.00 13,753.98 /1/ 454.25
2010 12,375.00 8,971.88 /1/ 265.39
2011 11,117.00 8,059.83 /1/ 220.07
2012 10,117.00 7,334.83 /1/ 181.36
_____________________________________________________________________

/1/ To be computed at a later date.

Patricia Hyde, Docket Nos. 28694-13 and 10597-14

Additions to tax
________________________________________

Sec. Sec. Sec.
Year Deficiency 6651(f) 6651(a)(2) 6654
_____________________________________________________________________

2007 $ 54,046 $ 39,183.35 $ 13,511.50 $ 2,459.78
2008 33,870 24,555.75 8,467.50 1,088.47
2009 22,159 16,065.28 /1/ 530.56

[*3]

2010 15,732 11,405.70 /1/ 337.40
2011 13,028 9,445.30 /1/ 257.94
2012 11,374 8,246.15 /1/ 203.93
_____________________________________________________________________

/1/ To be computed at a later date.

The notices of deficiency for 2007-11 were sent September 10, 2013, and the notices for 2012 were sent February 10, 2014. The deficiencies were determined after the Internal Revenue Service (IRS) had prepared substitutes for returns under section 6020(b) that were based upon an analysis of bank deposits into accounts maintained and controlled by petitioners. All section references are to the Internal Revenue Code for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Despite repeated warnings by the Court of the consequences of their positions, petitioners refused to testify or to present any evidence concerning their income and deductions. Throughout these cases they have presented only frivolous arguments denying their obligations to file tax returns and pay taxes on their income. Thus, the only issue for decision is whether petitioners are liable for the fraudulent failure to file additions to tax under section 6651(f).

[*4] FINDINGS OF FACT

Background Facts

The following facts have been deemed stipulated pursuant to Rule 91(f) because petitioners' response to the motion made under that Rule was evasive and not fairly directed to the proposed stipulation. See Rule 91(f)(3). In addition to the facts found here, the stipulation included copies of petitioners' bank records supporting respondent's determination and copies of official records of the IRS showing petitioners' failure to file returns. Because petitioners have not addressed the amounts determined other than by their frivolous procedural arguments, it is unnecessary to set forth the details of transactions apparent from the bank deposits.

Petitioners resided in Arkansas at the time they filed their petitions. They are not married but have resided together at least since 2006. On correspondence with the IRS they used an address of 8334 W. McNelly Road, Bentonville, Arkansas 72712 (petitioners' residence). The Batsch Revocable Trust and petitioners, as co-trustees of the trust, own petitioners' residence.

Between taxable years 2007 and 2012, receipts from the Spanker Creek Farm Arts and Crafts Fair were deposited into at least three bank accounts -- an account with Arvest Bank ending in 0093 held jointly in the names of Patricia [*5] Hyde and Robert F. Batsch; an account with Arvest Bank ending in 3981 held in the name of Patricia Hyde, Trustee for Patricia L. Hyde Revocable Trust (also known as Patricia L. Hyde Irrevocable Trust); and an account with Arvest Bank ending in 4637 held in the name of Patricia Hyde, Trustee for Spanker Creek Farm.

The total gross receipts deposited into those accounts and determined from that source were:

2007 2008 2009 2010 2011 2012
______________________________________________________________________________

$ 97,643.44 $ 86,062.80 $ 77,980.84 $ 70,923.80 $ 62,646 $ 57,525

Petitioners also had additional income from rents, dividends, capital gains, interest, and other sources during the years in issue.

Batsch has not filed Federal income tax returns for years 1998 through 2012. The IRS prepared substitutes for returns under section 6020(b) for Batsch for 2007, 2008, 2009, 2010, 2011, and 2012.

Hyde's last filed Federal income tax return was for 2005. She has not filed Federal income tax returns for 2006 through 2012. The IRS prepared substitutes for returns under section 6020(b) for her for 2006, 2007, 2008, 2009, 2010, 2011, and 2012.

[*6] Chronology

Hyde has had similar cases in this Court before, and the history of those cases and the course of these cases are set forth here because these facts are material in determining whether petitioners' admitted pattern of refusing to file returns or pay Federal income tax was fraudulent.

