Jagos v CIR - TP rejects lifeline, files overlength frivolous brief for 6673 penalty

[jcolvin2]

http://www.ustaxcourt.gov/UstcInOp/Opin ... x?ID=11445

T.C. Memo. 2017-202
UNITED STATES TAX COURT
HENRY M. JAGOS AND KATHY A. JAGOS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 476-16. Filed October 16, 2017.
Henry M. Jagos and Kathy A. Jagos, pro sese.
Alicia A. Mazurek and Robert D. Heitmeyer, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

BUCH, Judge: This case comes before the Tax Court as a result of a
petition filed by Henry M. Jagos and Kathy A. Jagos. The Jagoses are married and filed their 2012 tax return jointly. In 2012 they received $544,167 in income.

[*2] They do not dispute receiving the income, but instead they make various frivolous arguments as to why it is not taxable. We find for the Commissioner.

FINDINGS OF FACT

In 2012 the Jagoses, either directly or through a wholly owned passthrough entity, received income from the following sources and in the following amounts:

Source Amount
Asset Acceptance, LLC $1,000
Zerobase Energy, LLC 616
Michigan Switchgear
Services, Inc. 18,108
Weltman, Weinberg &
Reis, Co. LPA 4,500
Fidelity Investments 519,943
Total 544,167

The Jagoses filed a Form 1040, U.S. Individual Income Tax Return, for 2012. On that return they reported zero taxable income and claimed a refund of $98,387, the amount withheld by Fidelity Investments from payments it made to them. Along with their Form 1040 for 2012, the Jagoses also submitted several other documents:

[*3] • three Forms 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., and
• two documents each labeled “corrected Form 1099-MISC”.

Each of these documents reported zero taxable income.

In addition to the Form 1040, the three Forms 4852, and the corrected Forms 1099-MISC, the Jagoses submitted a letter describing the documents and explaining the position they took on their return. In the letter they state that they included the additional forms “due to the fact that the ‘PAYER’S’ [sic] provided the 1099’s which erroneously alleged payments of Internal Revenue Code (IRC) sections 3121 & 3401 wages”.1 The letter goes on to state that the income they received is not taxable because they “are private-sector citizens (non-federal employee) employed by a private-sector company (non-federal entity) as defined in 3401(c)(d).”

The Commissioner froze the Jagoses’ tax refund and selected their 2012 income tax return for audit. The Commissioner issued a notice of deficiency on October 8, 2015, and adjusted the Jagoses’ taxable income by $544,167. He found [*4] that the Jagoses had $1,000 in taxable income from Asset Acceptance, LLC, $616 in taxable income from Zerobase Energy, LLC, $18,108 in taxable income from Michigan Switchgear Services, Inc., $4,500 in taxable income from Weltman, Weinberg & Reis, Co. LPA, and $519,943 in taxable income from Fidelity Investments. The Commissioner found that the Jagoses were entitled to a $1,711 self-employment tax adjustment and determined a deficiency of $155,149. The Commissioner applied against the deficiency the frozen refund attributable to the amount withheld by Fidelity Investments and determined an accuracy-related penalty of $11,352 under section 6662(a) and (d) on the remaining underpayment, leaving a total amount due of $68,114 plus interest. The Commissioner also assessed a frivolous tax return submission penalty under section 6702.

The Jagoses filed a petition for redetermination to this Court on January 6, 2016. At the time they filed the petition they resided in Michigan. In their petition they argue that none of the income they received was taxable and that the notice of deficiency is invalid because the Commissioner had no firsthand knowledge of the income giving rise to the deficiency. The Jagoses also argue that the Commissioner failed to prepare a substitute for return, violating section 6020(b), and that they are not liable for the penalty under section 6702.

[*5] At trial the Jagoses reiterated the arguments in their petition. They requested an opportunity to submit written briefs following the trial, which the Court allowed. The Court also directed them to two cases, Wnuck v. Commissioner, 136 T.C. 498 (2011), and Waltner v. Commissioner, T.C. Memo. 2014-35, aff’d, 659 F. App’x 440 (9th Cir. 2016), and encouraged them to abandon arguments that had been repeatedly rejected by this Court and others. The Jagoses agreed to review both cases and assured the Court that the brief would be no more than 15 pages. The brief they submitted to the Court was over 70 pages, and they failed to abandon the well-worn tax-protester arguments that this Court has rejected time and again.

OPINION

The issues before the Court are whether the income the Jagoses received is taxable and whether the Jagoses are liable for the accuracy-related penalty under section 6662. The Jagoses bear the burden of proof and must produce credible evidence that they are not liable for the tax deficiency determined by the Commissioner.2

The Jagoses conceded that they received the income and failed to offer any credible evidence or meritorious legal arguments that it is not taxable.

[*6] Accordingly, we sustain the determined deficiency and accuracy-related penalty. Most of the arguments that the Jagoses presented in their petition, at trial, and in their briefs are familiar tax-protester arguments that we have rejected repeatedly. The other arguments that they have raised are either irrelevant or involve issues outside the Tax Court’s jurisdiction.

I. Receipt of Taxable Income Under Section 61

Section 61(a) provides that “gross income means all income from whatever source derived”. That includes the payments that the Jagoses received in 2012. The Jagoses have not advanced any credible arguments or offered any credible evidence showing that the payments they received were not taxable income. As a general matter we do not refute frivolous arguments “with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.”3 The Jagoses offered only “tax protester” or “tax defier” arguments. Consequently, we choose not to address them here.4

II. Accuracy-Related Penalty

Section 6662(a) and (b)(2) imposes a 20% accuracy-related penalty on any portion of an underpayment of tax that is due to any substantial understatement of [*7] income tax. This penalty does not apply to any portion of an underpayment for which a taxpayer establishes that he or she had reasonable cause and acted in good faith.5 The Commissioner bears the burden of production for this penalty before the burden shifts to taxpayers to prove that the penalty should not apply.6 When an understatement of income tax is substantial, as defined in section 6662(d), we routinely hold that the Commissioner has met his burden as to the substantial understatement penalty.7 An understatement is substantial if it exceeds the greater of 10% of the tax required to be shown on the return or $5,000.8 The Jagoses’ understatement of tax is $155,149, clearly meeting the statutory threshold. The Jagoses have not offered any evidence indicating reasonable cause or showing that they acted in good faith. Consequently, they are liable for the accuracy-related penalty.

[*8] III. Frivolous Tax Return Submission Penalty Under Section 6702

The Jagoses seek to challenge the frivolous tax return submission penalty that the Commissioner assessed against them. Under section 6702 the Commissioner can impose a $5,000 penalty for a frivolous return. This civil penalty is immediately assessable, and deficiency procedures do not apply to its assessment or collection.9 As a result, this civil penalty is outside the jurisdiction of the Tax Court and is not properly before us in this case.

IV. Section 6020 Substitute for Return

The Jagoses also argue that the Commissioner is required to prepare a substitute for return under section 6020. Section 6020 gives the Commissioner the authority to prepare a return for a taxpayer when that taxpayer fails to file a return. The Jagoses filed a return for 2012. Consequently, the Commissioner was not required to prepare a substitute for return under section 6020.

V. Sanctions Under Section 6673

Under section 6673 the Court is permitted to impose a penalty of up to $25,000 if a taxpayer takes a frivolous or groundless position or maintains a proceeding primarily for delay. A position is frivolous if it is “contrary to established law and unsupported by a reasoned, colorable argument for change in [*9] the law.”10 Frivolous claims waste judicial resources, divert resources away
from serious claims, and delay the collection of tax.11 At trial the Court encouraged the Jagoses to abandon their frivolous arguments and cited specific authorities for them to consider. The arguments raised in their 70-page brief were a rehash of the very same arguments that were dispatched in those cases. And the Jagoses have raised frivolous arguments at every stage of this process from their 2012 income tax return to their closing brief. For disregarding the cases cited to them and wasting the Court’s resources with their frivolous arguments, we impose a sanction under section 6673 of $1,000.

VI. Conclusion

The Jagoses received $544,167 of taxable income in 2012. They have not offered any credible evidence or meritorious legal arguments that the income they received is not taxable. The Jagoses are also liable for an accuracy-related penalty under section 6662. They have not offered any defense to the penalty. Although the Jagoses were encouraged to abandon their frivolous arguments and directed to [*10] cases that clearly refute the arguments they made, they continued to pursue them. Consequently, the Court is imposing a $1,000 penalty under section 6673.

To reflect the foregoing,
An appropriate order and decision
will be entered for respondent.