In the case at docket No. 25406-08, decided in Hyde v. Commissioner, T.C. Memo. 2011-131, Hyde contested her liability for a deficiency and an accuracy-related penalty for 2005. She claimed to have rescinded her 2005 return and raised a plethora of frivolous issues. The Court rejected Hyde's arguments about the administrative circumstances surrounding the determination, explained that this Court conducts a proceeding de novo to redetermine a taxpayer's tax liability on the basis of evidence presented, sustained the determination that Hyde's compensation for services was taxable, and sustained a section 6662 penalty.

In the case at docket No. 8225-10, decided in Hyde v. Commissioner, T.C. Memo. 2011-104, aff'd per curiam, 471 F. App'x 537 (8th Cir. 2012), Hyde contested her liability for a deficiency and failure to file additions to tax for 2006. The Court rejected the "hodgepodge of frivolous and groundless claims that both this Court and the Eighth Circuit have consistently rejected." Those claims included Hyde's arguments concerning the validity of the substitute for return and [*7] her liability for Federal income tax. The Court imposed a $ 3,000 penalty under section 6673, noting that Hyde had been warned at trial but had ignored the warning. In its opinion filed July 2, 2012, the Court of Appeals for the Eighth Circuit affirmed this Court's decision and found no abuse of discretion in the imposition of the penalty.

The examination for petitioners' years in issue was conducted by Revenue Agent Michael Shaun Oliver. Oliver began his work with respect to Batsch and expanded it to include Hyde. He determined that neither had filed tax returns for 2007 through 2012. Petitioners failed to respond to letters, notices, or summonses or to cooperate otherwise with Oliver. They responded only after they received his examination reports. Upon receipt of a letter dated May 28, 2013, from petitioners, Oliver sent them a copy of the IRS publication "The Truth About Frivolous Tax Arguments". Petitioners responded by acknowledging receipt of the publication in a letter dated June 14, 2013. (Hyde denied receipt of the publication during trial.)

Because petitioners failed to cooperate, Oliver researched various available materials concerning, among other things, the Spanker Creek Farm Arts and Crafts Fair. He obtained records from the Benton County Planning Commission, the tax assessor's office, brokerages, and several banks. He performed a thorough bank [*8] deposits analysis of multiple accounts in the names of petitioners or over which Hyde had signature authority. In that process he identified apparent income items and likely deductible expenses related to petitioners. He observed frequent withdrawals of cash.

During his analysis Oliver discovered that petitioners had unreported income from sales of stock and financial instruments, dividends, retirement account distributions, rents, and farming income. He carefully allocated items such as rents, interest, capital gains, and other income to one or the other petitioner to the extent apparent from the records. He identified nontaxable receipts and transfers and allowable deductions to the extent possible. He also discovered that petitioners had written checks to "Hearts Desire". Following that discovery, he issued a summons to Hearts Desire Precious Jewelry/NWA Gold & Silver and received records showing that Batsch had made substantial purchases of precious metals.

Oliver prepared and certified substitutes for returns under section 6020(b) for each petitioner for each year, pursuant to authority under Delegation Order 5-2, set forth in Internal Revenue Manual (IRM) pt. 1.2.44.3 (Sept. 19, 2012 & rev. Oct. 21, 2013). He recommended assertion of the fraudulent failure to file addition to tax because of the unreported income, assignment of assets to a trust, [*9] use of cash, dealings in gold and silver, and history of nonfiling. He also became aware of Hyde's assertion of frivolous arguments in cases decided by this Court. The substitutes for returns were submitted to IRS Technical Services for review and certification and were duly approved as the basis for the notices of deficiency.

Each notice of deficiency was signed on behalf of the Commissioner of the IRS by the Technical Services Territory Manager or the Acting Technical Services Territory Manager, pursuant to Delegation Order 4-8, set forth in IRM pt. 1.2.43.9 (Sept. 4, 2012).

The petitions in these cases, all filed in 2013 and 2014, reasserted Hyde's previously rejected arguments and added additional arguments that have been repeatedly and consistently rejected by this and other courts. Petitioners did not identify any bank deposits that would not constitute taxable income or any expenditures that would be allowable as deductions, and petitioners' position is that, as stated at trial by Hyde, "Your Honor, to my knowledge, we have no subject items of income; therefore, no deductions of any kind."

Throughout the course of these proceedings, petitioners have filed various requests and motions reasserting their frivolous positions. The cases were first set for trial on June 8, 2015. On May 14, 2015, the Judge scheduled to preside at the [*10] June 8, 2015, calendar denied petitioners' then-pending discovery motions except to the extent that respondent was ordered to provide third-party contacts made that related to the determinations of petitioners' income and deductions for the years at issue in these cases. The orders in each case also stated:

It appears to the Court that petitioner is making
frivolous and groundless arguments that have been
rejected repeatedly by this and other courts. Petitioner
is hereby warned that such conduct may lead to a
penalty against him [or her, as to Hyde] in an
amount not to exceed $ 25,000 under section 6673.
However, buried among the frivolous arguments in
the motions under consideration, [one or two] discovery
request[s] could be read to be aimed at discovering
information relevant to a determination of petitioner's
income and deductions, which is the issue to be resolved.

The cases were continued from the June 8, 2015, calendar, but the Judge presiding at that calendar retained jurisdiction in order to assist the parties in preparing for a later trial, specifically in reaching a stipulation of facts. On July 8, 2015, the Judge summarized proceedings to that time and denied another frivolous motion of petitioners, explaining:

Contrary to petitioners' Motion for Sanctions, the
record in these cases supports the conclusion that
petitioners, not respondent, have failed to comply
with this Court's Standing Pretrial Order. As that
Order states, if the failure to stipulate is "due
to lack of cooperation by either party, the Court
may order sanctions against the uncooperative party."

On the basis of the record before us, it appears
that petitioners do not intend to prosecute their
cases in accordance with the Court's [*11] rules,
but rather insist on making frivolous arguments and
impeding preparation of this case for trial. We already
have warned petitioners about the consequences of
making frivolous arguments (a penalty in an amount
not to exceed $ 25,000 under section 6673). We also
warn petitioners that failure to put on any evidence
may result in a default or dismissal of their cases
and entry of decision in favor of respondent, pursuant
to Rule 123.

As we did at the June 8, 2015, hearing, we again
remind petitioners that the purpose of a trial in
this Court is to consider evidence of petitioners'
income or deductions for the tax years 2007, 2008,
2009, 2010, 2011, and 2012 to determine their tax
liability. If petitioners do not put on any such
evidence, they risk being assessed tax twice on the
same income should the Court sustain the notices
of deficiency at issue here, as respondent, in the
absence of any evidence allocating the income between
them, attributed certain income to both petitioners
in those notices. Furthermore, because deductions
are a matter of legislative grace, petitioners must
put on evidence showing that they are entitled to
deductions; otherwise they may not be entitled to
reduce their taxable income by those amounts.

The cases were calendared for trial on April 11, 2016. On November 17, 2015, respondent filed a motion for order to show cause why proposed facts and evidence should not be accepted as established pursuant to Rule 91(f). Attached to the proposed stipulation were over 3,500 pages of exhibits consisting of official IRS documents and petitioners' bank records. Petitioners' response was filed December 14, 2015. Petitioners did not dispute any of the specific facts set forth in respondent's proposed stipulation, and they did not raise any reasonable objection to the attached exhibits. By order dated December 16, 2015, the Court [*12] made the order to show cause absolute and deemed the facts and evidence set forth in respondent's proposed stipulation to be stipulated for purposes of these cases. The order explained:

Rule 91(f)(3) provides, and petitioners were warned,
that if their responses were evasive or not fairly
directed to the proposed stipulation or portion thereof,
that matter or portion thereof will be deemed stipulated
for purposes of the pending cases. Petitioners' response
consists of nonsensical denials of facts that should
not reasonably be in dispute and legal arguments
that are gibberish and intended only to obstruct
determination of their correct liability. Petitioners'
pro se status does not excuse their attempt to litter
the docket of this Court with ridiculous allegations.
See Parker v. Commissioner, 117 F.3d 785, 787 (5th
Cir. 1997). Their arguments concerning delegation
of authority have been rejected and characterized
as frivolous. See, e.g., Winslow v. Commissioner,
139 T.C. 270, 274, 276 (2012). Their arguments concerning
jurisdiction, validity of the statutory notices,
and legality of respondent's evidence are "frivolous
squared". United States v. Cooper, 170 F.3d 691,
691 (7th Cir. 1999). See Hyde v. Commissioner,
T.C. Memo. 2011-131; Hyde v. Commissioner, T.C.
Memo. 2011-104, aff'd 471 Fed. Appx. .537 (8th
Cir. 2012). They have been repeatedly warned of the
adverse consequences that they face if they continue
the course they have adopted in these cases.

OPINION

With the exception of a few responses by Batsch to questions addressed to him by the Court, Hyde conducted the trial on behalf of petitioners. She began by stating her disagreement with the stipulation. She was advised by the Court:

The bank records should not be in dispute. This is
your last opportunity to present any evidence [that]
the bank deposits do not [*13] represent taxable
income [or] there's some nontaxable source,or that
you have deductions that have not been allowed in
the statutory notice. But the documents are in evidence.
You may present contrary evidence, but as far as
I can tell from the record, you haven't raised any
reasonable dispute as to the income. * * * The only
item in dispute from my perspective today is whether
your failure to file tax returns was due to fraud.
And as I explained yesterday, your persistence in
frivolous arguments, meritless arguments, your refusal
to cooperate in a correct determination of your liability
is an indication that your claims are not made in
good faith because you're rejecting the repeated
authorities in your own case, Ms. Hyde, that the
Court -- the Tax Court and the Court of Appeals that
your arguments are frivolous.

Notwithstanding the clear warnings to petitioners, Hyde spent over an hour presenting documents that she claimed supported her position, summarized as follows:

And let me make a couple of more comments just to
get them on the record, Your Honor. And basically
the point that we're getting at is we are not subject
to the jurisdiction of the United States. I don't
know how that's even possible. We was not born --
the United States as described in the law and according
to that, be it right or wrong, these laws are what
we based the (inaudible) that we are not subject
to. And we can't find one where we are subject to
because according to this and -- and according to
what we are as people that is a citizen of the several
states, not of what we see as being defined as the
United States or the state -- the term United States
when you used in a geographical sense includes the
state of -- I mean it -- it's just the -- where Congress
has its exclusive jurisdiction. Congress does not
have exclusive jurisdiction within the States.

The factual matters addressed during her presentation were records, showing that Batsch was born in Missouri and Hyde was born in Texas, in support [*14] of her theory that petitioners are not citizens of the United States for purposes of the tax laws. She also presented records that showed that petitioners' residence had been the subject of various deeds to the trust and to petitioners as trustees and is in the county of Benton rather than the city of Bentonville. Both petitioners declined to testify, asserting their privilege against self-incrimination. Thus, the only evidence in the record relating to petitioners' taxable income consists of the bank records, other documents that support Oliver's analysis, and the statutory notices. Petitioners never identified an error in Oliver's exceptionally detailed analysis of their taxable income for each year. Respondent has provided far more than the minimal evidentiary foundation to establish unreported income. See Dodge v. Commissioner, 981 F.2d 350 (8th Cir. 1992), aff'g in part, rev'g in part 96 T.C. 172 (1991). Once gross receipts were established, petitioners had the obligation to show offsets that would reduce taxable income. See, e.g., DiLeo v. Commissioner, 96 T.C. 858, 872 (1991), aff'd, 959 F.2d 16 (2d Cir. 1992); Brooks v. Commissioner, 82 T.C. 413, 433 (1984), aff'd without published opinion, 772 F.2d 910 (9th Cir. 1985).

Petitioners' failure to produce evidence with respect to the deficiencies is a ground for determination of those issues against them. Despite our reluctance to reach a decision where taxable income is duplicated to separate taxpayers, we have [*15] no alternative to accepting respondent's whipsaw position.See, e.g., Putnam v. Commissioner, T.C. Memo. 2015-160, at *25-*27; Tilley v. Commissioner, T.C. Memo. 2009-83, slip op. at 12; see also Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 446 (1997).