1 All section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.

2 See Rule 142(a)(1).

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

4 See Wnuck v. Commissioner, 136 T.C. 498 (2011).

5 Sec. 6664(c)(1).

6 Sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).

7 See, e.g., Mudrich v. Commissioner, T.C. Memo. 2017-101, at *14-*15; Johnson v. Commissioner, T.C. Memo. 2014-67, at *9-*10.

8 Sec. 6662(d)(1)(A).

9 Sec. 6703(b).

10 Takaba v. Commissioner, 119 T.C. 285, 287 (2002) (quoting Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986)).

11 Wnuck v. Commissioner, 136 T.C. at 510-512.

[Edited to add url to Tax Court website.]

[grixit]

The Commissioner froze the Jagoses’ tax refund and selected their 2012 income tax return for audit.

The commissioner could select a different year and do it again. I predict shoe dropping.

[Famspear]

Ah, yes, Henry Jagos -- another Follower of the Fabulous Felon, the Hopelessly Hapless Hendrickson. Jagos has posted at least one comment on Prevaricatin' Pete's web site, here:

....it is our job to teach ourselves and bring ourselves up to the level to understand what is written. It is no secret that the public schools are training up slaves.....

December 30, 2014, at:

http://losthorizons.com/blog2/2014/02/1 ... -comments/

[fortinbras]

I hate making wretched puns on peoples' names but this is too obvious to me to avoid. In 1896 Arthur Morrison, a Brit author who wrote about the dreadful life of slum-dwellers (he was famous for "Mean Streets") wrote A Child of the Jago, describing the hideous existence to be found on Old Jago and New Jago, two short blocks in the London slums. By the end of the book several characters have met untimely deaths, including one hanged for multiple murder, and one of the surviving characters is described as "a child of the Jago and the world's enemy".
Seeing this court case, I couldn't resist.

[Famspear]

I hate making wretched puns on peoples' names....

Ah, you see, that's where you and I differ. I love making wretched puns, wretched limericks, etc., etc.......

[notorial dissent]

And you do, you do.

[.]

the Court is imposing a $1,000 penalty under section 6673.

1K? You have to be kidding me.

They not only have an idiot PH adherent, they have someone with 500K of income and a history of BS filings.

25K -- per petitioner -- I'm sure they could find a way to justify that. Max 'em out. Make it sting at least a little. Will this idiot come back for 5 more beat-downs at 25 or 50K a pop? Probably not.

These judges no doubt mutter under their breath when they deal with these morons and then do next to nothing to discourage them. And the nutters laugh at them, as well they should.

25 or 50K might not stop guys like Jagos immediately but its got a shot at making the impecunious think twice before filing total nonsense.

[Cpt Banjo]

This morning's TaxProf Blog has an article on the Jagos case:

Everyone needs a hobby. Psychology Today explained why here. But some hobbies grow and grow until they become all-consuming. As Benjamin Franklin reportedly put it: beware the hobby that eats. Protesting your taxes for stupid reasons is one of those hobbies that eat.

Bob Wood once wrote a great blog post about stupid tax protest arguments. The legal term for “stupid” is, of course, “frivolous.” Bob rightly says it’s one of the worst names you can be called in the tax world. I really love his line: “In IRS lingo, it’s about as bad as you can get, just shy of the other “f” word, fraudulent.”

The case of Henry M. Jagos and Kathy A. Jagos v. Commissioner, T.C. Memo. 2017-202 (Oct. 16, 2017), teaches such a lesson. It appears from the opinion that the Jagoses are among those lucky taxpayers who do not have to work for their money because their money works for them. Of their total taxable income in 2012 of $544,000, $520,000 seems to have come from investments. At least it came from payments they received from Fidelity Investments and Fidelity withheld about $98,000 in taxes.

With that kind of income, one has plenty of time for hobbies. It appears from this case the Jagoses decided that tax protesting would be a good hobby to have. In 2012 they filed a return to get back the $98,000 in withheld taxes. They reported zero income, claiming the payments they received were not taxable income because they “are private-sector citizens (non-federal employee) employed by a private-sector company (non-federal entity) as defined in 3401(c)(d).”

In old-fashioned texting parlance my reaction to that statement vacillates between OMG, LOL and WTF. For the more measured IRS and Tax Court reaction, see below the fold.

http://taxprof.typepad.com/taxprof_blog ... -eats.html

[The Observer]

To rip off the late Robin Williams, in paraphrasing one of his wittiest observations on cocaine dependency:

"Pursuing frivolous arguments to detax yourself is just God's way of telling you that you have too much money."