Petitioners' arguments about the validity of the section 6020(b) substitutes for returns are groundless, as Hyde was advised in Hyde v. Commissioner, T.C. Memo. 2011-104, slip op. at 5, as follows: "It is well settled that a substitute for return prepared by the Commissioner under section 6020 is prima facie 'good and sufficient for all legal purposes', including to assess Federal income tax liability shown on a substitute for return as due and owing. See sec. 6020(b)(2); United States v. Silkman, 220 F.3d 935, 936 (8th Cir. 2000)." See also Rader v. Commissioner, 143 T.C. 376, 382 (2014); Whittington v. Commissioner, T.C. Memo. 2015-152.

Equally lacking in merit are petitioners' arguments about the validity of the statutory notices. Courts have held consistently, in various contexts, that (1) a signature is not required on a notice of deficiency and (2) provisions of the IRM do not give rights to a taxpayer or affect the validity of a notice or this Court's jurisdiction. See, e.g., Selgas v. Commissioner, 475 F.3d 697, 699-700 (5th Cir. 2007); Tavano v. Commissioner, 986 F.2d 1389, 1390 (11th Cir. 1993) (per [*16] curiam), aff'gT.C. Memo. 1991-237;Urban v. Commissioner, 964 F.2d 888, 889 (9th Cir. 1992) (per curiam), aff'g T.C. Memo. 1991-220; Ball v. Commissioner, T.C. Memo. 2006-141, slip op. at 7. Arguments concerning delegation of authority have been rejected and characterized as frivolous. See, e.g., Winslow v. Commissioner, 139 T.C. at 274, 276; Roye v. Commissioner, T.C. Memo. 2012-246, at *15, *16 n.6; see also Grunsted v. Commissioner, 136 T.C. 455, 460-461 (2011).

Hyde has a history of pursuing frivolous arguments and rejecting the conclusions of every court that has considered them. Petitioners' theory that citizens and residents of various States are not subject to Federal jurisdiction because the applicable statutes include certain Federal territories in the statement of coverage is an argument that "includes" means "only" and excludes anything else. Such interpretative arguments have been consistently rejected in strong terms, even in judicial opinions sustaining criminal convictions. See, e.g., United States v. Ward, 833 F.2d 1538, 1539 (11th Cir. 1987) (per curiam) ("utterly without merit"); United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985) ("inane" and "preposterous"); United States v. Rice, 659 F.2d 524, 528 (5th Cir. 1981) ("frivolous non-sequitur"). The Court of Appeals for the Eighth Circuit has characterized as "absurd" an argument that taxpayers were not citizens of the [*17] United States but rather citizens of a State and therefore not subject to Federal taxation. United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993) (per curiam) (citing United States v. Kruger, 923 F.2d 587, 587-588 (8th Cir. 1991)); see Crain v. Commissioner, 737 F.2d 1417, 1418 (5th Cir. 1984) (per curiam) (granting penalties against taxpayer whose spurious arguments on taxation and jurisdiction were "unsupported" and "meritless"). No further discussion of petitioners' stale theories is warranted.

We must decide, however, whether petitioners' failure to file returns for the years before us was accompanied by an intent sufficient to sustain the section 6651(f) additions to tax. Section 6651(f) provides an increased penalty of 75% of the amount required to be shown as tax on unfiled returns if the failure to file the returns is fraudulent. In applying section 6651(f) to determine whether petitioners' failure to file tax returns was fraudulent, we consider the same elements considered in cases involving former section 6653(b) and present section 6663. See Clayton v. Commissioner, 102 T.C. 632, 653 (1994); Niedringhaus v. Commissioner, 99 T.C. 202, 211-213 (1992). The civil fraud penalty is a sanction provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud. Helvering v. Mitchell, 303 U.S. 391, 401 [*18] (1938). Respondent has the burden of proving fraud by clear and convincing evidence. See sec. 7454(a); Rule 142(b).

Bank deposits are prima facie evidence of income. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C. 651, 656-657 (1975), aff'd, 566 F.2d 2 (6th Cir. 1977). Proof of gross receipts in the amounts shown by the bank deposits analysis in these cases is sufficient to satisfy respondent's burden of showing that petitioners had an obligation to file returns. See secs. 1, 6011, 6012.

Fraud may be proved by circumstantial evidence, and the taxpayer's entire course of conduct may establish the requisite fraudulent intent. Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). Circumstantial evidence of fraud includes "badges of fraud" such as those present here: a long-time pattern of failure to file returns, failure to report substantial amounts of income, failure to maintain adequate records, failure to cooperate with taxing authorities in determining the taxpayer's correct liability, and implausible or inconsistent explanations of behavior. See, e.g., Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), aff'g T.C. Memo. 1984-601; Powell v. Granquist, 252 F.2d 56, 60 (9th Cir. 1958); Grosshandler v. Commissioner, 75 T.C. 1, 19-20 [*19] (1980); Gajewski v. Commissioner, 67 T.C. 181, 199-201 (1976), aff'd without published opinion, 578 F.2d 1383 (8th Cir. 1978).

The additions to tax for fraud have frequently been imposed on taxpayers like petitioners "who were knowledgeable about their taxpaying responsibilities * * * [and] consciously decided to unilaterally opt out of our system of taxation." Miller v. Commissioner, 94 T.C. 316, 335 (1990); see Niedringhaus v. Commissioner, 99 T.C. at 212, 217-219; Porter v. Commissioner, T.C. Memo. 2015-122, at *24; Bennett v. Commissioner, T.C. Memo. 2014-256, at *12; Chase v. Commissioner, T.C. Memo. 2004-142, slip op. at 10; Madge v. Commissioner, T.C. Memo. 2000-370, slip op. at 4-5, aff'd, 23 F. App'x 604 (8th Cir. 2001). Because petitioners refused to testify, they have shown no plausible nonfraudulent explanation for their behavior. Their arguments about the validity of the statutory notices are directed at events occurring after the years in issue and do not reflect the relevant state of mind at the times the returns were due. Petitioners' persistence in discredited arguments in the face of unanimous rulings by the courts negates good faith. Thus, they have offered no defense to the inference of fraudulent intent to be drawn from the circumstantial evidence and objective facts found. Respondent's burden of proof has been satisfied.

[*20] To reflect the foregoing,

Decisions will be entered for respondent.

FOOTNOTES:

/1/ Cases of the following petitioners are consolidated herewith: Robert F. Batsch, docket No. 10638-14; and Patricia Hyde, docket Nos. 28694-13 and 10597-14.

[Judge Roy Bean]

I see the Dunning-Kruger syndrome in here. They are so obtuse that they can't see that they're obtuse.

[jcolvin2]

Affirmed by the Eighth Circuit:
http://media.ca8.uscourts.gov/opndir/17/08/164183U.pdf

[fortinbras]

This is a significant decision inasmuch as it addresses the difficulty of reading the tax code as an excuse for complete non-compliance. In other cases the courts have held that, even though taxpayers may not be skilled or trained in either tax law or accounting, they are expected to comply with instructions received from the IRS - such as the 1040 instruction book, other instructions issued in a general way by the IRS, and instructions in letter sent directly to them from the IRS. Taxpayers are also, in various decisions, held obliged to consult with 'professionals' - such as accountants, lawyers, and tax preparation specialists - (even though this may cost them something) rather than pull some crazy stunt (usually conspicuous tax evasion) on their own.

In most cases of tax evasion, the excuse of some misunderstanding of one's tax obligations is disproven by the fact that in previous years the scofflaw did file tax returns and pay his income tax more or less properly, so that demonstrates that he had a clear notion back then of his proper tax obligations.

The tax code is brutally complex and the IRS regulations are hardly better (at least two law publishers churn out a complete, multi-volume set of the entire Tax Code and IRS regs - about 7 thick volumes - every year for about $250 a set).

[Burnaby49]

This is also a frequent defense in Canada, that the Income Tax Act is so complex that you can accidentally engage in tax evasion while doing your honest best to comply with the law. This was the entire rationalle of the Paradigm tax evasion scheme promoted by Russell Porisky. His theory of why Canadians were not legally required to pay income tax made no sense whatever. But it was designed to serve as an excuse for individuals caught evading paying taxes. As I wrote in respect to Keith Lawson's arguments at his trial;

Anyhow almost done. A point about how he wasn't given the opportunity to test the Crown's case and a final point about statutory interpretation. Apparently if he interprets a statute differently than the Crown this is proof that the Crown has no basis to lay a criminal charge. To quote;

14. Where a statute is reasonably capable of two interpretations, the most favourable to the liberty of the Appellant was to be utilized. In a complex statute such as the Income Tax Act, where the legal onus is on the Appellant to voluntarily comply with the terms and provisions therein, errors of interpretation and/or application of the Act by the Appellant cannot form a basis for criminal or penal liability. These are not strict nor absolute liability offenses. The Honourable Trial Judge failed to so exercise her discretion accordingly.

Of course the critical two words in all of that verbiage are "reasonably capable".

It should be noted that this paragraph goes right to the heart of what the Crown has said all along was the entire reason that Paradigm existed. It was a cover to give justification for a defense against tax evasion charges, essentially insurance if Paradigm customers were caught not reporting their income. They had the entire Paradigm edifice to serve as their defense, masses of publications and videos with impossibly complex theories proving that they didn't have to pay income tax. If the CRA started making hurtful suggestions that they were criminals about to be charged with criminal offenses the Paradigm material was to serve as proof that they had no mens rea, no guilty mind.

They thought that, if caught, they could proclaim that they'd done their absolute best to comply with the law. But it's all so darn complicated that they just couldn't figure it out. So they quite reasonably relied on the analysis of Russell Porisky, a carpenter with no background or training in law or income tax, to instruct them how to fulfill their legal obligations under the Income Tax Act. They didn't try to evade tax. At worst they made, as Lawson put it "errors of interpretation and/or application of the Act". We know how that played out in real life. Apparently the courts have not, as yet, considered the Paradigm bullshit to be a "reasonably capable" interpretation.

viewtopic.php?f=50&t=8223&p=236215#p236215

[fortinbras]

The courts have been receptive to defenses based on misunderstanding or confusion about the terms of the tax code in instances of (1) relatively new or little used tax provisions whose details have not yet been made completely clear, and/or (2) uncommon or convoluted transactions whose handling under tax provisions might plausibly be unclear. Even so, failure to report or pay anything gets no sympathy.

I have known a few tax lawyers - many of them formerly IRS lawyers - who based their fees on a simple formula: A fixed percentage of the difference between what the IRS originally demanded and what the IRS eventually got from their clients.

[Arthur Rubin]

I have known a few tax lawyers - many of them formerly IRS lawyers - who based their fees on a simple formula: A fixed percentage of the difference between what the IRS originally demanded and what the IRS eventually got from their clients.

It should can be pointed out that Circular 230 prohibits tax preparers from basing fees for an original return on the amount of refund; it's allowed for amended returns, appeals, and court.

[jcolvin2]

[It should can be pointed out that Circular 230 prohibits tax preparers from basing fees for an original return on the amount of refund; it's allowed for amended returns, appeals, and court.

Circular 230 does not appear to allow contingent fees for amended returns, except when such returns are subject to examination (or the original return is under examination). Section 10.27 of Circular 230 provides:

(b) Contingent fees —
(1) Except as provided in paragraphs (b)(2), (3), and (4) of this section, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service.
(2) A practitioner may charge a contingent fee for services rendered in connection with the Service’s examination of, or challenge to —
(i) An original tax return; or
(ii) An amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return.
(3) A practitioner may charge a contingent fee for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service.
(4) A practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.

As the D.C. Circuit held in Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), that the preparation of tax returns is outside the scope of "practice before the IRS," it is possible that this bar no longer has any meaning. See Ridgely v. Lew, 55 F. Supp. 3d 89 (D. D.C. 2014) ("IRS lack[s] statutory authority to promulgate contingent fee restrictions on those preparing and filing ordinary refund claims pursuant to Section 10.27 of Circular 230").